Introduction to Business Ethics

Prof Kalagi Shah

Case1

When the great Greek philosopher Socrates was in jail, awaiting execution on a false charge of capital offense, his friends tried to persuade him to escape rather than face the unfair execution. But he refused because he was convinced that escaping would be morally wrong. Though he was awaiting death for a crime that he did not commit, he chose not to escape from the jail because he was convinced that intentionally doing wrong would harm him more than suffering an unjust death

Case 2

Reportedly, during mid 2008, after drinking the milk supplied by the Sanlu Group in China, 6 children died & nearly 30,000 children fell sick. The milk had been intentionally laced with melamine, a toxic industrial compound that can give a fake positive on protein tests in milk. The officials at Sanlu, contamination, neither made who were aware of this it public to warn the

consuming population nor recalled their product in time to prevent the damage. This scandalous of extra profit. immoral act was committed by few individuals in the company for the sake

Introduction
Our

acts or responses to a situation practically reflect our feelings, thinking and judgment based on our moral principles and values. ultimate aim of ethical behaviour and practice is to feel satisfied (and not necessarily justified) about ones conduct and behaviour or action and its outcome.

The

What is Ethics?
Ethics:
is a branch of philosophy.

is a normative science because it is concerned with the norms of human conduct as a science, involves systemising, defending and recommending concepts of right and wrong behaviour.

What is Ethics? (Conti..)

Ethics is a system of moral principles and attitude that guides our actions to be morally correct, fair and just. Ethics is about enforceable morality, justice and fairness of conduct, actions and governance by individuals, institutions, companies, organisations, societies and governments. However, ethics are not the law itself nor are they instruments parallel to the laws of the land. Ethics is seen as an individual's own personal attitude and a belief concerning what is right or wrong, good or bad. It is important to note that ethics reside within individuals and that organization doesn't have ethics. People have ethics

The Golden Rule

Do the same thing to your fellow as you would desire to be done to you.

In short .
y

Ethics is about self education & self regulation as to how to be guided in actions & decisions by some moral principles & values so that one is satisfied about his or her own actions & outcome.

Ethics & Law

To better understand ethics let us understand and contrast the definition of ethics and law Law is a consistent set of universal rules that are widely published, generally accepted and usually enforced. These rules describe the ways in which people are required to act in society. Ethics defines what is good for the individual and for society and establishes the nature of duties that people owe to oneself and others in society

Relation between ethics and law

Principles of Personal Ethics

1. 2. 3. 4. 5. 6. 7. 8.

Personal ethics refer to the application of values in everything one does. Principles of personal ethics include:
Concern for the well being of others; Respect for the autonomy of others; Trustworthiness and honesty; Willing compliance to law; Basic justice: being fair; Refusing to take unfair advantage; Benevolence: doing good; and Preventing harm to any creature.

Principles of Professional Ethics

The basic principles people are expected to follow in their professional career are the following:
Impartiality: neutrality; Trustworthiness and honesty; Openness: Full Disclosure; Confidentiality: Trust; Due Diligence: Duty of care; Fidelity to professional responsibilities; and Avoiding potential or apparent conflict of interest

1. 2. 3. 4. 5. 6. 7.

Nature of Ethics
1.

The concept of ethics deals with human beings only. Only human beings are endorsed with the freedom of choice.

2.

The study of ethics has become a set of systematic knowledge about moral behavior & conduct;- field of social science.

3. 4.

The science of ethics is a normative science. It deals with human conduct which is voluntary & not coerced by persons. It is basically an area dealing with moral judgment regarding voluntary human conduct

Why have a code of ethics? Or Objectives of Ethics

y

Makes evaluative assessment about what is moral & immoral To define acceptable behavior Makes judgment upon human behavior based on these standards & norms To establish a framework for professional behavior and responsibilities To provide a benchmark for self-evaluation

y y

What is Business Ethics?

Business ethics is the application of general ethical ideas to business behaviour.

It deals with the study of the problems arising in the relationship between the field of business & its management. business ethics is the art & discipline of applying ethical principles to examine & solve complex moral dilemmas

It is based on the principle of integrity and fairness and concentrates on the benefits to the stakeholders, both internal and external. Stakeholder includes those individuals and groups without which the organisation does not have an existence. It includes shareholders, creditors, employees, customers, dealers, vendors, government and the society.

