Business Ethics

1. Business Ethics Week 1

2. What is ethics? • The study and philosophy of humanconduct, with an emphasis on determining right and wrong. • Ethics is thestudy of whatneedsto be considered as normswithin a society • Rules andnormsareimportantforalltype of humanrelationships • Valuesand judgments play acritical role when we make ethical decisions.

3. Business Ethics • Businessethics relate to rules, standards, and moral principlesregarding what is right or wrong in specific situations. • For our purposes, business ethicscomprises the principles, values, and standards that guide behavior in the world of business.

4. PrinciplesandValues • Principles are specific and pervasive boundaries for behavior that are universal and absolute. • Principles often become the basis for rules. Some examples of principles include freedom ofspeech, fundamentals of justice, and equal rights to civil liberties. • Values are used to developnorms that are socially enforced. Integrity, accountability, and trust are examples of values.

5. Importance of Business ethics • In recent years, a number ofwell-publicized scandals resulted in public outrage about deception and fraud inbusiness and a demand for improved business ethics and greater corporate responsibility. • Theglobal financial crisis took a toll on consumer trust of financial services companies. A studyof 650 U.S. consumers by Lightspeed Research and Cohn & Wolfe revealed that 66 percentof respondents did not feel that the financial services industry would help them to regainthe wealth that they lost during the recession. • Words used to describe this industry includedgreedy, impersonal, opportunistic, and distant.

6. Importance of Business Ethics • According to another poll by Deloitte and Touche of teenagers aged 13 to18 years old, when asked if people who practice good business ethics are more successfulthan those who don’t, 69 percent of teenagers agreed. • If profits are realized through misconduct the life of the organizationmay be shortened. • Many firms, including Lehman Brothers and Enron, that madeheadlines due to wrongdoing and scandal ultimately went bankrupt or failed becauseof the legal and financial repercussions of their misconduct.

7. Whystudybusinessethics? • Studying business ethics will help you begin to identify ethical issues when they ariseand recognize the approaches available for resolving them. • You will also learn more aboutthe ethical decision making process and about ways to promote ethical behavior within yourorganization. • By studying business ethics, you may begin to understand how to cope withconflicts between your own personal values and those of the organization in which you work.

8. DecliningEthicalstandards • Abusive behavior, • harassment, • accounting fraud, • conflicts of interest, • defective products, • bribery, and • employee theft are all problems cited as evidence ofdeclining ethical standards.

9. Corporatescandals • Scandals in the corporate worldmadebusinessethics an importantarea of study • Tyco International is a diversified manufacturing conglomerate that deals with electronic components, health care, fire safety, security, and fluid control with headquarters in New Jersey, USA. In 2005, its CEO Dennis Kozlowski and CFO Mark H. Swartz were found guilty of stealing $600 million from the company. These two symbolized the excesses of executive compensation at shareholder’s expense, where Kozlowski will be remembered for the $2 million birthday bash he gave his wife on a Mediterranean Island at the company’s expense.

10. Someexamples • Parmalat, an Italian company, is the leading global producer of Ultra Hot Temperature (UHT) milk and other foods. However, its founder, Calisto Tanzi was accused of questionable accounting practices in 2003 when a €14 billion hole was discovered in the company’s accounting records. This resulted in oneof the biggest corporate scandals in history as he was selling credit-linked notes to the company and diverting the company’s funds elsewhere. .

11. Adelphia Communications Corp • was ranked as the fifth largest cable company in the US before it yielded to bankruptcy in 2002 due to internal corruption. The company incurred $2.3 billion debt and its founders were charged with securities violations. John and Timothy Rigas were sentenced to 15 to 20 years in prison, while five other officers were indicted. The Rigases made a complicated cash-management system where they diverted funds to other family-owned entities.

12. Systemortheagent? • Who is responsibleforthebadbehaviour? Systemortheagent? • A Junior Achievement/Deloitte survey of teens showed that 71 percent feel preparedto make ethical decisions in the workplace. • However, of those surveyed, 38 percentfeelit is sometimes necessary to lie, cheat,plagiarize, or engage in violence to succeed.

