Chapter 2
Understanding Business Ethics and S
ocial Responsibility
Ethics in the Workplace
Just what is ethical behavior? Ethics are beliefs about what’s
right and wrong or good and bad. An individual’s values and
morals, plus the social context in which his or her behavior
occurs, determine whether behavior is regarded as ethical or
unethical.
In other words, ethical behavior is behavior that conforms to
individual beliefs and social norms about what’s right and
good. Unethical behavior is behavior that conforms to
individual beliefs and social norms about what is defined as
wrong and bad. Business ethics is a term often used to refer to
ethical or unethical behaviors by employees and managers in
the context of their jobs.
Individual Ethics
Because ethics are based on both individual beliefs and social
concepts, they vary from person to person, from situation to
situation, and from culture to culture. Social standards are
broad enough to support differences in beliefs. Without
violating general standards, people may develop personal
codes of ethics reflecting a wide range of attitudes and beliefs.
Thus, ethical and unethical behaviors are determined partly by
the individual and partly by the culture. For instance, virtually
everyone would agree that if you see someone drop $20, the
ethical thing to do would be to return it to the owner. But
there’ll be less agreement if you find $20 and don’t know who
dropped it.
The Law and the Real World
Societies generally adopt formal laws that reflect prevailing ethical
standards or social norms. For example, because most people
regard stealing as unethical, we have laws against stealing and ways
of punishing those who steal. Those who write laws try to make
them as clear and unambiguous as possible, but interpreting and
applying them can still lead to ethical ambiguities. For instance,
during the aftermath of Hurricane Katrina, desperate survivors in
New Orleans burgled grocery stores for food. Although few people
criticized this behavior, these actions were against the law.
Individual Values and Morals
How should we deal with business situations that are
ambiguous in terms of both ethics and the law? No doubt we
have to start with the values and morals of people in a business,
its managers, employees, and other legal representatives. Each
person’s individual values and morals help determine their
personal code of ethics. Values and morals, in turn, are
determined by a combination of factors. We start to form values
and morals as children in response to our perceptions of the
behavior of parents and other adults. Soon, we enter school,
where we’re influenced by peers, and as we grow into
adulthood, experience shapes our lives and contributes to our
ethical beliefs and our behavior.
Business and Managerial Ethics
Managerial ethics are the standards of behavior that guide individual managers
in their work.8 Although your ethics can affect your work in any number of
ways, it’s helpful to classify them in terms of three broad categories:
• Behavior Toward Employees: This category of managerial ethics relates to
such matters as hiring and firing, wages and working conditions, and privacy
and respect. Ethical guidelines suggest and legal standards require that
hiring and firing decisions should be based solely on a person’s ability to
perform a job. A manager who discriminates against African Americans or
women in hiring exhibits both unethical and illegal behavior. But what about
the manager who hires a friend or relative who is qualified for the job when
someone else might be equally qualified? Or slightly more qualified?
Although such decisions may not be illegal, they may be questionable on
ethical grounds
• Behavior Toward the Organization: Ethical issues can also arise from employee behavior
toward employers, especially in such areas as conflict of interest, confidentiality, and honesty.
A conflict of interest occurs when an activity may benefit the individual to the detriment of
his or her employer. Most companies have policies that forbid buyers from accepting gifts
from suppliers, for instance, because such gifts might be construed as a bribe or an attempt
to induce favoritism. Businesses in highly competitive industries—software and fashion
apparel, for example—have safeguards against designers selling company secrets to
competitors.
• Behavior Toward Other Economic Agents: Ethics also comes into play in the relationship of
a business and its employees with so-called primary agents of interest, mainly customers,
competitors, stockholders, suppliers, dealers, and unions. In dealing with such agents, there
is room for ethical ambiguity in just about every activity—advertising, financial disclosure,
ordering and purchasing, bargaining and negotiation, and other business relationships.
Bernard Madoff’s investment scams cost hundreds of his clients their life savings. He led
them to believe their money was safe and that they were earning large returns when in fact
their money was being hidden and used to support his own extravagant lifestyle. He then
used funds from new clients to pay returns to older clients (this is called a Ponzi scheme).
Madoff’s actions showed a blatant disregard for his investors.
Companies adopt Written Codes of ethics
• Companies adopt Written Codes of ethics (conduct). Many other businesses (Texas
Instruments, Boeing, Apple, and Microsoft among them) have written codes that
formally announce their commitment to do business in an ethical manner. The
number of such companies has risen dramatically in the last three decades, and
today almost all major corporations have written codes of ethics. Even Enron had a
code of ethics, but managers must follow the code if it’s going to work. On one
occasion, Enron’s board of directors voted to set aside the code to complete a deal
that would violate it; after the deal was completed, they then voted to reinstate the
code!
• Hewlett-Packard, for example, has had the same written code of ethics, called The
HP Way, since 1957. Its essential elements are the following:
• . We have trust and respect for individuals.
• . We focus on a high level of achievement and contribution.
• . We conduct our business with uncompromising integrity.
• . We achieve our common objectives through teamwork.
• . We encourage flexibility and innovation.
Social Responsibility
Ethics affect individual behavior in the workplace.
