Business Ethics: Meaning, Definition, Nature, Importance

Ethics is a subject of social science that is related with moral principles and social values. ‘Business Ethics’ can be termed as a study of proper business policies and practices regarding potentially controversial issues, such as corporate governance, insider trading, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities.

Businesses must abide by some basic principles. It should provide quality goods and services at reasonable prices to their consumers. It must also avoid adulteration, misleading advertisements, and other unfair malpractices.

A business must also perform other duties such as distributing fair wages, providing good working conditions, not exploiting the workers, encouraging competition, etc.

There are many definitions of business ethics, but the ones given by Andrew Crane and Raymond C. Baumhart are considered the most appropriate ones.

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

Baumhart defines, “The ethics of business is the ethics of responsibility. The business man must promise that he will not harm knowingly.”

Features of Business Ethics

There are eight major features of business ethics:

• Code of Conduct: Business ethics is actually a form of codes of conduct. It lets us know what to do and what not to do. Businesses must follow this code of conduct.
• Based on Moral and Social Values: Business ethics is a subject that is based on moral and social values. It offers some moral and social principles (rules) for conducting a business.
• Protection to Social Groups: Business ethics protect various social groups including consumers, employees, small businesspersons, government, shareholders, creditors, etc.
• Offers a Basic Framework: Business ethics is the basic framework for doing business properly. It constructs the social, cultural, legal, economic, and other limits in which a business must operate.
• Voluntary: Business ethics is meant to be voluntary. It should be self-practiced and must not be enforced by law.
• Requires Education & Guidance: Businessmen should get proper education and guidance about business ethics. Trade Associations and Chambers of Commerce should be active enough in this matter.
• Relative Term: Business ethics is a relative term. It changes from one business to another and from one country to another.
• New Concept: Business ethics is a relatively newer concept. Developed countries have more exposure to business ethics, while poor and developing countries are relatively backward in applying the principles of business ethics.

Principles of Business Ethics

The principles of business ethics are related to social groups that comprise of consumers, employees, investors, and the local community. The important rules or principles of business ethics are as follows:

• Avoid Exploitation of Consumers: Do not cheat and exploit consumer with measures such as artificial price rise and adulteration.
• Avoid Profiteering: Unscrupulous business activities such as hoarding, black-marketing, selling banned or harmful goods to earn exorbitant profits must be avoided.
• Encourage Healthy Competition: A healthy competitive atmosphere that offers certain benefits to the consumers must be encouraged.
• Ensure Accuracy: Accuracy in weighing, packaging and quality of supplying goods to the consumers has to be followed.
• Pay Taxes Regularly: Taxes and other duties to the government must be honestly and regularly paid.
• Get the Accounts Audited: Proper business records, accounts must be managed. All authorized persons and authorities should have access to these details.
• Fair Treatment to Employees: Fair wages or salaries, facilities and incentives must be provided to the employees.
• Keep the Investors Informed: The shareholders and investors must know about the financial and other important decisions of the company.
• Avoid Injustice and Discrimination: Avoid all types of injustice and partiality to employees. Discrimination based on gender, race, religion, language, nationality, etc. should be avoided.
• No Bribe and Corruption: Do not give expensive gifts, commissions and payoffs to people having influence.
• Discourage Secret Agreement: Making secret agreements with other business people to influence production, distribution, pricing etc. are unethical.
• Service before Profit: Accept the principle of “service first and profit next.”
• Practice Fair Business: Businesses should be fair, humane, efficient and dynamic to offer certain benefits to consumers.
• Avoid Monopoly: No private monopolies and concentration of economic power should be practiced.
• Fulfil Customers’ Expectations: Adjust your business activities as per the demands, needs and expectations of the customers.
• Respect Consumers Rights: Honor the basic rights of the consumers.
• Accept Social Responsibilities: Honor responsibilities towards the society.
• Satisfy Consumers’ Wants: Satisfy the wants of the consumers as the main objective of the business is to satisfy the consumer’s wants. All business operations must have this aim.
• Service Motive: Service and consumer’s satisfaction should get more attention than profit-maximization.
• Optimum Utilization of Resources: Ensure optimum utilization of resources to remove poverty and to increase the standard of living of people.
• Intentions of Business: Use permitted legal and sacred means to do business. Avoid Illegal, unscrupulous and evil means.

Follow Woodrow Wilson‘s rules; There are four important principles of business ethics. These four rules are as follows:

• Rule of publicity: According to this principle, the business must tell the people clearly, what it tends to do.
• Rule of equivalent price: The customer should get proper value for their money. Below standard, outdated and inferior goods should not be sold at high prices.
• Rule of conscience in business: The businesspersons must have conscience while doing business, i.e. a morale sense of judging what is right and what is wrong.
• Rule of spirit of service: The business must give importance to the service motive.

Example of Unethical Business Practices

Satyam Computers, a global IT company, was defamed in a notorious list of companies involved in fraudulent financial activities. The list includes names such as Enron, WorldCom, Parmalat, Ahold, Allied Irish, Bearings and Kidder Peabody.

Satyam’s CEO, Ramalinga Raju, accepted his role in a broad accounting impropriety that had overstated the company’s net revenue and profit. The company had earlier reported a cash reserve of approximately $1.04 billion that actually existed only in books but not in reality.

In his letter to his board, exposing the fraud, Satyam’s Raju showed the propensity of the fraud. He stated that, “What started as a marginal gap between actual operating profits and ones reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions. …”

Later, he described the process as “like riding a tiger, not knowing how to get off without being eaten.”

Employees often need to make various moral decisions in the workplace. While many of these workplace decisions have to be made depending on moral obligations, some morally supportable decisions may require courage and need to be performed beyond the generally accepted norms.

