Principle of Management- unit 2

BUSINESS ETHICS – MEANING AND NATURE

Meaning and Definition

Business ethics are those principles, policies or philosophies that are concerned with moral
judgment &good conduct as they are applicable to business situation.

Business Ethics is a branch of ethics which prescribes standards of how the business is to be
carried out. It lays down guidelines for the company’s response and accountability to its various
stakeholders. It gives a deeper understanding of what is good and bad, what is moral and
immoral or what actions are right or wrong in the operations of a business with respect to
its customers, employees, investors, society and all other stakeholders – in order to protect
them from harm and damages to their interests.

According to ICAI
―The principles and standards that determine acceptable conduct in business organization.

According to Andrew Crane, “Business ethics is the study of business situations, activities, and
decisions where issues of right and wrong are addressed.”

According to Raymond C. Baumhart

"The ethics of business is the ethics of responsibility. The business man must promise that he will
not harm knowingly." In short application of ethics to business is business ethics.

Good Business Ethics

• The businessmen must give a regular supply of good quality goods and services at
reasonable prices to their consumers.
• They must avoid indulging in unfair trade practices like adulteration, promoting misleading
advertisements, cheating in weights and measures, black marketing, etc.
• They must give fair wages and provide good working conditions to their workers.
• They must not exploit the workers.
• They must encourage competition in the market.
• They must protect the interest of small businessmen. They must avoid unfair competition.
• They must avoid monopolies.
• They must pay all their taxes regularly to the government.
• In short, business ethics means to conduct business with a human touch in order to give
welfare to the society.

Characteristics or Features of business ethics:

1. Code of conduct : Business ethics is a code of conduct. It tells what to do and what not to
do for the welfare of the society. All businessmen must follow this code of conduct.

2. Based on moral and social values : Business ethics is based on moral and social values.
 It contains moral and social principles (rules) for doing business. This includes self-control,
consumer protection and welfare, service to society, fair treatment to social groups, not to
exploit others, etc.

3. Gives protection to social groups : Business ethics give protection to different social
groups such as consumers, employees, small businessmen, government, shareholders,
creditors, etc.

4. Provides basic framework : Business ethics provide a basic framework for doing
business. It gives the social cultural, economic, legal and other limits of business. Business
must be conducted within these limits.

5. Voluntary : Business ethics must be voluntary. The businessmen must accept business
ethics on their own. Business ethics must be like self-discipline. It must not be enforced by
law.

6. Requires education and guidance : Businessmen must be given proper education and
guidance before introducing business ethics. The businessmen must be motivated to use
business ethics. They must be informed about the advantages of using business ethics.
Trade Associations and Chambers of Commerce must also play an active role in this matter.

7. Relative Term : Business ethics is a relative term. That is, it changes from one business to
another. It also changes from one country to another. What is considered as good in one
country may be taboo in another country.

8. New concept : Business ethics is a newer concept. It is strictly followed only in developed
countries. It is not followed properly in poor and developing countries.

IMPORTANCE OF ETHICS IN BUSINESS:

Ethics is important for any business, big or small, for its long term success. Following are the
benefits of ethics for any business:

1. Decision Making: It is our means of deciding a course of action. Without it our actions
would be random and aimless.

2. Standardizing Behaviour of Employees: Business Ethics is about standard of behavior

in workplace, with partners, colleagues, customers etc. Many companies have standard
code of ethics which everyone in the organization has to follow.

3. Greater Customer Satisfaction: Customer will be satisfied only if the business follows
all the business ethics. Business ethics is needed to make business activities fair to
consumers. It checks business malpractices and offers protection to consumers.
 4. More Responsible Behaviour: Business ethics is needed in order to make businessmen
conscious as regards their duties and responsibilities towards consumer and other social
group.

5. Improved Confidence of Stakeholders: Business ethics is needed in order to improve the

confidence of consumers as regards quality, price, reliability etc. of goods and services
supplied. It also helps in retaining confidence of stakeholders like financial institutions,
shareholders, buyers, suppliers etc.

6. Protecting Rights: Business ethics is needed for the protection of rights of consumers at
the business level such as right to health & safety, right to be informed, right to choose,
right to be heard etc.

7. Enhanced Corporate Image: Business ethics is needed in order to create good image of
businessmen in the society and also for avoiding public criticism. Ethical business gets public
support while unethical business is criticized by all. Public will be ready to invest or lend money
only if they are convinced that the organization is following fair business practices.

8. Cordial Relationship and Support: Business ethics is needed in order to develop cordial and
friendly relations between business and society.

9. Long Term Survival and Growth: Organizations doing business ethically will continue to
survive & prosper for the long time. Hence, it is important for the growth & development of the
business in the long term.

10. Uniform Behaviour across Organization: Ethics in business are important most of all
because we pass them on to others. We have the ability to show others the correct way to act and
behave by remaining ethical in the way we live.