What is not Business Ethics?

Ethics is different from religion y Ethics is not synonymous with law y Ethical standards are different from cultural traits y Ethics is different from feelings.
y

Code of Conduct and Ethics for Managers

Managers must observe the following ethical values while performing their duties:

Integrity Impartiality Responsiveness to public interest Accountability Honesty Transparency Integrity

Importance and Need for Business Ethics

A business organisation competes in the global market on its own internal strength, in particular, on the strength of its human resource, and on the goodwill of its stakeholders.

The value-based management and ethics that an organisation uses in its governance enables it to establish productive relationship with its internal customers, and lasting business relationship with its external customers.

Business needs to function as a responsible citizen

Reasons for occurrence of ethical problems

Personal Gain y Clash of personal values & business goals y Competitive Pressure on profit
y

Values and Ethics in Business

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A value is a view of life and judgement of what is desirable. Business ethics relates to issues of what is right and what is wrong while doing business. What values are to individuals, ethics are to business. Business ethics operates as a system of values, relating business goals and techniques to meet specific human ends

Distinction between Values and Ethics

Values
Personal in nature (eg. a belief in providing customer satisfaction and being a good paymaster)

Ethics
Generalised value system (eg. avoiding discrimination in recruitment and adopting fair business practices). Provides general guidelines within which the management can operate.

Offer alternatives to choose from.

Why should Businesses act Ethically?

The reasons for an organisation to be ethical include: To protect its own interest, so that the public will have trust in it. To keep its commitment to society to act ethically, To meet stakeholder expectations. To build trust with key stakeholder groups, To prevent harm to the general public,

Why should Businesses act Ethically? (contd.)

The reasons for an organisation to be ethical include: To protect themselves from abuse from unethical employees and competitors, To protect their own reputations, To protect their own employees, and To create an environment in which workers can act in ways consistent with their values.

Sources of Ethics
y y y y

Genetic Inheritance Religion Codes of conduct Legal system

Ethical Decision Making

Is your decision fair? Is it a win-win situation ? Is your decision legal? If it is not legal, it is not ethical.

How Corporations Observe Ethics in their Organisations? Organisations?

Publish in-house codes of ethics to be strictly followed by all their associates Employ people with a reputation for high standards of ethical behaviour at the top levels Incorporate consideration of ethics into performance reviews. Give rewards for ethical behaviour. SEBI , CII and such other organisations representing corporations, issue codes of best practices and enjoin their members to observe them. IIMs and highly rated B-schools give extensive and intensive instruction in business ethics, corporate social responsibility and corporate governance as part of their curriculum. Conduct an Ethics Audit

Benefits from Managing Ethics in Workplace

The many benefits that arise from managing ethics in the workplace are: 1. Attention to Business Ethics improves Society 2. Ethical practice contributes towards high productivity and strong team work 3. Changing situations require ethical education 4. Ethical practices create strong public image 5. Strong ethical practices act as an insurance

Characteristics of an Ethical Organisation

Mark Pastin provides the following characteristics of ethical organizations:
1. At ease while interacting with diverse internal and external stakeholder groups. 2. Obsessed with fairness. 3. Assuming personal responsibility for actions of the organisation. 4. See their activities in terms of purpose.

CORPORATE GOVERNANCE
y

Corporate governance is a set of processes, policies, regulations, rules, customs and laws governing the way a corporation should be directed, administered and controlled to maximize the efforts of its employees and the resulting gains for all stakeholders.

Stakeholders include shareholders or promoters, board of directors, management, financiers, employees, customers, vendors, society, community, government, etc.

In short
y

Corporate governance is a set of rules that governs the administration and management of companies.

defined as the system by which companies are directed and controlled.

Its goalposts are

o honesty, o openness & transparency, o trust & integrity, o performance orientation, o responsibility & accountability, o values & mutual respect, o full disclosure of financial and non-financial information, and o protection of stakeholders interests.

Strategic Approach to Corporate Governance

The strategic approach to corporate governance is to view it /as a system of structuring, operating& controlling an organization /with an aim to achieve long term strategic goals/ so as to satisfy the interest of its stakeholders & /to comply with the legal & regulatory requirements , /apart from meeting environmental, social & local community needs.

