Business Eriics -Cuapter OUTLINE }— 17.1 Meaning and Nature of Business Ethics 17.2. Characteristics of Ethical Organization 17.3 Benefits of Adopting Ethics in Business ~ 17.4 Factors Governiing Business Bthies 17.5 Principles of Business Ethics 17.6 Approaches to Business Ethics 17.7 Ethical Governance 17.8 Globalisation and Business Ethics 17.9. . Stakeholders’ Protection 17.10 Code of Ethics 17.11 Steps to Enforce Code of Ethics © Sammary “ © Test Questions x Ethics is concerned with the study of morality. it refers to a set of moral principles that specify what is good or bad, right or wrong, fair or unfair, Ethics relates to the basic question of what human conduct ought to be or what is desirable behavior from the viewpoint of society. The term ‘ethics’ has been derived from the Greek world ‘ethos’ which means character. According to Thomas Garret, “Ethics is the science of judging specifically human ends and the relationship of means toqt Thidiing and Corporate Governance / those ends. In some way, it is also the art of controlling means so that they will serve specifically htiman ends.” In the words of Dale S. Beach; “Ethics, refers, to a set of moral principles which should play.a very ‘significant.role-in guiding the conduct ofmanagers and jentpioyece in: . the-operation of any enterprise.” The terms ‘ethics’ and ‘morals’ até often used interchangeably. In fact, ethics is a broader term.than morals.Moralsare any generally accepted customers and conduct and proper living in a society. Morals indicate what people do whereas ethics indicate what people should do. Values * are our basic beliefs which people consider important to their life. Morals are valués that have gained social acceptance and recognition. Distinction between Morals and Ethics Basis of Morals. Ethics Distinction Meaning Morals are principles of right and | Ethics refers to what is good or wrong. Latin word “mos,” meaning bad. Itrelates to morel duty and obligation. Greek word “ethos,” meaning Root Word Analyse | “Custom.” It is an attribute of a| “character.” Character is a ue group or society. Societies have | personal attribute. People have customs, Character. E Morals are accepted from an | Ethicsare accepted because they Nature authority (cultural, religious, etc) | follows personally accepted principles. : Expression | Morals norms can usually be | Ethical norms are comparati- expressed as general rules or | vely abstract and caiinot be statement such as “always speak | described in general rules and ‘ruth’, statements. Absorption | Morals are typically first absorb- | Ethics are adopted/absorbed by ed by a child from family friends, } an individual gradually be taking school, religious teaching & other | reasonable actions/decisionsi association. appropriate situations. Scope Morals work on a smaller scale | Ethics has a much wider scope than ethics, moje reliably by addressing human needs for belonging and emulation. that includes evaluation, of . moral standards of an individuals or society, to see whether these standards are reasonable or un- reasonable in concrete situations - and issues. .Business Ethtés--——— ~~ 17.1 MEANING AND NATURE OF BUSINESS ETHICS Business ethics meanis'a set of moral standards which should govérn the decisions and actions of business persons. It is the study of which is morally’ acceptable and desirable-in business. ‘According to Velasquez : “Busipess ethics is-a specialised study of moral right or wrong. It. concentrates on moral’ standards as they apply’to business policies, institutions and behavior.” In other words, business ethics involves the- application of moral standards to business relationships and activities. -The main features of business ethics are as follows: (iy Business ethics is. applied ethics. It involves.the application of morality in business. (ii)-Business-ethics is a broad term as it covers all business practices. that are morally right and socially desirable. (iif) Business ethics seeks to make business people honest, fair‘and responsible citizens (iv) Business ethics requires just and fair treatment toall stakeholders. The concept of equity is inherent in ethics. Business ethics is wider than law. Law may permit some business practices which may not be ethical. Vv (vi) By adopting business ethics, businessmen impose on themselyes self-discipline. Business ethics demands that business firms engage in behaviours ' that dre socially responsible. (vii Key issues in business ethics are as follows: 1. Charging fair prices and providing good gealty products and services to customers 2. Using fair weights and measurements for products, 4 Faittreatment to employees q 4, Earning reasonable profits 5. Paying