3. Business Ethics and Social Responsibility
Business Ethics
Businesses must establish a clear set of values that promote ethical practices and social responsibility. In today’s business climate, companies are increasingly under scrutiny by private citizens. A company that builds its foundation on sound principles will have a better chance of staying competitive in a volatile market.
Ethics consist of the values and principles that guide and influence the ways in which we interact with others. From a business perspective, ethical standards signal to customers, clients, employees, investors, and other stakeholders the conduct and behaviours the organization expects, supports, and endorses. Stephen M. Byars explains:
“Ethics consists of the standards of behaviour to which we hold ourselves in our personal and professional lives. It establishes the levels of honesty, empathy, and trustworthiness and other virtues by which we hope to identify our personal behaviour and our public reputation. Ethics are the standards of behaviour to which we hold ourselves accountable in our personal and professional lives. Laws and regulations set the minimal standards by which society lives out those ethical norms. Because laws are minimal standards, it is not uncommon for an act to be legal but generally deemed unethical. The fact is that law and ethics are not always the same. Always, however, they are in dialogue, and each informs the other.” – Byars, S.M., Stanberry, K. Business Ethics. 2018. OpenStax, Rice University. CC BY 4.0.
For many people, it is far from easy to recognize an ethical problem and know how to proceed. Even in situations where a clear process exists to report an ethical issue, a perceived lack of support within an organization or business may serve to discourage disclosure. Reporting an ethical breach can have implications beyond the immediate and obvious ones, so it can be difficult to understand the full consequences of a particular decision which may make people uneasy and reluctant to act. Add to this the complexity and variability within organizations, where individuals and groups of employees vary in their motivations, loyalties, commitments, and values and it becomes evident that unambiguous processes and internal supports are important elements for creating and maintaining business ethics. There is no universally accepted way for developing an organization where employees feel valued, respected, and supported; where the actions of leaders are explicit; and where all the employees feel loyal and accountable to one another, so exploring and applying processes and practices that work well within the context of the business is essential.
Three Considerations:
- Although morals and ethics are not precisely measurable, people generally have similar reactions about what actions or conduct can rightly be called ethical or moral.
- It is generally the case that people appreciate and need ethical codes, practices and perspectives.
- Saying that someone or some organization is law-abiding does not mean the same as saying a person or company is ethical. Laws should be ethical and principled, but it is not always the case.
Business ethics are foundational for building a successful organization. If an organization is built on socially responsible values, it will be stronger than an organization that is built on profit alone. More than just a positive reputation, the core ethics of a business dictate how every decision, process, and procedure will take place. Promotion of and adherence to ethical codes of conduct should be embedded in and expressed through the organizational culture and the way in which business is conducted both internally and externally.
How Do Law and Ethics Differ?
There is a difference between legal compliance and moral excellence. Business ethicists have talked for years about the intersection of law and ethics. Simply put, what is legal is not necessarily ethical. Conversely, what is ethical is not necessarily legal. There are lots of legal maneuvers that are not all that ethical; the well-used phrase “legal loophole” suggests as much.
Here are two propositions about business and ethics. Consider whether they strike you as true or whether you would need to know more in order to make a judgment.
Proposition 1:
Individuals and organizations have reputations. (For an individual, moral reputation is most often tied to others’ perceptions of his or her character: is the individual honest, diligent, reliable, fair, and caring? The reputation of an organization is built on the goodwill that suppliers, customers, the community, and employees feel toward it.
Although an organization is not a person in the usual sense, the goodwill that people feel about the organization is based on similar perceptional impressions and indicators.
Proposition 2:
The goodwill of an organization is to a great extent based on the actions it takes and on whether the actions are viewed in a positive light. This goodwill is usually specifically counted in the sale of a business as an asset that the buyer pays for. While it is difficult to place a monetary value on goodwill, a firm’s good reputation will generally call for a higher evaluation in the final accounting before the sale. Legal troubles or a reputation for having legal troubles will only lessen the price for a business and will even lessen the value of the company’s stock as negative legal news comes to the public’s attention.
Another reason to think about ethics in connection with law is that the laws themselves are meant to express some moral view. If there are legal prohibitions against cheating an organization, it is because people (legislators or their agents) have collectively decided that cheating an organization is wrong. Thus, the law provides some important cues as to what society regards as right or wrong.
Finally, important policy issues that face society are often resolved through law, but it is important to understand the moral perspectives that underlie public debate. Some ethical perspectives focus on rights, some on social utility, some on virtue or character, and some on social justice.
People consciously (or, more often, unconsciously) adopt one or more of these perspectives, and even if they completely agree on the facts with an opponent, they may not change their views. Fundamentally, the difference comes down to incompatible moral perspectives, a clash of basic values. Understanding the varied moral perspectives and values in public policy debates is a clarifying benefit in following or participating in these important discussions.
Why Should an Individual or a Business Entity Be Ethical?
The usual answer is that ethics is good business. In the long run, businesses that pay attention to ethics as well as law do better; they are viewed more favourably by customers. But this is a difficult claim to measure scientifically, because “the long run” is an indistinct period of time and because there are as yet no generally accepted criteria by which ethical excellence can be measured. In addition, life is still lived in the short run, and there are many occasions when something short of perfect conduct is a lot more profitable.
