CHAPTER 1

BUSINESS ETHICS: CONCEPTUAL

COMPREHENSION
Table of Contents

 Business Ethics: An Introduction

 History and Development of Business Ethics
 Concept of Business Ethics
 Elements of Business Ethics
 Ethics and Law
 Ethical Behavior
 Relationship between Business and Ethics
 Why Ethics matters in Business?
 Pressure Points for Ethical Behavior
 Why be ethical in business? Who cares
Business Ethics: An Introduction

 Greek historian Polybius once said that “Carthage fell because it had become a place where
nothing that leads to profit is considered as disgraceful”.

 The statement shows that ethical problems faced by the modern business are not new and the
ethical problems faced by our ancestors were in no way more different than what we are facing
today. It is only the cultural and technological contexts of these problems that have changed
over the time.

 “Is the Ethics of the Business Changing?”, was the question asked by Professor Steven Brenner
and Earl Molander in their epic article published in 1977.

 Their study found that the moral compass of the business has remained steady with signs of
improvements in some areas and remaining unchanged in other areas.
 Ian Maitland in his article titled, “A Theory of Ethical Business Cycle”, argues that the business
ethics is related to the business cycle. It deteriorates during boom period and improves during
recession.

 However, Professor Joanne B Ciulla counters this argument saying, “ There are moral problems
inherent in business and human nature that makes ethics a constant struggle, regardless of business
cycle or system of regulations”.

 Modern business is plagued by many ethical problems mainly arising due to complex business
conditions and human nature.

 Business schools across globe are realizing the need to introduce business ethics as a compulsory
subject to address the ethical concerns of modern business and to produce ethically strong business
leaders
History and Development of Business
Ethics
 There seems to exist an inextricable relationship between business history and business ethics.

 Wallace Donham, the Second Dean of Harvard Business School wanted a business school curriculum
that would prepare students to take on the responsibility of managing the moral impact of business and
technology on society. This led HBS to introduce a course on business history into its curriculum in
1927.

 It was only in 1928, when HBS became the first business school to introduce a course on Business
Ethics.

 Carl F Taeusch, from University of Iowa was hired to teach the course but the course had to be
discontinued from the curriculum in 1935, after the students complained of the course being too
 In 1988 HBS introduced its first required module “Decision Making and Ethical Values.”

 In addition to Harvard, Universities like Yale Stanford and the University of California at Berkeley have
started the course of Business Ethics.

 The first conference on business ethics was organized at the University of Kansas in November, 1974.

 The first meeting of the Society for Business Ethics was held on April 25, 1980 in Detroit in conjunction
with the meeting of the American Philosophical Association.

 The development of Business Ethics in US attracted some eminent scholars of Business Ethics European
scholars to initiate the European Business Ethics Network (EBEN), which held its first meeting in 1987.

 In modern time, Business Ethics has become inextricable from business studies and many business schools
have devoted a separate course on this subject in their curriculum, but it will not be an exaggeration to
state that the development of Business Ethics as a separate and integral part of the business studies
curriculum is still in its nascent phase in many parts of the world.
Concept of Business Ethics

 The word Ethics is derived from the Greek word ethikos and ethos meaning custom, habit, or
character.

 The Oxford dictionary defines the term ethics as “the moral principles which govern a person's
behaviour or the conducting of an activity.”

 Ethics therefore can be defined as moral standards that guide a person in differentiating between right
or wrong, good or evil, Profit and wealth maximization are the primary objectives of business.
However, the promoters may jeopardize the entire organization if they compromise with the ethical
principles in maximizing profit and wealth.

 Accordingly, Business ethics helps us in applying the ethical principles to examine and solve the
complex business problems and ethical dilemmas.
 It is through the process of ethical reasons that bad things are avoidable and great things become more
probable.

 It is based on the principles of integrity, fairness and the benefits to the stakeholders.

 Business Ethics can thus be defined as the accepted set of moral standards which govern and guide the
conduct of business people.

 Values and judgment play pivotal role when a person takes an ethical decision. Values are the behavioural
codes of conducts that guide the actions and judgments across variety of situations.

 They play fundamental role in shaping the beliefs, perception, attitude, behaviour, interests and
personality of a person. Integrity, trust, accountability, transparency are the examples of cherished
business value.
Elements of Business Ethics

 Values, Rights and Duties are three main elements of Business Ethics.

 A company with strong value system may decide to charge reasonable prices from its

 customer’s despite of having monopoly position in the market.

 Rights are the fundamental normative rules about what is allowed of people or owed to people,
according to some legal system, social convention, or ethical theory.

 Duties are the obligations of a person or an organization. A country’s constitution defines not only the
Rights but also the Duties of the person. It is the moral obligation of a person or an organization to
comply with the country’s law.
 Ethics and Law

 There is an inextricable relationship between law and ethics and at times there is also an overlap
between the legal and ethical conduct.

 In general, people believe that the law compliance and abiding conduct is also an ethical conduct.
Some believe that all behaviour which do not violate the law is an ethical behaviour.

 However, this may not be true every time. Everything that is legal may not always be ethical and
everything that is ethical may not always be legal.