taxes to the Government honestly and in time 1. Manuel G. felasquez: Business Ethics- Concepts and Cases, 2002, P29 a ~Auditing 6. -Protecting environmental resources te Acting as.a-honest and responsible citizen. Conduct, These ‘are derived from social values. For éxample, honesty and truth. are’basic vahiies of society. Theréfore, business people are - expected to bé honest and true, Values,and ethics are inter-related, Ethics is the entire body of morale Which in turn are the language of ethics. Values determine the culture _ of a company. These also serve as the standards by which the conduct : Of corporate executives'can be judged. By following business values a company can fulfill its social responsibilities, * Integrity: We must conduct our’ business fairly, with hanesty and “transparency. Everything we do must stand the test of public scrutiny + Understandiiig: We miust be caring, show respect, compassion andhumanity towards our colleagues and customers around the world, and always work for the benefit of the communities we serve. + Excellence: We,must-constantly strive to-achieve the hjghest possible. standards in onr-day-to-day, work and in the quality for the goods and services we provide. : * Unity: We niust work cohesively with pur colleagues across the Group'and =: with our customers and’partiers around the-world, buildings strong. relationship based on tolerance, understanding and mutual cooperation. «Responsibility: We must continue to be responsible, sensitive to the couniries, communities and environments in which we work, alyays ensuring that what comes from the people goes back to the people many times over. 17.2 CHARACTERISTICS OF ETHICAL ORGANIZATION Main features of an ethical organization are given below: 1. Ethical Imagination: Sensitivity to ethical issues in business decision-making is a prerequisite to ethical behavior. Businessmen= Business Ethics. ys ie must have the ability to identify those situations where decision- making is likely to hurt the interests of others. 2. Ethical Identification: One must have the ability to judge the --relevance of ethical issues and rank them in order, of importance: Issues like plant closure and the right’of employees to know work? hazards require identification and ordering of ethical factors. 3. Ethical Evaluation: In order to evaluate ethical issues properly, "businessmen miust develop clear guidelines. They need the ability to assess the likely economic and social consequences of business decisions. . ° 4. Tolerasice of Ethical Disagreement: Ethical issues aré ~ 0 controversial and ambiguous. Business persons must have high level of tolerance for’differences of opinion and ambiguity on ethical questions. o . 5. Ethical Competence: Managers must be competent both in their jobs-and in ethics. They must integrate the ethical perspective with the business perspective. They have to realise that unethical behavior has to be paid for dearly. 6. Ethical Obligation: Ethical fibres need to be woven into the fabric _ of managerial decision-making. Truth, honesty, justice and fair play are the ethical fibres. 17.3 BENEFITS OF ADOPTING ETHICS IN BUSINESS Business ethics is beneficial in the following ways: 1. Improvement of Society: Business is a part and parcel of society and business activities exercise a significant influence on society. When business firms follow ethical principles and practices, social stung Corpo Governance =" ast Enhi¢s Te ee Ta 3. The Justice Theory ‘The theory also known as fairness theory has emerged out of the Greek philosophers who have contributed to the idea that all equals should be treated equally, Justice does not depend on conse-quentes. -Justice consists in giving each person his or her duc. t depends on the principle of equality. a + The contemporary American Philosopher John Rawls’ objection to utilitarianism is that it does not give adequate attention to the way in which utility is distributed among different individuals. As an alternative to the utiitarian idea of society with highest welfare, Rawls’ proposes a society that recognizes its members as free and equal moral persons. For Rawls’ questions of justice arise primarily where free and equal persons atiempts to advance their own interests and come into conflict ‘with others pursuing their self interests The key to a well ordered society is the creation of institutions that enable individuals with con-ficting ends to interact in mutually beneficial ways. The principle of justice assists in the effort by assigning rights and duties in the basicinstitutions of society and distributing the benefits, and burdens of mutual cooperation. The focus is on social justice. This isto be suited to well ordered society. The question of justice has to be applied to political, legal and economic spheres. According to Rawls there are two principles that a national, self interested person agrees in position of equality 1. Each person is to have an equal right to the most extensive total eee basic liberties compatible with equa similar system of 2. Social and economic inequalities are to be arranged so thas they (a) To the greatest benefit of the least advantage; and (© Atlached to ofices and fositons open to all under the conditions of fair equality hnd opportunity. 