Social responsibility, meanwhile, is a related concept
that addresses the overall way in which a business
attempts to balance its commitments to relevant
groups and individuals in its environment. These
groups and individuals are often called organizational
stakeholders, who are groups, individuals, and other
organizations that are directly affected by the
practices of an organization and, therefore, have a
stake in its performance.
The Stakeholder Model of Responsibility
Most companies that strive to be responsible to their stakeholders
concentrate first and foremost on five main groups: (1) customers,
(2) employees, (3) investors, (4) suppliers, and (5) the local
communities where they do business.
1) Customers Businesses that are responsible to their customers
strive to treat them fairly and honestly. They also seek to
charge fair prices, honor warranties, meet delivery
commitments, and stand behind the quality of the products
they sell.
2) Employees Businesses that are socially responsible in their
dealings with employees treat workers fairly, make them a part
of the team, and respect their dignity and basic human needs.
3) Investors To maintain a socially responsible stance toward investors, managers
should follow proper accounting procedures, provide appropriate information to
share- holders about financial performance, and manage the organization to protect
share- holder rights and investments. Managers should also strive to be accurate and
candid in assessing future growth and profitability, and they should avoid even the
appearance of impropriety in such sensitive areas as insider trading, stock-price
manipulation, and the withholding of financial data.
4) Businesses and managers should also manage their relations with suppliers with
care. For example, it might be easy for a large corporation to take advantage of
suppliers by imposing unrealistic delivery schedules and reducing profit margins by
constantly pushing for lower prices.
5) Local and International Communities Most businesses also try to be socially
responsible to their local communities. They may contribute to local programs, such
as Little League baseball, get actively involved in charitable programs, such as the
United Way, and strive to simply be good corporate citizens by minimizing their
negative impact on communities.
Areas of Social Responsibility
• Responsibility Toward the Environment
The topic of global climate has become a major issue for business and government alike. However,
although most experts agree that the Earth is warming, the causes, magnitude, and possible solutions
are all subject to widespread debate. In the following sections, we focus on the nature of the
problems in these areas and on some of the current efforts to address them.
1) Air Pollution: results when several factors combine to lower air quality. Carbon monoxide
emitted by cars contributes to air pollution, as do smoke and other chemicals produced by
manufacturing plants.
2) Water Pollution: Water becomes polluted primarily from chemical and waste dumping. For
years, businesses and cities dumped waste into rivers, streams, and lakes with little regard for
the consequences.
3) Land Pollution: How to restore the quality of land that has already been damaged.
4) TOXIC WASTE DISPOSAL An especially controversial problem in land pollution is toxic waste
disposal. Toxic wastes are dangerous chemical or radioactive by-products of manufacturing
processes.
5) RECYCLING Recycling is another controversial area in land pollution. Recycling, the reconversion
of waste materials into useful products, has become an issue not only for municipal and state
governments but also for many companies engaged in high-waste activities.
Responsibility Toward Customers
A company that does not act responsibly toward its customers will ultimately lose their
trust and business. To encourage responsibility, the Federal Trade Commission (FTC)
regulates advertising and pricing practices, and the Food and Drug Administration (FDA)
enforces labeling guidelines for food products. These government regulating bodies can
impose penalties against violators, who may also face civil litigation. For example, the
FTC fined the social networking site Xanga $1 million for allowing children under the age
of 13 to create accounts, in clear violation of the Children’s Online Privacy Protection.
Consumer Rights: Interest in business responsibility toward customers can be traced to
the rise of consumerism, social activism dedicated to protecting the rights of consumers
in their dealings with businesses.
Unfair Pricing: Interfering with competition can take the form of illegal pricing practices.
Collusion occurs when two or more firms collaborate on such wrongful acts as price
fixing.
Ethics in Advertising: Attention is also often focused on ethics in advertis- ing and
product information.
Responsibility Toward Employees
Legal and Social Commitments By law, businesses cannot discriminate against
people in any facet of the employment relationship for any reason not related to
performance. For example, a company cannot refuse to hire someone because of
ethnicity or pay someone a lower salary than someone else on the basis of
gender. A company that provides its employees with equal opportunities without
regard to race, sex, or other irrelevant factors is meeting both its legal and its
social responsibilities. Firms that ignore these responsibilities risk losing good
employees and leave themselves open to lawsuits.
Responsibility Toward Investors
Managers can abuse their responsibilities to investors in several ways. As a rule,
irresponsible behavior toward shareholders means abuse of a firm’s financial
resources so that shareholder owners do not receive their due earnings or
dividends. Companies can also act irresponsibly toward shareholder owners by
misrepresenting company resources.
How Governments Influence Business
The government (national, state, or local) attempts to shape social responsibility
practices through both direct and indirect channels. Direct influence most
frequently is manifested through regulation, whereas indirect influence can take
a number of forms, most notably taxation policies.
• Direct Regulation The government most often directly influences
organizations through regulation, the establishment of laws and rules that
dictate what organizations can and cannot do. This regulation usually evolves
from social beliefs about how businesses should conduct themselves. To
implement legislation, the government generally creates special agencies to
monitor and control certain aspects of business activity.
• Indirect Regulation Other forms of regulation are indirect. For example, the
government can indirectly influence the social responsibility of organizations
through its tax codes. In effect, the government can influence how
organizations spend their social responsibility dollars by providing greater or
lesser tax incentives.