Module - 1 Business Ethics and Corporate Governance Meaning & Definition of Ethics and Business Ethics: Business ethics

is an application of ethical judgments to business activities. There was an argument whether ethics should form a part of business or not. This resulted in three different views: Unitarian view, Separatist view and Integration view. Unitarian view argues that morality and ethics are related to business. The Separatist view expressed that, business should concentrate on profits, and ethics and morality do not form a part of business. The Integration view defined a new area called business ethics, where ethical behavior and business are integrated. The external forces like government, market system, law and services will guide the ethical behavior of the business. Nature of Ethics: The followings are characterized as the nature of ethics. 1. Ethics deals with human beings 2. Ethics belongs to the field of social science. It deals with moral behavior and conduct of human being. 3. The science of ethics is a normative science. It deals with value judgment. It decides what ought to be rather than factual judgments. 4. It deals with human conduct which is voluntary and not forced by other person or circumstances. Sources of Ethics: Five primary sources of ethics have been identified in the American business area by ethics scholars George and John Stever as under: 1. Genetic Inheritance: A lots of evidence and arguments suggests that the evolutionary forces of natural selection influence the development of traits such as cooperation and alteration that lie at the core of our ethical system. 2. Religion: Many business people believe that their religion provides them with ethical principles and standards which are applied in business. Hinduism, Christianity, Islam, Judaism are the great world religions that guides people to behave ethically. The Christians believe the ten commandments as the will of god and so preached in their day to day life. The ethical commands are: You shall not kill You shall not commit adultery You shall not steal You shall not bear false witness against your neighbors You shall not covert your neighbors house. 3. Philosophical system: There are two basic philosophical systems who teach differently to pleasure and pain. The Epicureanism believe that pleasure is the chief good. Whereas the stoics are indifferent to pleasure and pain. Similarly different philosophies guide people differently towards good and bad. 4. Legal System: The law educates us about the ethical course in life. The legal system of a nation guides the businessmen how to deal with employees, shareholders, customers, suppliers and with the society at large. 5. Code of Conduct: The followings are the three primary codes of conduct to shape our ethical judgments. These are as follows: Company Codes Company operating policies Code of Ethics.

Definition of Business Ethics: Business ethics is a form of applied ethics that scrutinizes ethical principles and moral or ethical problems that occur in a business environment. In the more conscientious marketplaces of the 21st century, the demand for more ethical business processes and actions (referred to as ethicism) is mounting. Also, pressures for the application of business ethics are being exerted through enactment of new public initiatives and laws What is Business Ethics? Business ethics demand that a company examines its behavior towards the outside world. It takes into consideration morality, ethical reasoning and ethics application. For instance, the business manager's moral philosophy of situations does affect the manager's ethical beliefs. Moral philosophy pertains to the overall guiding belief system behind the individual's perception of right or wrong. It is important to be acquainted with moral philosophy, ethical reasoning, and especially the application of ethics to business and management. Ethical theories and concepts are important to resolving moral problems confronting business. Employees and managers must integrate moral concerns into their decision-making process. What is ethical business performance? Ethical business performance always adheres to societys basic rules that define right and wrong behavior. One of the major challenges faced by business is to balance ethics and economics. Society wants business to be ethical and economically profitable at the same time. Therefore the ethical decision should be right, proper and just. Ethical Objectives: The followings are the basic objectives of ethics. 1. It studies human behavior. It makes evaluative assessment of what is moram and what is immoral. 2. It establishes moral standard/norms of behavior. 3. Makes judgment of human behavior based on these standards and norms. 4. It prescribes moral behavior. It makes recommendation how to or how not to behave. 5. Expresses opinion about human attitude or conduct in general. Importance of Ethics in Business
The need of business ethics can be explained with the help of the following points:-

(1) Introducing Socialism in Business: This means the gains of business must be shared by all concerned and not just by owner of business. Profit is the result of group efforts and hence all concerned must share the same. In other words, the concept of socialism in business say that workers, shareholders, consumers all others who contribute to the success of the business must share its gain. (2) Interest of Industry: Business ethics are required to protect the interest of small business firms. Big firms normally try to dominate and eradicate small firms. If industry follows code of conduct, small firms can fight for their existence and stay in the business for long. (3) Buyers Market: In recent times, structural changes have taken place in the concept of business. In case of many products, sellers market has been converted into buyers market. Under such changed business conditions

business ethics is needed to stress the importance of consumer satisfaction and service orientation in place of profit orientation. (4) Better Relations with Society: Code of conduct results in better relations between business and society. It will reconcile conflicting interest of various sections of the society such as workers, shareholders, consumers, distributors, suppliers, competitors and government. (5) Advantages to Business and Society: Ethics point out what is good and bad, so also what is right or wrong. It brings to the notice of the business community the importance of honesty, sincerity, fairness which makes them alert and socially conscious. In the final analysis, business ethics help the business and society at large. It ensures healthy atmosphere in business which ensures improvement in social, economic and cultural values of the society.