 The legal environment of the company varies from region to region and country to country. For
example, in United States, the Foreign Corrupt Practices Act (FCPA) of 1977, amended in 1988,
holds the facilitating payment or "grease payment" as legal.
 As the laws vary from country to country, many developing nations are not having as stringent
environmental laws as are there in developed countries.

 The companies therefore may legally exploit the natural resources and compromise with the
environmental security of a country without violating its law, however, such an act will always be
considered as a serious lapse of business ethics.

 Similarly in one country a particular act may be considered as legal whereas in other country it is
considered as illegal. However, the rules of ethics are likely to remain consistent globally. The domain
of ethics therefore extends beyond the ambit of law.
Ethical Behaviour

 The contour of an individual’s personality and ethical behavior of a person in an organization is

largely determined by cultural, organizational, and external factors.
 Cultural factors like, religion, family, education, tradition, art, literature, and media play pivotal role in
shaping the personality of an individual A good organizational culture should always adopt from the
prevailing social customs and beliefs.

 For example, the Hindu society in general does not consume beef whereas the Muslim society doesn’t
consume pork. A Big Mac beef burger is the signature product of Mc Donald across the globe but, the
company changed its strategy when it decided to penetrate into the Indian market by not offering beef
and pork burger. In this way the company managed to empathize the Indian market by understanding its
culture and sentiments.
 Religion is a part of culture and considered as one of the oldest source of ethics. Despite of some
doctrinal differences, the major religions of the world unanimously consider ethics as an expression of
will of divinity which guide and helps the mankind in taking right decision.

 Religion is the building block of secular ethical doctrine. Major religions like Hinduism, Christianity,
Islam, Judaism and Confucianism are unanimous in propagating the common ethical principles of
truth, non-violence, non-stealing, non possessiveness, perseverance, contentment, right attitude and
complete abstinence from evils.

 Apart from religion, family system, educational background, cultural traditions, literature and media
also contribute significantly in shaping an individual’s personality and determining his ethical
conduct.
 Organizational influences like ethical codes of the organization, organizational culture, perceived
pressure for results, reward/punishment systems also plays a pivotal role in shaping the ethical conduct of
a person.

 Legal/Political Rules, Economic factors and Technological factors are another important source of
business ethics. Legal rules are passed and approved by the legislature of the country. The ethics codified
by the law of the land is binding upon all the organizations. Society expects the business to abide by law
and obeying law is presumed to be ethical behavior. However, laws have their own limit and cannot cover
all the ethical expectations of the society. Economic factors like, business cycle, wage rate, employment
levels and technological factors are also vital and in influencing and determining the ethical behavior of a
person at the work place.
Relationship between Business and
Ethics
 Some classical economists like Adam Smith have given more emphasis on the maximization of profit
by the business with very less focus on ethics. However, other thinkers believe that business is though
not an extension of morality or ethics yet it cannot be kept away from the ethical practices prevalent
in the society where it exists. There exist different views on the relationship between business and
ethics like:

o Unitarian View of Ethics

o Separatist View of Ethics

o Integration View of Ethics

 Why Ethics matters in Business?
 We are living in a world where ethical misconduct has become an order of day to day functioning in
business. Clear lack of ethics and morality is exhibited in almost all the important disciplines of Business
Management. Modern businesses are struggling to maintain a balance between ethics and profit
maximization.

 The EY’s 14 the Global Fraud Survey of 2016 also presents a very dismal picture of the eroding ethical
practices in global businesses. 28 percent Indian respondents cited bribery as an accepted practice of
doing business in India. More than quarter of the respondents in the surveys conducted by consulting
firms Ernst& Young (EY) and PricewaterhouseCoopers (PwC), reported of being affected by the
economic crimes. Many instances of economic crimes in the organization go unreported due to the fear
of retaliation and loyalty to the company and colleagues.
 The unethical conduct in business can lead to the deterioration of relationship between various
stakeholders of the organization and may lower the employee’s morale, creativity and loyalty to the
organization. Organizations with questionable integrity may find difficulty in recruiting and retaining
valued professionals.

 The information flow in the organization will be ineffective and the absenteeism among the employees
will increase if the unethical business conduct is not checked. Therefore, doing business with ethics is
inevitable, as it shapes the culture, values and principles of the organization. It promotes commitment
and confidence amongst the employees and strengthens the foundation of the business as a whole.
Pressure Points for Ethical Behavior

 There exist six major pressure points which shape and guide the ethical conduct of a person.

1. Value forming Social Institutions

2. Work and Career

3. Top Management

4. Peers and Colleagues

5. Organizational Goals

6. Professional Codes
Why be ethical in business? Who cares?
 A question often pops into the young manager’s mind, that why at all should he bother about the
ethics in business? And who actually cares about ethical principles being followed by the business?