4. Kant's Theory of Ethics Kant defines a rational person and differenti nn and differentiates betwee i that pecuey to do from others that we ought not to do In is ie ‘poral obligations have nothingto do with consequences but arise solely ‘moral law that is binding on all. He shows that there are certainattr ‘aponme Ggccrnanee. ; that all human beings possess torian benefits that the exercise of those rights and dures may Brovide for others. His theory is ised on principle of ‘categorical imperative". This implies that everyone should be treated asa tree person equal to eveiyone else. The two rules are: 1 regardless of any Do to others as you would have them do to you. 2 2 Respect each person's freedom by treating people only as they have frecly consented to be treated and develop his consent te freely choose for himself, For determining moral right and wrong the two criteria can be used 1+ Universalizability: This implies thatthe person's reasons for acting must be reasons that everyone could act on, atleast in principle 2. Reversibility: The person's reasons for acting must be reasons that he or she would be willing to have all others use, even as @ basis of way he is treated by them Kant believes that a person is motivated by a sense. of “duty” which makes his actions morally right. And an action will be considered morally right for a person only ifin performing it the person does not use other merely as a means for advancing his own interests. This all can be illustrated by considering one of Kant'’s own examples: "A man finds himself forced by need to borrow money. He well knows that he will not be abl: to-repay it. He also soes that nothing will-be loaned to him if he does not firmly promise to repay it ata certain time. He desires fo imake such a promise, but hewhas enough conscience to ‘ask himself whether it is:not improper and opposed to duty to relieve his distress in siich | ‘The ‘question’ is what should this man do? Kant regards the | | | ! consequences a§ morally irrelevant. He only holds the duty to tell the truth at the time of miaking a promise and not regard the consequences the ini cold do'more good by borrowing money under fi Even if! {ill be wrong sont devised that ahy consequence sich “rathe is joral theory. For exampl rathér than good is thé fundamestal in his to re aes have right to fe his ight hata corresponding duty f fe. A person's fight to his or her property others riot to false his life. A person's right 10 sory fon on ethers not to take the propert imposes the obligation on oth: ny ‘dicre Ja 8 denial tht rights are dependent on consequencs + (Pstencmemmr tnt usin BR ae 17.7 ETHICAL GOVERNANCE Business ethics and corporate governance are coniplementaty to each other. An ethical organization is most likely to apply good governance practice. Similarly, a well-governed organization tends to-be ethical Good governance involves + tansparency ~adequate and timely disclosuie of information to stakeholders, + independent oversight and control on management. + protection of the rights’and interests of all stakeholders. All these are ethical practices, Business ethics isin fact, the foundation ‘on which corporate governance is based. The following etlical guidelines help to improve corporate governance: () Honesty and integrity (8) Complying with both the letter and spirit of laws of the land. (ii) Actin good faith and with due care. (#) Maintain confidentiality of information wherever desirable. (#) Act as trustee of the organization's assets and resources and employ them for the beneficiaries. (xf) Avoid conflict of interest in personal and professiofal relationships. Good corporate governance is not simply a matter of adopting 2 set of ries and regulations but to develop a corporate conscience, which is impossible without business ethics. 17.8 GLOBALISATION AND BUSINESS ETHICS Globalisation has increased the need for and relevance of business ethics. Some of the unethical and undesitable consequences of lobalisation are given as follows: 1, Inequality; According to the Universal Declaration of Human Rights (United Nations) all people are equal. In other words, non- discrimination is a basic and fundamental human right Globalisation has increased inequality and discrimination in the following ways: (2) Inequality between Nations: The rich countries are becoming richer and poor countries are unable to catch up with them.