Objectives of Business Ethics Statement To establish a framework for professional behavior and uphold values such as trust, transparency, honesty and integrity in all dealings; To increase the awareness to management and employees of the companys ethical stand in carrying out the daily activities and the discharge of responsibilities; To comply and maintain high ethical standards, obeying all applicable laws and regulations locally and internationally. Nature of business ethic 1. Most ethical questions could be of two types overt and covert: eg. Theft, sabotage etc. 2. Ethical issues commonly occur in management. E.g. if two firms are merged, ethical question arises with regard to demoting or firing the employees of those who have been serving honestly for many years. 3. Ethics want a manager to be honest within himself and also in the society. 4. Following characteristics for a decision to be ethical are needed: a) Right b) Equitable c) Justice is not only done; also seen to have been done. d) Proper e) Highest good for all concerned f) Honest 5. Ethical decision should express some obligations to others. The very concept of being ethical means that results in some good for the larger society and means that results in some good for the larger society. Scope of business ethics: The scope and application should extend throughout the company. The Code of Ethics statement is applied to all levels of management and employees, customers, suppliers, contractors, government authorities, and associated bodies or organizations. There are following scope which has illustrated below: 1. Stakeholders Employees Security of job Better working conditions Better recommendations participative management welfare Customers

 Better quality goods Goods and services at reasonable price Not to corner stocks and create securities Not to practice discriminatory pricing Not to make false claims about products in advertisements. Shareholders Ensure capital appreciation Ensure steady and regular dividends Disclose all relevant information Protect minority shareholders interests Not to window dress balance sheets Protect interests in times of mergers, amalgamations and takeovers. Banks and other lending institutions Guarantee safety of borrowed funds Prompt repayment of loans Government Complying with rules and regulations Honesty in paying taxes and other dues Acting as partner in the progress of the country. 2. Personal policy level Not to use office car, stationery and other facilities for personal use. Not to fall prey to short ends. Not misuse others for personal Not to indulge in politics to gain power. Not to spoil promotional chances to others Promise keeping Mutual help. 3. Societal level Concern for poor and downtrodden No discrimination against any particular section or group Concern for clean environment Preservation of scarce resources for posterity Contributing to better quality of life. 4. Internal policy level Fair practices relating to requirement, compensation, layoffs, perks, promotion etc. Transformational leadership to motivate employees to aim at better and higher things in life Better communication at levels. Objective of business ethics:

A) Analysis and evaluation- it leads to an ethical diagnosis of past actions and events.

B) Therapeutic (curative) advice- it suggests solutions and policies when facing the present dilemmas and future dangers, based on well informed opinions. This specially requires and identification of relevant stakeholder and a clear understanding of the vital issues at stake. There are following factors are responsible for business ethics: Business may be defined as a set of standards or principles governing the moral conduct of businessman. There are many factors influencing business ethics. Some of them are social values, legislation, industry norms, personal values and professionalization. The main determinants of business ethics are as follows: Social forces and pressure exercise considerable influence on business ethics. Often, different groups in society compel businessman to discontinue unethical issues. Laws are generally passed to keep a check on unethical practices. They are the result of social pressures. When society considers a practice unethical, it may exercise its influence to get that practice declared illegal. In some industries and trades, specific codes of conduct have been laid down. In addition, many organizations have laid down guidelines for regulating their behavior of their employees. Most industries have ethical climate which governs the code of conduct of the employees. The personal beliefs of the individuals working in an organization also influence business ethics. However sometimes there is conflict between personal moral values and company goals. Generally employees look at their superiors and tend to adopt their values and actions. The behavior of competitors and associates also influences business ethics Professional managers normally tend to have higher ethical standards than family managers. Therefore growing professionalisation of management has exercised a healthy influence on ethics in business.

Characteristics of business ethic: Ethical decisions differ with the individual perspective of different persons. Each person views the ethical question in terms of his/her own frame of reference. Ethical decisions are not limited to them, but affect a wide range of other situations as well. Ethical decisions do not end in themselves but have widespread ramifications. Most ethical decision involves a tradeoff between costs incurred and benefits received. It needs to be clearly understood that costs and benefits, profits and responsibilities are two ends of a single spectrum. The consequences of most ethical decisions are not clear and are ambiguous in nature. It is not often clear what the consequences will be of an unethical decision, either of an individual or of an organization. Every person is individually responsible for the ethical or unethical decision or action that he / she takes. Ethical decisions are voluntary human actions. All human beings have the freedom of choice and of free will.