While discussing workplace ethics, six predominant subjects are of primary importance. These are −

• Obligations to the firm
• Abuse of one’s position
• Bribery and kickbacks
• The obligations to third parties
• Whistleblowing
• Employee’s self-interest

Obligations to the Firm

Employees are hired for the company’s tasks. The employees may obligate themselves to do the work of the particular company for financial gains. The employers often have numerous conditions to employment which the employee has to follow. These may include dress codes and respectful behavior.

Loyalty to the Company

Most people have a viewpoint that employees must have some moral obligations to stay loyal to their organizations. It is true that employees are obligated to do the tasks offered to them, but is it acceptable to have an obligation to work for the company in a manner that is beyond the assigned jobs?

Many employers may think so, but is not mentioned anywhere. The employees are not bound or obligated to have any kind of loyalty to the employers. But on a moral ground, loyalty to the company is often considered to be a good thing and it is plausible that the loyalty is rewarded through pay-raises, promotions, and good recommendations etc.

Conflicts of Interest

Employees can have a conflict of interest with the company. Some of these conflicts of interest are minor and include general workplace conditions or situations. However, some other conflicts may be serious and can let the employees to show disloyalty.

Generally, employees must avoid significant conflicts of interest by not involving themselves in disloyal activities. However, it is difficult enough to decide when a conflict is significant and it may not always clear what employees should do besides resisting the temptation to be disloyal.

Abuse of Official Position

Using the official position for private or personal gains is often considered as an abuse of power. Such abuse can result from disloyalty.

Insider Trading

Insider trading occurs when an employee has access to company information that’s usually unavailable to the public and can have an impact on the stock prices. For example, some employees may come to know that their company is going to be bankrupt before general public and they can sell all their stock. People who tend to buy the stocks will be deceived. It is also a kind of insider trading to encourage near ones to sell their stock having such “insider information.”

Proprietary Data

Companies can often have “trade secrets” which they don’t want to share with other organizations, and few employees may divulge such information to the benefit of competing organizations which is unethical.

Three major arguments why trade secrets should be protected by the law are −

• These are intellectual property.
• Trade secrets theft is wrong.
• Stealing trade secrets is a violation of the confidentiality terms.

Sharing trade secrets and obeying confidentiality information is a difficult moral issue. People have the right to seek and advance employment and it is not easy to separate proprietary information from a worker’s own skills and technical knowledge.

Bribes and Kickbacks

Bribery is aimed to letting someone to act against their duties. Bribes can be very serious when it can injure people. Kickbacks are also a form of bribery that involves a person to uses his/her position to benefit a party or someone.

Bribing foreign officials for favors could harm people. However, instances of bribing are numerous and they include both large and small organizations.

Lockheed Aircraft Corporation had the culture of bribing foreign officials and it paid $22 million to get aircraft contracts with foreign governments. These bribes harm governments as they have to pay too much for aircrafts, and the harm can propagate to citizens who pay taxes. In this case, the knowledge of the bribery caused a political crisis in the Japanese government.

Gifts and Entertainment

Gifts and entertainment may be used to reward and encourage certain behavior from employees. This can result in a conflict of interest. Entertainment isn’t as likely to be morally wrong if allowed to be used according to ethical standards.

The following considerations may be considered while judging the ethics of gifting:

• The Price of the Gift: Gifts of huge prices are more likely a bribe.
• The Purpose of the Gift: Gift can be used to encourage, for advertising, or as a bribe.
• The Circumstances: A gift given at a special occasion is different than a gift on non-special occasions, and a gift given openly is more ethical.
• The Position of the Person Receiving the Gift: A person in a position to reciprocate is more likely to be taking a bribe.
• The Accepted Practices: Gifts as “tips” for a waiter or waitress is norm, but to a CEO; it is clearly unethical.
• The Company’s Policy: Some companies may have stricter rules about gifts than others.
• The Law: Gifts against the law are usually unacceptable.

Obligations to Third Parties

A person is morally obligated to let others know about dangerous and deceptive business practice. However, employees should compare and judge the importance of their job duties and personal interests with the importance of the interests of others. It can be morally preferable to let the third parties know about immoral and illegal business practices, even when it is not a moral obligation to do so.

Whistleblowing

Whistleblowing is the act of going public with significantly immoral or illegal acts of an organization one is part of. However, someone is not a whistle blower for discussing the embarrassing or rude behavior with public, and a whistle blower doesn’t need to involve in sabotage or violence.

The reasoning given to judge a whistle-blowing activity may include the following:

• The motive must be ethical. The employee must act against the organization that committed a significant immoral or illegal act.
• The whistleblower should look for less harmful ways to resolve the issue first. Employees should tell the management and executives of wrong-doing before making the information public.
• The whistleblower should have enough evidence. It is unethical to accuse a company when there’s a possibility of company being innocent.
• The company’s fault must be specific and significant. The wrong-doing must have specific and significant reasons.

Self-Interest

Are the people obligated to save the interests of others by making misconducts known to the management or by alerting the public by making significant immoral acts committed by companies publicly?

It is always preferable to think rationally and impartially regarding morality. It is important to think about our life and ask the following questions:

• Are we following authorities blindly?
• Are we suffering from a moral tunnel vision?
• Are we mindlessly doing what is asked from us, without considering the impact on outside parties?
• Are we considering about our possible roles as accomplices in the immoral activities?
• Are we having a proper view of our interests against those of others?
• Is there any substantial evidence for acting against the norms?

Morality often wants us to consider the interests of everyone who can be affected by our decisions and also about the situations we are in. We can have serious social and personal obligations and depends on all these important and unique factors.