 Well! The answer is simple; most of the people want to work with organizations which follow high
standards of ethics. Following the high ethical standard at workplace instills confidence and
satisfaction into the employees. Following high standard of business ethics, an organization can earn
the trust and respect of its customers and common citizens of the country. Thus we see that ethical
business practices may result in higher profits because workers work harder, customers become more
loyal and may even be willing to pay higher prices, suppliers work hard to ensure prompt delivery of
quality supplies, and communities support the firm. We will be discussing in detail, the significance
of business ethics in modern era.
o Business Ethics contributes to Profit and Wealth Maximization: It has been observed that doing
business with ethics increases the performance of the organization without compromising with their
objective of profit maximization and wealth maximization of their shareholders. The Ethisphere-2017
report, which compares the stock price of publicly-traded world’s most ethical companies of 2017 to the
S&P 500 companies over the last two years, states that the world’s most ethical companies of US
enjoyed the ethic premium of 6.6 percent above the US large CAP Index.

 The report further states that ethical companies have historically out-performed other companies on
financial parameters. Thus, it can be said that there is a strong correlation between good ethical
practices and performance that is valued in the marketplace.

 Tata Steel and Wipro Ltd from India were the two companies which found space in the list of World’s
Most Ethical 124 Companies published by Ethisphere. A business with high ethical culture in stills
confidence amongst the internal stake holders (Employees, Managers, and Owners) and external
stakeholders (Suppliers, Government, Shareholders, Customers, Creditors and Society).
o Business Ethics Contributes To Customers and Investors Loyalty: Ethical climate of the firm is
positively associated with customer loyalty. For example, when Samsung discovered that some of the
phones of Galaxy Note 7 series are imploding due to battery flaws, it decided to issue a global recall of it.
As per Samsung, even though, only a handful of Galaxy Note 7 devices had battery issues yet it decided to
replace the entire line. Even though the replacement of more than 2.5 million Galaxy Note 7 devices would
cost $5 billion to Samsung, yet through its responsible and timely action it managed to contain the
customer’s discontent and keep its reputation of making premium quality mobile phones.

 Relationship between a Customer and firm is based on good faith, trust and fair dealings. Business ethics
also increases the investors’ loyalty in the organization. An efficient market generally rewards the ethical
companies with premium pricing.
o Executive Leaders value ethics: Many successful business leaders give utmost importance to ethics and
seriously care about the image of their organization in the society.

 Narayan Murthy, the founder of Indian IT giant Infosys says “if you want to enhance the trust of
employees in the leader, then the leadership of the company has to conduct itself in a manner that
enhances trust.. never before in the history of business community in the world did we have a situation
where trust of man and woman in the street is lowest in business leaders…it is incumbent on our part to
live up to expectations and conduct ourselves in a manner that enhances trust of all stakeholders,
particularly the government and the society.”

 Stressing on the importance on value system in an organization, Murthy says, “Compliance to a value
system creates the environment for people to have high aspirations, self-esteem, belief in fundamental
values, confidence in future and the enthusiasm necessary to take up apparently difficult task.
o Business Ethics Contributes to Employee Commitment and Trust: It has been observed that employees
feel more comfortable and committed in working with organizations which have cultivated good ethical
culture. A good organization with sound ethical culture attracts employee’s trust and they even become
willing to make personal sacrifices for that organization because they believe that their future is tied to the
organization.

 A good ethical culture enhances the productivity and creativity of employees’ along with positively
increasing their job satisfaction and reduction in attrition rate. The good ethical culture of an organization
is reflected in its employee-friendly policies like safe working environment, good pay package, and zero
tolerance towards abusive behavior.

 For example; Infosys, a highly regarded Indian IT firm, known for practicing highest standards of
corporate governance, undertook unique initiative to save the jobs of young IT professionals during
recession of 2001.
An overview of how business ethics is useful in establishing coordination between various
internal and external stakeholders, so as to achieve the target of profit and wealth
maximization.
Summary

 Ethics can be defined as moral standards that guide a person in differentiating between right or wrong,
good or evil. Values and judgment play pivotal role when a person takes an ethical decision. Profit and
wealth maximization are the primary objectives of business. Values, Rights and Duties are three main
elements of Business Ethics.

 The contour of an individual’s personality and ethical behavior of a person in an organization is largely
determined by cultural, organizational, and external factors. There exist different views on the
relationship between business and ethics like: Unitarian View of Ethics holds that the business and ethics
are not separate from each other.

 Thus we see that ethical business practices may result in higher profits because workers work harder,
customers become more loyal and may even be willing to pay higher prices, suppliers work hard to
ensure prompt delivery of quality supplies, and communities support the firm.
 Ethical problems faced by the modern business are not new and only the cultural and technological
contexts of these problems have changed over the time. Modern business is plagued by many ethical
problems mainly arising due to complex business conditions and human nature. Business schools across
globe are realizing the need to introduce business ethics as a compulsory subject to address the ethical
concerns of modern business and to produce ethically strong business leaders.

 Now a day’s business ethics has become a highly deliberated topic in the academic world and many new
courses on business ethics have started popping up. Large corporations have become active in funding
university programs in business ethics, as well as seminars in business ethics for executives. Some
corporations even appoint ethical and compliance officer or moral philosophers to address the ethical
concerns in the organization. For example, company like Cumin's Engine, has even hired a moral
philosopher who is actively involved in the process of corporate planning.
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