~ pata nd Cire Goreme (b) Creation of Monopolies: Giant multinational corporations are buying out or destroying local firms in host country. For example, soft drinks industry in India is now dominated by Coca Cola and Pepsi (Q Rural urban Disparity; The gains of Globalisation have acerued mainly to urban population. Rural people have gained litle from globalization. The divide between urban and rural population has increased. (@) Discrimination: Discrimination on the basis of race, religion, caste, gender, etc, has increased Environmental Damage: Globalisation has led to rapid industilisation which in turn hes raised pollution of cir, water, sil, etc. to alarming proportion. Forest cover and bio-diversity are being reduced. Cultural Invasion: Globalisation is threatening diversity of cultures, language and values. Meterialism and consumerism of the West are leading to deterioration of moral standards and cultured values, ‘Threat to Democracy: Globalisation increases interde between nations. More powerfal countries are reducing the freedom of poor countries in policy making. Powerful multi nationals pose 2 threat to duly elected governments of small ‘countries. They interfere in the political affairs of nation states and pose a threat to sovereignty of the host nation. = Higherlevels of business ethics and good governance ar required to face the challenges of globalization. With advances in globalization, business practices across are becoming increasingly uniform. Managers from different countries have a similar approach to business. However, ethical standards differ from country to country depending upon national ‘alture. What is considered morally right ant-¥iong taries from ‘one culture to another. Different cultures emphasize the concept of rights, equality, freedom, welfare and rust in diferent degrees. ndence countries While conducting business globaly, itis necessary to understand ‘cultural differences and moral outlook of people in various countries. It is said, for example; that in Asian countries public sraprceranetsteepn ere busines Emir welfare is given more importance than human rights. Similarly, health and safety standards in developed countries are more © stringent than in developing countries. Lavish gifts that are viewed as bribes or kickbacks in the United States are considered as ‘means to strengtlien business relationship in Japan and somé other Asian Countries. - It's, therefore, wrong to impose the standards of home country in host countries or vice versa-Cultural awareness and cultural - sensitivity have become critical due to. globalization of business. Cultural training, cross-cultural communication, multicultural ‘work teams are helpful for this purpose. ° 17.9 STAKEHOLDERS’ PROTECTION All those individuals, groups and organizations who have a stake inthe working and performance of acompany are known as its stakeholders They inflieiice the company and are influenced by it. Therefore, a company must take care ofthe rights and interests of its stakeholders. Sharcholders, creditors, employees (including managers), customers, suppliers, dealers, government and the community ‘ire these stakeholders. They directly or indirectly support a company and, therefore, the company is accountable to them. Ethical business practices and good corporate governance help to protect stakeholders. In addition, legislative measures, rules and regulations, oversight and control, checks and balances’ are necessary. Companies Act, 2013 imposes checks and balances to prevent frauds, make corporate boardroom decisions transparent and hold auditors and directors more accountable. At least @ third of a company’s board should consist of independent directors and at least oize of the board members should be a woman, according to the new law. The Bill also {Contains provisions defining rules for inter-corporate loans and norms for creation of a web of step-down sister companies or subsidiaries will allow creation ofspecialcourfs for speedy trials-an i en speedy trials-an assurance to investors Standing Guard + The law will allow shareholders’ associations to take legal action against promoters and management through ‘class action suits- _. Alavi and Ci + Companiés will hav ry four € to rotate auditors after ever ~ which would prevent promoters and books of accounts. ry four years auditors from cooking the An independent director cannot serve on the board of the same company for more thain two consecutive terms.’ < ‘This will prevent influencing of independent directors to push promoters interests + Every company with a net worth minimum turnover of € 1,000 cro1 crote inva year, three years on « of at least % 500 crore, or a Fe, OF net profit of at least €S Will have. to spend 2% of its average profits of ‘orporate social responsibility activities, What does the new law stipulate about SF10? The law empowers the Serious Fraud Investigation Office (SFIO), an Agency Mandated to investigate corporate scams, with a statutory status armed with the authority to impose punitive measures and in specific instances, even arrest persons found guilty of corporate crimes. Minority shareholders have the right to dissent and can ask the management to buy them out According toa Study from the Ethics Resources Centers 00 onl Business Ethics Survey recession played a role in improving business ethics. Not only had the over-all misconduct gone down (from soni 2007 to 49% in 2009) but the whistle-blowing also increased by 63% a compared to 58%. Whatis yourwork ethics quotation i in how you For each point, choose one of the three options based on how y think, feel and behave across situations at workplace. 1. When youare sittingidle, the internet connection at workplace A. Savesyojur private bill to download updates, music and movies B. Helps you increase your general knowledge C. Touch base with friends and acquaintances 2. Your preferred strategy t impress the boss ‘A. Isto be a competent professional one B. Isto take a stand against those whom boss dislike C. Isto be his/her satellite Business Ethies 3. When angey with yourbossyou would ‘A: Share the matter with himther clearly arid politely B. Create scene in the office CC. Secretly dasinage or tel office projierty 4. Your subordinate needs emotional support A. You frown because you believe that emotional mess should be kept outside office B. You offer it C. You are too busy and make an excuse 5. Inorderto mect deadlines, lis better to . A. Do substandard work when no one is ¢hecking you B. Pall yoursocks and work hard C. Boss around and throw work at otfiers. 6 Doyou tellexaggerated lies t6 reduce your workload A Yes B. Sometimes Cc. No 7, In your opinion seeking and giving sexual favours for achieving Promotionis A. Ok, if both parties consent to it B.A dirty shortcut C. Is thrilling and pleasurable . 8 Your superior at work has cheated on thé company for huge monetary gain . A. You happily become a partner in crime B. Report it to the authorities Sleep overit Scoring 1. A=1,B=3,c=C= Between 16-22 + You are self-centered and have a tolerant attit dishonestly at work. Your work ethics are poor 23 and above. You fallow good work ethics. Although this may seem to be ¢ waste of time in the short run, the vision will push you to internal satisfaction : Compiled by Pulkit Sharma, Clinical Psycholgist, Imago Centee for self. tude towards 17.10 CODE OF ETHICS ‘A code of ethics or code of conduct is a set of moral guidelines which meimbers of the organisation are expected to follow in all their decisions and actions. Professional bodies such as thé Institute of Charted ‘Accountanats of India (ICAI), All India Management Association (AIMA) and others have formulated codes ofethics for their members. Nowdays, companies also devlop written codes of ethics for their stall It is publicly available on the company’s website. A corporate code of conduct may thus be defined as a document which contains the core values and moral principles which all those working “in the company are “expected to follow in the course’of their duties and day-to-day activities. It reflectsa commitment and measures taken by the company to ensure ethical behaviour oa the part of itsmembers Ie indicates how shobld employees act in general-and in specific situations. A code of conduct lays down ‘dos’ and ‘do nots: It describes socially acceptable anid responsible behaviogp, A code of ethics isa tengible guide to eithically desirable behaviour. PURPOSES: Code of ethics is intended to serve the following purposes (i) To give every employee an insight into the mission, values, and principles which the company wants to pursue. -audonigend Corpor Governance ——- ii cine hier —~— (ii) To establish standards of ethical behaviour which shall govern relations within the company and between the company and: its stakeholders. : (ii) To reflect the company’s commitment to highest. ethical standards of business. - (iv) To prevent possible offiences and conflicts of i BENEFITS: A formal and well written code of ethics 38.2 vital doctinient. Its main | advantages are as follows: (i) Wacilitates ethical decision-making at all levels