Maximizing profits while being legally compliant is not a very inspiring goal for a business. People in an organization need some quality or excellence to strive for. By focusing on pushing the edge of what is legal, by looking for loopholes in the law that would help create short-term financial gain, organizations have often learned that in the long term they are not actually satisfying the market, the shareholders, the suppliers, or the community. Legal compliance is not the same as acting ethically. Your reputation, individually or organizationally, depends on how others regard your actions. Goodwill is challenging to measure or quantify, but it is a significant factor in business relationships and can best be protected by acting ethically.
An Ethical Decision Model: Josephson’s Core Values Model
When confronted by a decision that involves ethical judgment, Michael Josephson (founder of the Joseph and Edna Josephson Institute of Ethics) advises asking as many questions as necessary to obtain a full view of the relevant facts.
Then, assuming you have all the needed information, the decision process is as follows:
- Identify the stakeholders (who might gain or lose based on the decisions being considered)?
- Identify several likely or reasonable decisions that could be made.
- Assess which stakeholders gain or lose with each decision.
- Determine which decision satisfies the greatest number of core values.
- If there is no decision that satisfies the greatest number of core values, try to determine which decision delivers the greatest good to the various stakeholders. It is often helpful to identify who (or what group) is the most important stakeholder, and why.
The Core Values
Here are the core values and their subcomponents as developed by the Josephson Institute of Ethics.
- Trustworthiness: Be honest; be sincere, forthright; don’t deceive, mislead, or be tricky with the truth; don’t cheat or steal, and don’t betray trust. Demonstrate integrity—stand up for what you believe, walk the walk as well as talking the talk; be what you seem to be; show commitment and courage. Be loyal—stand by your family, friends, co-workers, community, and nation; be discreet with information that comes into your hands; don’t spread rumors or engage in harmful gossip; don’t violate your principles just to win friendship or approval; don’t ask a friend to do something that is wrong. Keep promises—keep your word, honor your commitments, and pay your debts; return what you borrow.
- Respect: Judge people on their merits, not their appearance; be courteous, polite, appreciative, and accepting of differences; respect others’ right to make decisions about their own lives; don’t abuse, demean, mistreat anyone; don’t use, manipulate, exploit, or take advantage of others.
- Responsibility: Be accountable—think about the consequences on yourself and others likely to be affected before you act; be reliable; perform your duties; take responsibility for the consequences of your choices; set a good example and don’t make excuses or take credit for other people’s work. Pursue excellence: Do your best, don’t quit easily, persevere, be diligent, make all you do worthy of pride. Exercise self-restraint—be disciplined, know the difference between what you have a right to do and what is right to do.
- Fairness: Treat all people fairly, be open-minded; listen; consider opposing viewpoints; be consistent; use only appropriate considerations; don’t let personal feelings improperly interfere with decisions; don’t take unfair advantage of mistakes; don’t take more than your fair share.
- Caring: Show you care about others through kindness, caring, sharing, compassion, and empathy; treat others the way you want to be treated; don’t be selfish, mean, cruel, or insensitive to others’ feelings.
- Citizenship: Act with integrity; do your share, respect authority, stay informed, vote, protect your neighbors, pay your taxes; be charitable, help your community; protect the environment, conserve resources.
When individuals and organizations confront ethical problems, the core values decision model offered by Josephson generally works well (1) to clarify the gains and losses of the various stakeholders, which then raises ethical awareness on the part of the decision maker and (2) to provide a reliable guide as to what the most ethical decision would be. In nine out of ten cases, step 5 in the decision process is not needed.
That said, it does not follow that students (or managers) would necessarily act in accord with the results of the core values decision process. There are many psychological pressures and organizational constraints that place limits on people both individually and in organizations. These pressures and constraints tend to compromise ideal or the most ethical solutions for individuals and for organizations. For a business, one essential problem is that ethics can cost the organization money or resources, at least in the short term. Doing the most ethical thing will often appear to be something that fails to maximize profits in the short term or that may seem pointless because if you or your organization acts ethically, others will not, and society will be no better off, anyway.
Indigenous Ethics and Values:
Indigenous ethics focuses on trust and community – connecting to and valuing environmental, social, spiritual, ancestral relationships. While there is much diversity among Indigenous Peoples and Nations overall, Indigenous ethics resonate with the values of honour, trust, honesty, and humility; they reflect commitment to the collective and embody a respectful relationship with the natural world.
In Indigenous communities, the process of ethical thinking begins at birth with storytelling as the primary learning process. Storytelling is used to guide behaviour and solidify belonging and responsibility to the family, community, and larger world. Through stories, a child develops identity and learns about moral responsibility. Through stories, the community articulates and embraces its shared valued system or mindset. Ethical thinking emerges from a community’s customs, teachings, and ideals.