Scope/Purpose of Business Ethics

Ethical problems and phenomena arise across all the functional areas of companies and at all levels
within the company.

1.Ethics in Compliance
• Compliance is about obeying and adhering to rules and authority.
• It is an important part in any department of the organization.
• Monitors the processes that are mapped for internal & external regulations.
• Failing to meet compliance would lead to penalties.

2.Ethics in Finance
The ethical issues in finance that companies and employees are confronted with include:
• In accounting – window dressing, misleading financial analysis.
• Insider trading, securities fraud leading to manipulation of the financial markets.
• Executive compensation.
 • Bribery, kickbacks, over billing of expenses, facilitation payments.
• Fake reimbursements

4.Ethics in Marketing
Marketing ethics is the area of applied ethics which deals with the moral principles behind the
operation and regulation of marketing. The ethical issues confronted in this area include:
• Pricing: price fixing, price discrimination, price skimming.
• Anti-competitive practices like manipulation of supply, exclusive dealing arrangements,
tying arrangements etc.
• Misleading advertisements
• Content of advertisements eg. Statutory warning for cigarettes not enough
• Children and marketing.
• Black markets, grey markets.

3.Ethics in Human Resources

The ethics of human resource management (HRM) covers those ethical issues arising around the
employer-employee relationship, such as the rights and duties owed between employer and
employee.
The issues of ethics faced by HRM include:

• Discrimination issues i.e. discrimination on the bases of age, gender, race, religion,
disabilities, weight etc.
• Sexual harassment.
• Issues surrounding the representation of employees and the democratization of the
workplace.
• Issues affecting the privacy of the employee: workplace surveillance, drug testing.
• Issues affecting the privacy of the employer: whistle-blowing.
• Issues relating to the fairness of the employment contract and the balance of power between
employer and employee.

4.Ethics of Production
This area of business ethics deals with the duties of a company to ensure that products and
production processes do not cause harm.
The issues of ethics faced by production include:
Defective, addictive and inherently dangerous products and services eg. Tobacco, alcohol,
Ethical relations between the company and the environment include pollution, environmental
ethics, and carbon emissions trading.
Ethical problems arising out of new technologies for eg. Genetically modified food
Product testing ethics.

5. Ethics of Intellectual property, knowledge and skills

Who as the greater rights to an idea: the company who trained the employee or the employee
themselves? As a result attempts to assert ownership and ethical disputes over ownership arise.

The issues of ethics faced by intellectual property, knowledge & skills include:
• The practice of employing all the most talented people in a specific field, regardless of
 need, in order to prevent any competitors employing them.
• Employee raiding: the practice of attracting key employees away from a competitor to take
unfair advantage of the knowledge or skills they may possess.
• Patent misuse, copyright misuse.

6. Ethics in Technology
• The computer and World Wide Web are two most significant inventions of the twentieth
century. There are many ethical issues that arise from this technology. It is easy to gain
access to information. This leads to data mining (hacking), privacy invasion.
• Social Responsibilities/Ethics of Business towards different stakeholders

7. Ethics at stakeholder’s level:

Employees:
• Security of job Better working conditions
• Better recommendation
• Participative management
• Welfare facilities

Customers:
• Better quality of goods
• Goods and services at reasonable price
• 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
• Not to indulge in monopolistic and restrictive trade practices
• Conforming to pollution control norms set up by the government
• Not to indulge in corruption through bribing and unlawful activities

• Owners:
• Run the Business efficiently
 • Proper utilization of capital and resources
• Growth and appreciation of capital
• Regular and fair return on capital invested

• Suppliers:
• Giving regular orders for purchase of goods
• Dealing on fair terms and conditions
• Availing reasonable credit period

8. Ethics at societal level:

• Concern for poor and downtrodden
• No discrimination against any particular section of the society
• Concern for clean environment
• Preservation of scarce resources for future prosperity.
• Contributing for better quality of life

9. Ethics at personal policy level:

• Not to use office car, stationery and other facilities for personal use
• Not to misuse others for personal gain
• Not to indulge in politics to gain power
• Not to spoil promotional chances of others
• Promise keeping
• Mutual help

10. Ethics at management policy level:

• Fair practices relating to requirements, compensations, layoffs, perk, promotions
• Transformational leadership to motivate employees to aim at better and higher things in
life.
• Better communication at all levels

Factors Influencing Business Ethics:

In taking decisions involving ethical issues a business must consider -

1. Leadership
Leader is a person who leads people towards achieving a common goal. Leaders are models and
mentors and should have strong commitment towards ethics and ethical conduct and should give
a constant leadership in renewing the values of an organization. They play a key role in creating,
maintaining and changing the ethical culture.
Its necessary for leaders to set good examples and follow ethics. Where there are good leaders
there will be good ethical practices in business. Eg. JRD Tata, Dhirubhai Ambani, N.R. Narayana
Murthy.