13. The Ring of Gyges • The Ring of Gyges is a mythical magical artifact mentioned by the philosopher Plato in book 2 of his Republic (2.359a–2.360d). • It granted its owner the power to become invisible at will. Through the story of the ring, Republic considers whether an intelligent person would be moral if he did not have to fear being caught and punished.

14. Why do webehavemorally? • Fear? • Benefit? • Principles?

15. StakeholderTheory • Stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. • It was originally detailed by R. Edward Freeman in the book Strategic Management: A Stakeholder Approach, and identifies and models the groups which are stakeholders of a corporation, and both describes and recommends methods by which management can give due regard to the interests of those groups.

16. Stakeholders • In a business context, customers, investors and shareholders, employees, suppliers,government agencies, communities, and many others who have a “stake” or claim in someaspect of a company’s products, operations, markets, industry, and outcomes are knownas stakeholders.

17. StakeholderTheory • A stakeholder framework helps identify the internal stakeholders such as employees,boards of directors, and managers and external stakeholders such as customers, special interestgroups, regulators, and others who agree, collaborate, and have confrontations on ethicalissues. • Most ethical issues exist because of conflicts in values and belief patterns about rightand wrong between and within stakeholder groups. • This framework allows a firm to identify,monitor, and respond to the needs, values, and expectations of different stakeholder groups.

18. Stakeholders Stakeholders apply their values andstandards to many diverse issues; • working conditions • consumer rights • environmentalconservation • product safety • proper information disclosure

19. Power of Stakeholders • Shareholderssupplycapital; suppliers offer material resources or intangible knowledge; employees and managersgrant expertise, leadership, and commitment; customers generate revenue and provideloyalty and positive word-of-mouth promotion; local communities provide infrastructure;and the media transmits positive corporate images. • Stakeholders’ ability to withdraw—or to threaten to withdraw—these neededresources gives them power over businesses.

20. Nikecase • Nike experienced a backlash from its use of offshore subcontractors to manufacture its shoes and clothing. • When Nike claimed no responsibility for the subcontractors’ poor working conditions andextremely low wages, some consumers demanded greater accountability and responsibilityby engaging in boycotts, letter-writing campaigns, and public service announcements. • Nike ultimately responded to the growing negative publicity by changing its practices andbecoming a model company in managing offshore manufacturing.

21. Identifying Stakeholders • Primaryandsecondarystakeholders • Primary stakeholders are those whosecontinued association is absolutely necessary for a firm’s survival.These include: • Employees • Customers • investors and shareholders, • the governments and communities thatprovide necessary infrastructure.

22. Secondary stakeholders • Secondary stakeholders do not typically engage in transactions with a company andthus are not essential for its survival.These include: • the media • trade associations • specialinterest groups. The American Association of Retired People (AARP), a special interestgroup, works to support retirees’ rights such as health care benefits. Both primary andsecondary stakeholders embrace specific values and standards that dictate what constitutesacceptable or unacceptable corporate behaviors.

23. stakeholder orientation • The degree to which a firm understands and addresses stakeholder demands can be referredto as a stakeholder orientation. This orientation comprises three sets of activities: • Theorganization-wide generation of data about stakeholder groups and assessment of the firm’seffects on these groups • The distribution of this information throughout the firm, and (3) the organization’s responsiveness as a whole to this intelligence.

24. “the basic missionof business [is] thus to produce goods and services at a profit, and in doing this, business[is] making its maximum contribution to society and, in fact, being socially responsible.”MiltonFriedman

25. Invisiblehand vs. ethicalregulation • A governance system that does not providechecks and balances creates opportunities for top managers to put their own self-interestsbefore those of important stakeholders. While many people lost their investments,some CEOs were able to profit off of the latest recession, even as their companies andshareholders fared poorly. • Some directors even tweaked performance targets in order tomake goals easier to achieve so that they could receive more bonusmoney. • Bonuses havebecome a very contentious issue—as they are the part of an executive’s pay most tied toperformance. Many people are asking why executives continue to receive bonuses as theircompanies fail, but most of the time bonuses are tied to targets other than stock prices.