The structure of CG flows downwards from the board of directors to the managing director & below

The basic purpose of CG structuring is to motivate executives & employees to a fair business practice & to effectively utilize various resources so as to maximize efficiency of business.

ETHICS AND CORPORATE GOVERNANCE

y

From the ethics point of view, the aim of corporate governance should be to ensure that certain moral standards are maintained while dealing with the internal systems & administration, product policy & safety, marketing, customer care, order procurement & social responsibility, else the business can suffer, due to loss of reputation, brand image, profitability or financial penalty

Important issues relating to ethics that corporate governance must focus on, are:
o setting ethical standards and rules in the company, o accountability of actions, o managing the trusts, and o managing economic efficiency without compromising ethical principles and values.

ETHICS AND CORPORATE GOVERNANCE (Conti)

To achieve good corporate governance, the following ethical aspects must be ensured:
y y y y y

Rights and equitable treatment of shareholders Protection of interests of other stakeholders Role and responsibilities of the board Integrity and ethical behaviour Disclosure and transparency

Four Pillars of Corporate Governance

y y y y

Accountability Fairness Transparency Independence

Accountability
y

Ensure that management is accountable to the Board Ensure that the Board is accountable to shareholders

Fairness
y y

Protect Shareholders rights Treat all shareholders including minorities, equitably Provide effective redress for violations

Transparency
Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance

Independence
y

Procedures and structures are in place so as to minimise, or avoid completely conflicts of interest Independent Directors and Advisers i.e. free from the influence of others

Why Corporate Governance?

Better access to external finance y Improved company performance sustainability y Reduced risk of corporate crisis and scandals
y

Morality
y

Morality and morality of actions are the yardsticks of ethics. The study of ethics is involved with the investigating & knowing if the outcome of an action has been morally right or wrong. Thus, Morality is the subject matter that ethics investigates through a process of moral reasoning. To determine whether a person has been ethical, his or her moral beliefs & moral standards have to be examined by moral reasoning Moral standards include those norms that we believe are morally right or wrong as well as the value we place on subject matters that are morally good or bad.

CHARACTERISTICS OF MORAL STANDARDS

y

Moral standards deal with subject matters that have serious implications in society, environment and workplace, irrespective of whether the implications are beneficial or harmful. Moral standards are self-regulatory. Moral standards are based on impartial considerations. Moral standards are self-inflicting.

Levels of development of Moral understandingunderstandingKohlberg

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Level I: Childhood Stages

Punishment and obedience orientation: As a child where physical
consequences of an act wholly determine the goodness or badness of an act

Instrument and relativity orientation: When right actions become

those that can serve as an instrument to satisfy the childs own needs.

Level II: Conventional Stages

Interpersonal concordance orientation: where good behavior is
living up to the expectations of those for whom one feels loyal, affection & trust.(right action is what is expected of an individual by the family, friends, teachers etc)

Law and order orientation: where sense of right or wrong comes

from loyalty to the laws of nation

Levels of development of Moral understandingunderstanding- Kohlberg

y

Level III: Principled Stages

Social contract orientation: when the person becomes aware that
people hold variety of conflicting personal views & opinions & that they should be tolerated or adjusted as far as possible

Universal ethical principles orientation: at this stage, a persons

reason for doing what is right are based on his or her understanding of these moral principles

MORAL REASONING FOR ETHICS

y

Moral reasoning tries to logically place or project facts and figures that help one to judge human behaviour, institutional activities, policies, programmes, etc. as to whether they are in accordance to, or in violation of, acceptable moral standards. Distinct features of Moral or ethical reasoning:
identifying what constitutes moral standards; by which actions & results will be measured & compared examining facts and figures concerning the policy, behaviour and actions under the specific situation; and arriving at a moral judgment on the basis of rightness or wrongness of policy, behaviour or actions.

Cont
y

To decide if an action or policy is ethical, one has to exercise moral reasoning by examining the factual information with regard to morality of the action or policy by analyzing:
a) b) c) if justice is being meted out by the decision; the amount of care being shown to those who are related and valued in the subject matter; and the consistency of the decision with the past and present.

MORAL RESPONSIBILITY
y

Moral responsibility means owning responsibility for doing something knowingly and deliberately that had caused harm or injury to others. Establishing moral responsibility has the association with law or rules, in addition to its ethical implications.