Ethical Aspects in Marketing Frameworks of analysis for marketing ethics Possible frameworks:

Value-oriented framework, analyzing ethical problems on the basis of the values which they infringe (e.g. honesty, autonomy, privacy, transparency). An example of such an approach is the AMA Statement of Ethics. Stakeholder-oriented framework, analysing ethical problems on the basis of whom they affect (e.g. consumers, competitors, society as a whole). Process-oriented framework, analysing ethical problems in terms of the categories used by marketing specialists (e.g. research, price, promotion, placement).

Specific issues in marketing ethics Market research Ethical danger points in market research include:

Invasion of privacy. Stereotyping.

Stereotyping occurs because any analysis of real populations needs to make approximations and place individuals into groups. However if conducted irresponsibly, stereotyping can lead to a variety of ethical undesirable results. In the AMA Statement of Ethics, stereotyping is countered by the obligation to show respect ("acknowledge the basic human dignity of all stakeholders"). Market audience Ethical danger points include:

Targeting the vulnerable (e.g. children, the elderly). Excluding potential customers from the market: selective marketing is used to discourage demand from undesirable market sectors or disenfranchise them altogether.

Examples of unethical market exclusion or selective marketing are past industry attitudes to the gay, ethnic minority and obese ("plus-size") markets. Contrary to the popular myth that ethics and profits do not mix, the tapping of these markets has proved highly profitable. For example, 20% of US clothing sales are now plus-size.Another example is the selective marketing of health care, so that unprofitable sectors (i.e. the elderly) will not attempt to take benefits to which they are entitled.A further example of market exclusion is the pharmaceutical industry's exclusion of developing countries from AIDS drugs. Examples of marketing which unethically targets the elderly include: living trusts, time share fraud, mass marketing fraud and other.The elderly hold a disproportionate amount of the world's wealth and are therefore the target of financial exploitation.[12] In the case of children, the main products are unhealthy food, fashionware and entertainment goods. Children are a lucrative market: "...children 12 and under spend more than $11 billion of their own money and influence family spending decisions worth another $165 billion", but are not capable of resisting or understanding marketing tactics at younger ages ("children don't understand persuasive intent until they are eight or nine years old"). At older ages competitive feelings towards other children are stronger than financial sense. The practice of extending children's marketing from television to the schoolground is also controversial (see marketing in schools). The following is a select list of online articles:

Sharon Beder, Marketing to Children (University of Wollongong, 1998). Miriam H. Zoll, Psychologists Challenge Ethics Of Marketing To Children (American News Service, 2000) Donnell Alexander and Aliza Dichter, Ads And Kids: How Young Is Too Young? Rebecca Clay, Advertising to children: Is it ethical? (Monitor on Psychology, Volume 31, No. 8 Sept. 2000) Media Awareness Network, How marketers target kids

Other vulnerable audiences include emerging markets in developing countries, where the public may not be sufficiently aware of skilled marketing ploys transferred from developed countries, and where, conversely, marketers may not be aware how excessively powerful their tactics may be. See Nestle infant milk formula scandal. Another vulnerable group are mentally unstable consumers. The definition of vulnerability is also problematic: for example, when should endebtedness be seen as a vulnerability and when should "cheap" loan providers be seen as loan sharks, unethically exploiting the economically disadvantaged? Pricing ethics: List of unethical pricing practices.

price fixing price skimming price discrimination variable pricing predatory pricing supra competitive pricing price war bid rigging dumping (pricing policy)

Ethics in advertising and promotion Content Ethical pitfalls in advertising and promotional content include:

Issues over truth and honesty. In the 1940s and 1950's, tobacco used to be advertised as promoting health. Today an advertiser who fails to tell the truth not only offends against morality but also against the law. However the law permits "puffery" (a legal term).The difference between mere puffery and fraud is a slippery slope: "The problem... is the slippery slope by which variations on puffery can descend fairly quickly to lies.". Issues with violence, sex and profanity. Sexual innuendo is a mainstay of advertising content (see sex in advertising), and yet is also regarded as a form of sexual harassment. Violence is an issue especially for children's advertising and advertising likely to be seen by children. Taste and controversy. The advertising of certain products may strongly offend some people while being in the interests of others. Examples include: feminine hygiene products, hemorrhoid and constipation medication. The advertising of condoms has become acceptable in the interests of AIDS-prevention, but are nevertheless seen by some as promoting promiscuity. Some companies have actually marketed themselves on the basis of controversial advertising - see Benetton. Sony has also frequently attracted criticism for unethical content (portrayals of Jesus

which enfuriated religious groups; racial innuendo in marketing black and white versions of its PSP product; graffiti adverts in major US cities). Negative advertising techniques, such as attack ads. In negative advertising, the advertiser highlights the disadvantages of competitor products rather than the advantages of their own. The methods are most familiar from the political sphere: see negative campaigning.

