Business Ethics

5th Jul 2010

Business ethics is the application of ethical values to business behaviour. It applies to all aspects of business conduct, from boardroom strategies and how companies treat their employees and suppliers to sales techniques and accounting practices.

Ethics goes beyond the legal requirements for a company and is, therefore, about discretionary decisions and behaviour guided by values. Business ethics is relevant both to the conduct of individuals and to the conduct of the organisation as a whole. Ethical values differ from business values, as shown in the diagram below.

Identifying Company Values

What is the difference between business ethics and an ethical business?

Business ethics relates to how any organisation conducts its business in order to make profit or achieve other goals. Any organisation can seek to do business in a way that is guided by ethical values. Whether an organisation is judged to be an ethical business however, may involve a subjective assessment of any of the following: the products and services it offers, its founding priorities, goals and values, its philanthropy, its reputation among its stakeholders, the way it treats customers and staff etc. Law is mandatory- you are obliged to obey; ethics is discretionary – you have choice – it is determined by values

How does business ethics relate to corporate responsibility?

If business ethics is about the application of ethical values, corporate responsibility (CR) is the expression of those values both within core business strategies and as a set of commitments and obligations made to its stakeholders. CR is about an organisation's approach to what it is responsible for, to whom it is responsible, and why, and this will be underpinned by its ethical values and by the policies and programmes in place to make those values operational.

What are ethical dilemmas?

An ethical dilemma involves a situation that makes a person question what is the 'right' or 'wrong' thing to do. Ethical dilemmas make individuals think about their obligations, duties or responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a 'right' versus 'wrong' answer. A majority of people will agree, for example, that it is morally unacceptable to exaggerate an expense claim. However, complex ethical dilemmas involve a decision between right and right. An example might be where you uncover a friend's misdemeanor: you have a duty to your employer to report it, but also a duty to be loyal to your friend in a situation that could lead to his or her dismissal.

What are some examples of business ethics issues?

Some of the key issues addressed in current codes of business ethics are bribery & corruption; gifts & hospitality; conflicts of interest; diversity; health and safety, environmental stewardship and political donations & lobbying. According to IBE/MORI research published in October 2006, the three major areas of public concern are speaking out/whistleblowing (32%), environmental responsibility (32%) and discrimination in treatment of people (31%). Supply chain management is also becoming an increasingly important issue for companies, as consumers learn more about the potential environmental and social impact of the products they purchase. Other, recent concerns include customer data protection, work-home balance and the responsible treatment of suppliers. As well as being asked to identify and address their wider impacts on society, companies have been under pressure to consider "product responsibility": for example regarding fast food companies and the nutritional value of their products and alcohol companies regarding 'binge drinking' by young people.

How do you promote an ethical culture in an organisation?Many organisations use a code of ethics (often referred to as a code of conduct) as a tool for communicating and embedding values and behavioural standards in the business. The code needs to be communicated to staff at all levels and training provided in the form of an ethics programme to ensure that it becomes embedded in the organisation and staff are clear as to what is expected of them. Doing so encourages a culture of trust and integrity, which in turn, will positively influence employees’ conduct and decision making (see Figure 2). Codes can take several formats (stakeholder based, issue based etc.) and should be updated regularly. Buy-in from senior management is fundamental to building an ethical culture in any organisation.


How do Companies Implement This?



Figure 2: How ethical values are embedded in an organisation

Is ethics just another burden on companies or does it pay to be ethical?

There are a number of commonsense arguments that lead to the conclusion that ethical business practice positively affects company performance. For example, if employees are being treated well, it is likely that workplace productivity will increase and good employees will be retained. Similarly, the provision of a responsive customer service may result in increased customer loyalty and repeat business. It can also be shown to benefit the company financially. A 2003 IBE report found that during 1997-2001, those companies with a code of ethics outperformed a similar sized group who said they did not have a code, on three out of four financial performance measures. A further IBE report published in 2007 suggests that companies which provide training on business ethics outperform those that have a code but do not provide training.


Summary of the business case



Figure 3: Summary of the business case for ethics

Conclusion

Ethics is playing an increasingly important role in business today. Firstly, companies do not operate in a vacuum, but are part of a society which expects a certain standard of behaviour from businesses. According to IPSOS- MORI research in September 2006, 83% of the British public say that a company's social responsibility is an important factor when deciding which product or service to purchase. At the same time, 67% believe that industry and commerce do not pay enough attention to their social responsibilities. Companies require what is often called 'a license to operate'. In other words, they need the approval of society in order to continue doing business. People expect companies to look after their staff and tell customers the truth. They also increasingly expect companies to address their environmental impacts and make sure that the people who make their products are treated fairly, wherever the company operates.

Secondly, ethical values are relevant in providing guidance to staff in situations where the right thing to do is unclear. Employers can not take for granted that their staff understand what ethical standards are expected of them in carrying out their work on behalf of the company. Provision of guidance is therefore essential. There is often no right or wrong answer to ethical dilemmas so asking questions such as: is it legal? Is it consistent with the company's code of business ethics? What would my mother think? How would I feel about it being on the front page of tomorrow's newspapers? can help you to reach a decision on a correct course of action. Ultimately, setting the tone from the top is essential for the effective embedding of an ethical culture.

Remember: who's responsible for business ethics in your organisation? You are!

This page was prepared for the Institute by the Institute of Business Ethics.

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