Indigenous teachings involve notions of taking care of one another, collective decision-making, and sustainability. All are based on a value system that locates itself within the Anishinaabe seven grandfather sacred teachings. The sacred teachings of respect, bravery, honesty, humility, truth, wisdom, and love are significant guidelines that resonate in most Indigenous cultures. The teachings are represented by seven sacred animals each having a special gift to help the people understand and to maintain a connection to the land and to each other. The values embodied in the teachings coupled with storytelling, and articulated through Indigenous language, reinforce Indigenous ways of being and doing. In other words, fortifying ethical thinking lends itself to ethical practice.
In an analogous way, the story of an organization is embedded in the culture of the organization and it is that story which defines organizational norms and commitment to ethical practice and standards.
Why Is Corporate Ethics So Important in Business?
Few subjects are more contentious or important as the role of business in society, particularly, whether corporations have social responsibilities that are distinct from maximizing shareholder value. While the phrase “business ethics” is not oxymoronic (i.e., a contradiction in terms), there is plenty of evidence that businesspeople and firms seek to look out primarily for themselves. However, business organizations ignore the ethical and social expectations of consumers, employees, the media, nongovernment organizations (NGOs), government officials, and socially responsible investors at their peril. Legal compliance alone no longer serves the long-term interests of many companies, who find that sustainable profitability requires thinking about people and the planet as well as profits.
The idea of business ethics may seem subjective, but it comes down to acceptable levels of behaviour for everyone who makes up the organization. This behaviour must start at the top with responsible actions demonstrated by leadership. By doing so, leaders create and embody a set of rules and behaviours that are to be followed by others in the company. These rules and behaviours can be based on the deep values that the company has concerning the quality of products and services, the commitment to customers, or how the organization gives something back to the community. The more a company lives by its ethical practices, the more likely it is to be successful.
Anna Spooner, who writes for LovetoKnow, shares tips on how to evaluate whether or not an organization is creating ethical practices by determining the impact of each practice. Some examples include:
- Executive compensation rates during employee layoffs. Let’s say a company is struggling during an economic downturn and must lay off a portion of its workforce. Does the CEO of the company take his or her annual raise or take a pay cut when others are losing their jobs? One could say that to take a raise is unethical because the CEO should also sacrifice some pay for the good of the company.
- Fair compensation for employees. Paying employees minimum wage, or just above minimum wage, is not always fair compensation. In most regions, the cost of living has not been adjusted in years, meaning that people are surviving on less money. Ethics can make a difference here.
Ethical business practices, guided by a corporate set of standards, can have many positive outcomes, including recruitment and retention improvement, better relationships with customers, and positive PR.
On the opposite side, unethical business behaviours can have a negative impact on any business. Even if an unethical decision is made by a single member of the executive team, it can have far-reaching repercussions.
Some possible results of unethical business actions may include:
- Poor company reputation. In an increasingly transparent world, unethical decisions made by businesspeople become permanent stains on the company. Social networks have become sounding boards for anything deemed unethical or politically incorrect, and everyone from disgruntled employees to dissatisfied customers can rate companies on public company review websites.
- Negative employee relations. If employees continually see a discrepancy between what’s expected of them and how leadership behaves, this contrast can create serious problems in the management of employees. Some employees may become disengaged, while others will stop working as hard. After all, if the same rules don’t apply to everyone, why even bother? The downside to negative employee relations is that the entire company becomes less productive, less responsive to customers, and less profitable.
- Recruitment and retention problems. Once a company has developed a negative reputation, it can be difficult to recruit new talent, let alone retain the talent that’s already there. Disengaged employees who grow tired of inconsistent standards and lack of commitment to fair, equitable, and inclusive practices will leave. This attrition can impact customers who then have to deal with less experienced and less interested employees, who are already overworked and frustrated.
- Lost organizational credibility. Customers are savvy enough to follow what’s going on from an ethics standpoint. If they hear of a problem, they begin to question the actions of every person at the company. For example, if a member of the board is accepting expensive gifts from clients in exchange for favorable pricing of materials, this situation could set off major alarms for other customers, and even vendors. The company can expect to lose business if this unethical behaviour continues.
As you can see, poor ethics can quickly spiral downward, destroying every aspect of the business and making it very difficult to compete. It’s critical for every business to pay attention to ethical standards and continually remind employees at all levels that their behaviour has an impact on the entire organization.
Establishing a Code of Conduct
To educate and guide others in the organization, a set of ethics, or a code of conduct, should be developed and distributed. A good code of conduct is a working document that can be updated and shared as needed. Many companies include this document as part of their employee manual, while others use a secure intranet for displaying this information. No matter where or how it is accessed, employees need to be educated about the code of conduct and refer to it regularly, beginning from their first day on the job.
What to Do When Something Goes Wrong
It should be noted that along with a code of conduct, there needs to be a clear “whistleblower” policy in which violators are identified and action is taken. This process should be handled with complete confidentiality and sensitivity to the company and all parties involved. Retaliation should never be tolerated when it comes to ethics violations. The company should have a step-by-step plan of action for dealing with ethics problems at all levels, up to and including the executive leadership of the company. A third-party investigative firm can be used to handle such matters to remove the burden and influence that internal resources may have.