of management by reducing ambiguity and by providing a common framework. (ii) Itsets standards for interactions between the company and its shareholders, investors, suppliers, dealers, etc (iii) Ithelps to protect the company’s reputation and legal position in case of breach of ethics by'an employee. (iv) It serves as a tool for induction of new employees in the company's ethical standards. (») Itboosts the confidence of national and foreign investors in the company. (vf) Xi guides employees in their day-to-day actions and behaviour. © Ganfraud iapact met + Ave iny sofware applications equipped to prevent fp? + Cantreporta sospicious stvity without fearing srisiment? + Mila endors non-gpmpliance impact my busines? * How.do I verify credentials am| i _£ Pipe dol vent eredlials othe person lam hirog? ——- ‘+ How do I prepare myself for litgation? = * Jsenin-house counsel sufficient? ‘i + Cans fetitation payment be consirued/as a bye © And any more,Aig an Copan Gye nancy 17.11 STEPS TO ENFORCE CODE OF ETHICS 1. Ethics Committee-Pthics commitjeeis group of top managerial positions. Which oversees the matters or complaints relating to breach of ethics withi an enterproses. To solve issbes relating to ethics in business it comprises specialized inembets. Several companies appoint an ethics officers, The role of ethics officer is to guide management on matters concerning ethics. The level and position of ethics committee is usually the top level. + Rcomprises directors and its chaired by an outside baard member: Its composition is shared by top managerial positions, and second layer of top rhanagemeht like vice president or functional heads At times enterproses also appoint ‘ombudsman’ so as to redress the grievances of employees in a fei and transparent manner. 2. Bthics Hotline-Concept of ethi¢s hotline has also come into being recently. If an employee in any enterprose is reluctant to disclose his complaint to the immediate superior, it may inform bby using company’s ethics hotlines, Ethics hotline keeps identity of the caller secret and thus helps to encourage internal whistle blowing. It is a measure to avoid the instances of employees going, to media and resorting to external whistle blowing. 3, Ethics Training Programme-Another vay of creating better awareness amongest employees several enterprises have developed extensive training programmes. The purpose of these training programmes are: (i) To develop awareness against employee about ethics; and ii) Velp employees to deal with ethical issues. 44. Ethics AuditeIt is a process whereby a deep scrutiny of ethics practised by an enterprise iscarried outand reported. Ethics audit verifies the appropriateness of ethical standards, ethical decisions in conduct of business and deviation from the standards. For ] cxample, Hewlett Packard (HP) has 2 system of annual ethics audit to ascertain ethical violations and fix accountability. '5. Ethics Awards-In order to encourage compliance of ethical code of conduct, enterprises have evolved schemes ike awarding those who deal with ethical situations well. This approach encourages people to follow ethical code of conduc. SUMMARY Meaning: Business tics refers to the moral values and standards an applied to:business Characteristics: disagreement, competence and-obligation. Ethical imagination, identification, evaluation, Relevance: Social improvement, teamwork and productivity, change, lbovr relation, legal compliance, public image, strategic advantage. Determinants: Social, cultural, political, economic and organizational factors. Principles: Trust, respect, open mind, mecting obligation, clear documents, conimunity involvement, accounting control . ianisrs (Bentham, and Mill) (i ‘Theories: (i) Teleological theory-utili Deontological theory. nplementary and interdependent. Ethics of Governance: The two are co Globalisation and Ethics: Inequality, discrimination, cultural invasion, threat to democracy: Ethical standards differ across countries and, therefore, ‘cultural awareness and sensitivity are essential for success in global business, Stakeholders’ Protection: A company must protect the interests and rights of its stakeholders to get their support and to maximize value in the long Code of Ethics! A set of moral guidelines which everybody is expected to follow. TEST QUESTIONS 1. Define business ethics and explain its nature; , 2. Discuss the characteristics of an ethical organization. 3. Why should business firms act in an ethical manner? Explain 4 Describe the relationship between business ethics and corporate governance. 5. “Ethical behavior provides several benefits to a business enterprise Explain 6. Discuss the factors that govern business ethics.