Delivery channels

Direct marketing is the most controversial of advertising channels, particularly when approaches are unsolicited. TV commercials and direct mail are common examples. Electronic spam and telemarketing push the borders of ethics and legality more strongly. Shills and astroturfers are examples of ways for delivering a marketing message under the guise of independent product reviews and endorsements, or creating supposedly independent watchdog or review organisations. For example, fake reviews can be published on Amazon.[21] Shills are primarily for message-delivery, but they can also be used to drive up prices in auctions, such as Ebay auctions.

The use of ethics as a marketing tactic Business ethics has been an increasing concern among larger companies, at least since the 1990s. Major corporations increasingly fear the damage to their image associated with press revelations of unethical practices. Marketers have been among the fastest to perceive the market's preference for ethical companies, often moving faster to take advantage of this shift in consumer taste. This results in the expropriation of ethics itself as a selling point or a component of a corporate image.

The Body Shop is an example of a company which marketed itself and its entire product range solely on an ethical message, although its products were deceptively characterized and its history was marked by misrepresentations. "The Body Shop's only real product is honesty..." (Jon Entine in an ethics audit of the company). However the story of the Body Shop ended with increasing criticism of a gap between its morals and its practices. Greenwash is an example of a strategy used to make a company appear ethical when its unethical practices continue. Liberation marketing is another strategy whereby a product can masquerade behind an image that appeals to a range of values, including ethical values related to lifestyle and anti-consumerism.

"Liberation marketing takes the old mass culture critique consumerism as conformity fully into account, acknowledges it, addresses it, and solves it. Liberation marketing imagines consumers breaking free from the old enforcers of order, tearing loose from the shackles with which capitalism has bound us, escaping the routine of bureaucracy and hierarchy, getting in touch with our true selves, and finally, finding authenticity, that holiest of consumer grails." (Thomas Frank) APPROACHES TO ETHICAL DECISION MAKING: Business owners often face difficult ethical dilemmas, such as whether to cut corners on quality to meet a deadline or whether to lay off workers to enhance profits. A current ethical debate concerns the use of extremely low-wage foreign workers, especially in the garment industry. The intense pressures of business may not always allow you the luxury of much time for reflection, and the high stakes may tempt you to compromise your ideals. How will you respond? No doubt, you already

have a well-developed ethical outlook. Nevertheless, by considering various approaches to ethical decision making, you may be better able to make the right choice when the need arises. The subject of business ethics is complex. Fair-minded people sometimes have significant differences of opinion regarding what constitutes ethical behavior and how ethical decisions should be made. This article discusses four approaches that business owners can use to consider ethical questions. The method you prefer may not suit everyone. Hopefully, by considering the alternatives, you will be able to make decisions that are right for you. Utilitarian The utilitarian approach to ethical decision making focuses on taking the action that will result in the greatest good for the greatest number of people. Considering our example of employing low-wage workers, under the utilitarian approach you would try to determine whether using low-wage foreign workers would result in the greatest good. For example, if you use low-wage foreign workers in response to price competition, you might retain your market share, enabling you to avoid laying off your U.S. employees, and perhaps even allowing you to pay your U.S. employees higher wages. If you refuse to use low-wage foreign workers regardless of the competition, you may be unable to compete. This could result in layoffs of your U.S. workers and even your foreign workers, for whom the relatively low wages may be essential income. On the other hand, using low-wage workers may tend to depress the wages of most workers, thus reducing almost everyones standard of living and depressing their ability to purchase the very goods you and others are trying to sell. Moral Rights The moral rights approach concerns itself with moral principles, regardless of the consequences. Under this view, some actions are simply considered to be right or wrong. From this standpoint, if paying extremely low wages is immoral, your desire to meet the competition and keep your business afloat is not a sufficient justification. Under this view, you should close down your business if you cannot operate it by paying your workers a "living wage," regardless of the actions of your competitors. Universalism The universalist approach to ethical decision making is similar to the Golden Rule. This approach has two steps. First, you determine whether a particular action should apply to all people under all circumstances. Next, you determine whether you would be willing to have someone else apply the rule to you. Under this approach, for example, you would ask yourself whether paying extremely low wages in response to competition would be right for you and everyone else. If so, you then would ask yourself whether someone would be justified in paying you those low wages if you, as a worker, had no alternative except starvation. Cost-Benefit Under the cost-benefit approach, you balance the costs and benefits of taking versus not taking a particular action. For example, one of the costs of paying extremely low wages might include negative publicity. You would weigh that cost against the competitive advantage that you might gain by paying those wages.

Conclusion In our complex global business climate, ethical decision making is rarely easy. However, as a business owner, you have several models available for analyzing your ethical dilemmas. Sometimes one approach will be more appropriate than another. If you take time to consider the various possibilities, you are more likely to make a decision you believe is ethically correct.