The Importance of Business Ethics University of Bahrain College of Business Administration MGT 437 Business Ethics Chapter 1 The Importance of Business Ethics Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Why differentiate between rules/policies/law and ethics? The difference between an ordinary decision and an ethical one is the point where rules no longer serve. Values and judgment play a key role in ethics decisions. Employees need a “buffer zone” of expected ethical behavior. Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Copyright © Houghton Mifflin Company. All rights reserved.MGT437 Business Ethics Comprises principles and standards that guide behavior in the world of business Whether a specific behavior is ethical or unethical is often determined by stakeholders: Investors Employees Customers Interest groups Legal system Community Copyright © Houghton Mifflin Company. All rights reserved.MGT437

American Distrust of Business Source: Data from Yankelovich Partners Inc., Point, February 2005 Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Ethics and social responsibility have distinct meanings... Social responsibility is the obligation a business assumes to maximize its positive effect while minimizing its negative effect on society. Social responsibility consists of the following responsibilities: Economic (satisfy investors) Legal (obey the law) Ethical (expected activities and behaviors) Philanthropic (desired activities and behaviors) Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Why study business ethics? Reports of unethical behavior are on the rise. Society’s evaluation of right or wrong affects its ability to achieve its business goals. Studying business ethics is a response to FSGO and stakeholder demands for ethics initiatives. Individual ethics is not enough. Studying business ethics helps identify ethical issues to key stakeholders. Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Ethical Issues on the Rise Increased awareness of: Accounting fraud Insider trading of stocks and bonds Falsifying of organizational documents Deceptive advertising Defective products Bribery Employee theft Copyright © Houghton Mifflin Company. All rights reserved.MGT437

A Timeline of Ethical and Socially Responsible Concerns Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Before 1960: Ethics in Business Theological discussions of ethics emerged: Catholic social ethics included a concern for morality in business, workers’ rights and living wages. Protestants developed ethics courses in their seminaries and schools of theology. (Also, the Protestant work ethic encouraged frugality and hard work.) Copyright © Houghton Mifflin Company. All rights reserved.MGT437

The 1960s: The Rise of Social Issues in Business Societal social consciousness emerged As well as an anti-business sentiment JFK’s Consumer Bill of Rights ushered in a new era of consumerism Right to safety, to be informed, to choose, and to be heard Consumer protection groups fought for consumer protection legislation Ralph Nader Copyright © Houghton Mifflin Company. All rights reserved.MGT437

The 1970s: Business Ethics as an Emerging Field Business professors began to write about social responsibility. Philosophers became involved in business ethics. Businesses became more concerned with their public image and addressed ethics more directly. Conferences were held and centers developed. Issues: Bribery – Product safety Deceptive advertising – Environment Price collusion Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Copyright © Houghton Mifflin Company. All rights reserved.MGT437 The 1980s: Consolidation Membership in business ethics organizations increased. Ethics centers provided: Publications, courses, conferences and seminars Firms established ethics committees. Defense Industry Initiatives emerged and became the foundation for the Federal Sentencing Guidelines for Organizations Corporate support for ethical conduct Copyright © Houghton Mifflin Company. All rights reserved.MGT437

The 1990s: Institutionalization of Business Ethics The Federal Sentencing Guidelines for Organizations set the tone for ethical compliance. These took preventative actions against misconduct; a company could avoid or minimize the potential penalties. Copyright © Houghton Mifflin Company. All rights reserved.MGT437

The Federal Sentencing Guidelines for Organizations Standards and procedures capable of detecting and preventing misconduct High level oversight Care in delegation of authority Effective communication (training) Systems to monitor, audit, and report misconduct Consistent enforcement Continuous improvement Copyright © Houghton Mifflin Company. All rights reserved.MGT437

The 21st Century: A New Focus A move from legally based ethics initiatives to culturally or integrity-based programs However, legislation such as the Sarbanes-Oxley Act was passed to address the lack of confidence in financial reporting and corporate ethics. Realization that business ethics programs are good for business Businesses working more closely together, globally, to establish standards of acceptable behavior Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Relationship of Business Ethics to Performance Customers, employees, and investors are major concerns for firms that want to develop loyalty and competitive advantage. Goals are to increase customer dependence on the company and to provide products in an environment of mutual respect and perceived fairness. This focus creates satisfying relationships with employees. It also supports relationships with investors based on trust, dependability, and commitment. Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Ethics Contributes to Employee Commitment Employee commitment comes from employees who believe their future is tied to that of the organization and their willingness to make personal sacrifices for the organization. The more dedication on the part of the company, the greater the employee dedication. Concerns include a safe work environment, competitive salaries and benefit packages, and fulfillment of contractual obligations. Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Ethics Contributes to Investor Loyalty Companies perceived by their employees as having a high level of honesty and integrity are more profitable than companies with a low level of honesty and integrity. Ethical climates in organizations provide platform for: Efficiency Productivity Profitability Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Ethics Contributes to Customer Satisfaction Consumers respond positively to socially concerned businesses. Being good can be extremely profitable. Customer satisfaction dictates business success. A strong organizational ethical climate often places the customer’s interests first. Research shows a strong relationship between ethical behavior and customer satisfaction. Copyright © Houghton Mifflin Company. All rights reserved.MGT437

Ethics Contributes to Profits Corporate concern for ethical conduct is increasingly being integrated with strategic planning to maximize profitability. Corporate citizenship is positively associated with: Return on investment and assets Sales growth Many studies have found a positive relationship between citizenship and performance. Copyright © Houghton Mifflin Company. All rights reserved.MGT437