11.1 Business Ethics

Doing good business requires attention to ethics as well as law. Understanding the long-standing perspectives on ethics helps sort out the ethical issues we face as individuals and businesses. Each business needs to create or maintain a culture of ethical excellence, where there is ongoing dialogue not only about the best technical practices but also about the company’s ethical principles and practices. A firm that has purpose and passion beyond profitability is best poised to meet the needs of diverse stakeholders and can best position itself for long-term, sustainable success for shareholders and other stakeholders as well.

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 consists 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, trustworthiness and other virtues by which we hope to identify our behaviour and 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.

– S.M Byars and K. Stanberry

For many people, it is far from easy to recognize an ethical problem and know how to proceed. Even when a clear process exists to report an ethical issue, a perceived lack of support within an organization or business may 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 support are important elements for creating and maintaining business ethics. There is no universally accepted way to develop 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 should be kept in mind:

1. Although morals and ethics are not precisely measurable, people generally react similarly to what actions or conduct can rightly be called ethical or moral.
2. It is generally the case that people appreciate and need ethical codes, practices and perspectives.
3. 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 this is not always true.

Business ethics are foundational for building a successful organization. If an organization is built on socially responsible values, it will be stronger than one 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 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. Many legal maneuvers 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.

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 and 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 and law do better; customers view them more favourably. However, 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 much 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. Organizations have often learned that in the long term, they do not satisfy the market, the shareholders, the suppliers, or the community by focusing on pushing the edge of what is legal or looking for loopholes in the law that would help create short-term financial gain. 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.

The Core Values

Here are the core values and their subcomponents developed by the Josephson Institute of Ethics.

• Trustworthiness: Be honest; be sincere and 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 and talk the talk, be what you seem to be, and 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; do not spread rumours or engage in harmful gossip; do not violate your principles to win friendship or approval; do not ask a friend to do something wrong. Keep promises—keep your word, honour 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 for 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 do not make excuses or take credit for other people’s work.
• Pursue excellence: Do your best, don’t quit easily, persevere, be diligent, and make all you do worthy of pride. Exercise self-restraint—be disciplined and 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; do not let personal feelings improperly interfere with decisions; do not take unfair advantage of mistakes; do not 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 neighbours, pay taxes, be charitable, help your community, protect the environment, and 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. Step 5 in the decision process is unnecessary in nine out of ten cases.

That said, it does not follow that students (or managers) would necessarily act according to 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 ideals or the most ethical solutions for individuals and 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 may seem pointless because if you or your organization acts ethically, others will not. 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, and ancestral relationships. While there is much diversity among Indigenous Peoples and Nations, Indigenous ethics resonate with the values of honour, trust, honesty, and humility; they reflect a commitment to the collective and embody a respectful relationship with the natural world.

Ethical thinking begins at birth in Indigenous communities, with storytelling as the primary learning process. Storytelling guides behaviour and solidifies belonging and responsibility to the family, community, and larger world. Through stories, a child develops an 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 caring for one another, collective decision-making, and sustainability. All are based on a value system 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 maintain a connection to the land and 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.

Analogously, the story of an organization is embedded in the culture of the organization, and it is that story that 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 than the role of business in society, particularly whether corporations have social responsibilities 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, the planet, and profits.

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 evaluating whether an organization is creating ethical practices by determining the impact of each practice. Some examples include:

• Executive compensation rates during employee layoffs. Let us say a company is struggling during an economic downturn and must lay off a portion of its workforce. Does the company’s CEO take their annual raise or pay cut when others lose their jobs? One could say that taking a raise is unethical because the CEO should also sacrifice some pay for the company’s good.
• Fair compensation for employees. Paying employees minimum or just above minimum wage is not always fair compensation. In most regions, the cost of living has not been adjusted in years, meaning 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 improvement in recruitment and retention, better relationships with customers, and positive public relations.

On the other hand, 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 do not apply to everyone, why even bother? The downside to negative employee relations is that the 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 have to deal with less experienced and less interested employees who are overworked and frustrated.
• Lost organizational credibility. Customers are savvy enough to follow what is 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 board member accepts expensive gifts from clients in exchange for favourable 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. Every business must pay attention to ethical standards and continually remind employees at all levels that their behaviour impacts 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 in their employee manual, while others use a secure intranet to display 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 company’s executive leadership. A third-party investigative firm can be used to handle such matters to remove the burden and influence that internal resources may have.

Supporting Ethical Behaviour or Practices in Purchasing

Organizations have a variety of ways to promote ethical behaviour and practices. If the organization is quite large, its goal is to develop a corporate code of ethics to guide each department, and all employees must see that the ethics program is driven by management. The organization’s culture dictates the codes of ethics and codes of conduct, and all employees must be aware of and act in full accordance with policies and procedures.

Means of Supporting Ethical Behaviour in Purchasing

Top management must work to establish a culture that reinforces ethical behaviour and does not tolerate ethical lapses. Executive management must also lead by example and not look the other way or, worst of all, act unethically themselves. When employees do act unethically, management should respond appropriately. This can include taking direct and immediate disciplinary action against such employees.

Companies should also develop written corporate and supplier codes of conduct that clearly describe how buyers and suppliers are expected to act ethically. These codes should be distributed to internal participants and suppliers. They are distributed to suppliers because suppliers are also expected to abide by the codes of conduct in such documents. Organizations are encouraged to develop and enforce policies supporting ethical principles and standards.

The following are additional examples of how companies can support ethical behaviour among their procurement employees:

• Organizations have corporate compliance programs and training that are mandatory for employees.
• Buying organizations may choose to rotate procurement personnel to avoid buyers becoming too comfortable with specific groups of suppliers.
• A beneficial way to promote ethical behaviour is to designate a corporate ombudsman who investigates and attempts to resolve complaints, problems, and concerns.

Professional Principles and Standards of Ethical Conduct