2. Individual Characteristics
It refers to the attitude and lifestyles of each person individually. It includes values (belief about
right and wrong), Ego (strength of one‘s convictions) and degree of one‘s control.
3. Environment
It refers to things around us. An organization uses abundant natural resources for its production
purposes and hence should be ethical in its utilization. It should follow the principle of sustainable
development and not exhaustive development.

4. Corporate Culture
It is the set of shared values, beliefs, goals, norms that prevail within an organization. If the
company makes huge profits in unethical way then individuals who join the organization would
also have to practice unethical activities to survive in the company.
As in the case of Enron where many executives and managers knew the company was following
some illegal and unethical practices, but the executives and managers did not know how to make
the ethical decisions and corporate ethical culture. Thus they fall back and managers have to pay
in the form of fines and imprisonment.

5. Strategy and performance

• To integrate ethics into the business strategy, business people have to add three more
questions :
• What do we stand for?
• What is our purpose?
• What values do we have?

6. Corporate governance
It is a set of systems and processes that a company follows to ensure that it is in the best interest
of the stake holders. Stake holders are the shareholders, customers, creditors, government,
suppliers and the community.

7. Other factors include:

• Importance of profit and other similar motives of the business and its managers in relation
to the importance of morality, honesty and other similar values.
• The extent of responsibility of business for specific areas and to the community in general.
It includes environmental protection, equality and fairness dealing with stakeholders,
product quality and reliability and a betting corruption.
• Personal value system and beliefs of the owners and managers of the business.
• Impact of ethical behavior on short and long term prospects and performance of business.
• The company policies, rules, work-procedures and system.
• The organizational culture and shared values.

Corporate Social Responsibility (CSR) –

Meaning-CSR refers to the concept whereby companies decide voluntarily to contribute to a

better society and a cleaner environment. Corporate Social responsibility is represented by
the contribution undertaken by companies to society through its business activities and
its social investment.
In other words CSR is a management concept whereby companies integrate social and
environmental concerns in their business operations and interactions with their
stakeholders. CSR is a self-regulating business model that helps a company be socially
accountable – to itself, its stakeholders, and the public.

Corporate Social Responsibility (CSR) Definitions Devi’s Blomstorm “ it is the obligation of

decision makers to take actions that protects and improve the welfare of society as a whole
along with their own interest , protecting and improving are two aspects of social responsibilities.

According to Lord Holme and Richard Watts “ Corporate social responsibility is the continuing
commitment by the business to behave ethically and contribute to economic development while
improving the quality of workforce and their families as well as of local community and society at
large.”

Nature or Feature of Corporate Social Responsibility

1. Economic Responsibility
2. Legal Responsibility
3. Ethical Responsibility
4. Philanthropic Responsibility

Need and importance for CSR -

1. To establish a good corporate image
2. Certain donations are exempted by income tax
3. Companies undertaking social responsibility can position their product better and increase the
market share.
4. The culture is strong that they take up social responsibility as their moral responsibility
5. Social approach demand that they should be responsive to the social problems of society.
6. Commitment to social responsibility enhance its image , resulting in better business
environment

Aspects of Corporate Social Responsibility

1. Responsibility towards Shareholders
2. Responsibility towards Employees
3. Responsibility towards Creditors
4. Responsibility towards Customers
5. Responsibility towards suppliers of Goods
6. Responsibility towards Government in return
7. Responsibility towards Society

Responsibility towards Shareholders-

Shareholders are the owners of the company and they cannot be treated as just investors of
the company.
1. Investment into profitable scheme
2. Timely payment of dividends
3. Providing requisite information
4. Informing progress of the business.

Responsibility towards Employees -

1. Providing with a fair salary and wages
2. Providing good working conditions
3. Satisfaction of security needs
4. Providing opportunity for career development

Responsibility towards Creditors-

1. Determination of proper terms and conditions of loans
2. Proper utilization of debt capital
3. Regular payment of internet and advances
4. To provide with requisite information.

Responsibility towards Customers-

1. Determination of fair prices
2. Making available goods and services
3. Providing the quality goods
4. Satisfaction and solution to customer complaints in time.

Responsibility towards Government in Return-

1. Timely payment of taxes and duties
2. Keeping away from politics of business
3. Following legal provisions pertaining to the business
4. Cooperation with the government during times of crisis and emergency

Responsibility towards Society -

Business and society go hand in hand the duties which the company and the society owe to
each other are reciprocal. The welfare and growth of the society depends upon the business at
the same time survival and profits of the based on the society.

1. Health services :Donations to the hospitals

2. Educational services : Donations to school and colleges
3. Community Development :welfare of women & children & community services , rural
development
4. Environmental Protection: protecting the ecology and environment
5. Promotions of Culture.
6. General Coverage: funding of sports activities , creating awareness on road safety,