Business Ethics Meaning and Importance

14/07/2020 2 By indiafreenotes

The term ‘Business Ethics’ refers to the system of moral principles and rules of the conduct applied to business. Business being a social organ shall not be conducted in a way detrimental to the interests of the society and the business sector itself. Every profession or group frames certain do’s and do not’s for its members. The members are given a standard in which they are supposed to operate. These standards are influenced by the prevailing economic and social situations. The codes of conduct are periodically reviewed to suit the changing circumstances.

“Business Ethics is generally coming to know what is right or wrong in the work place and doing what is right. This is in regard to effects of products/services and in relationship with the stake holders.” —Cater Mcnamara

“Business ethics in short can be defined as the systematic study of ethical matters pertaining to the business, industry or related activities, institutions and beliefs. Business ethics is the systematic handling of values in business and industry.” :John Donaldson

Business ethics is the study of appropriate business policies and practices regarding potentially controversial subjects including corporate governance, insider trading, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities. The law often guides business ethics, but at other times business ethics provide a basic guideline that businesses can choose to follow to gain public approval.

Business ethics ensure that a certain basic level of trust exists between consumers and various forms of market participants with businesses. For example, a portfolio manager must give the same consideration to the portfolios of family members and small individual investors. These kinds of practices ensure the public receives fair treatment.

The concept of business ethics began in the 1960s as corporations became more aware of a rising consumer-based society that showed concerns regarding the environment, social causes, and corporate responsibility. The increased focus on so-called social issues was a hallmark of the decade.

Since that time period, the concept of business ethics has evolved. Business ethics goes beyond just a moral code of right and wrong; it attempts to reconcile what companies must do legally versus maintaining a competitive advantage over other businesses. Firms display business ethics in several ways.

Importance of Business Ethics

  1. Corresponds to Basic Human Needs

The basic need of every human being is that they want to be a part of the organization which they can respect and be proud of, because they perceive it to be ethical. Everybody likes to be associated with an organization which the society respects as a honest and socially responsible organization. The HR managers have to fulfill this basic need of the employees as well as their own basic need that they want to direct an ethical organization. The basic needs of the employees as well as the managers compel the organizations to be ethically oriented.

  1. Credibility in the Public

Ethical values of an organization create credibility in the public eye. People will like to buy the product of a company if they believe that the company is honest and is offering value for money. The public issues of such companies are bound to be a success. Because of this reason only the cola companies are spending huge sums of money on the advertisements now-a-days to convince the public that their products are safe and free from pesticides of any kind.

  1. Credibility with the Employees

When employees are convinced of the ethical values of the organization they are working for, they hold the organization in high esteem. It creates common goals, values and language. The HR manager will have credibility with the employees just because the organization has creditability in the eyes of the public. Perceived social uprightness and moral values can win the employees more than any other incentive plans.

  1. Better Decision Making

Respect for ethics will force a management to take various economic, social and ethical aspects into consideration while taking the decisions. Decision making will be better if the decisions are in the interest of the public, employees and company’s own long term good.

  1. Profitability

Being ethical does not mean not making any profits. Every organisation has a responsibility towards itself also i.e., to earn profits. Ethical companies are bound to be successful and more profitable in the long run though in the short run they can lose money.

  1. Protection of Society

Ethics can protect the society in a better way than even the legal system of the country. Where law fails, ethics always succeed. The government cannot regulate all the activities that are harmful to the society. A HR manager, who is ethically sound, can reach out to agitated employees, more effectively than the police.

Sources of Business Ethic

In every society there are three sources of business ethics-Religion, Culture and Law. The HR manager in every organization, thus, has to be well versed with the unique system of values developed by these three sources.

These sources are discussed as follows:

  1. Religion

Religion is the oldest source of Religion is the oldest source of ethical inspiration. There are more than ethical inspirations. 1, 00,000 religions which exist across the whole world, but all of them are in agreement on the fundamental principles. Every religion gives an expression of what is wrong and right in business and other walks of life. The Principle of reciprocity towards one’s fellow beings is found in all the religions. Great religions preach the necessity for an orderly social system and emphasize upon social responsibility with an objective to contribute to the general welfare. With these fundamentals, every religion creates its own code of conduct.

  1. Culture

Culture is the set of important understandings that members of a community share in common. It consists of a basic set of values, ideas, perceptions, preferences, concept of morality, code of conduct etc. which creates distinctiveness among human groups. When we talk about culture we typically refer to the pattern of development reflected in a society’s pattern of knowledge, ideology, values, laws, social norms and day to day rituals. Depending upon the pattern and stage of development, culture differs from society to society. Moreover culture is passed from generation to generation. Culture facilitates the generation of commitment to something larger than one’s individual self interest.

Culture encourages the members of the organization to give priority to organizational goals over and above their personal interests. Culture also serves as a sense making and control mechanism that guides and shapes the attitudes and behaviour of people. Managers have to run an industrial enterprise on the cutting edge of cultural experience. The tension that their actions create makes the business ethically more complex.

  1. Law

The legal system of any country, guide the human behaviour in the society. Whatever, ethics the law defines are binding on the society. The society expects the business to abide by the law. Although it is expected that every business should be law abiding, seldom do the businesses adhere to the rules and regulations. Law breaking in business is common eg. Tax evasion, hoarding, adulteration, poor quality & high priced products, environment pollution etc.

Examples of Business Ethics

Here are a few examples of business ethics at work as corporations attempt to balance marketing and social responsibility. For example, Company XYZ sells cereals with all-natural ingredients. The marketing department wants to use the all-natural ingredients as a selling point, but it must temper enthusiasm for the product versus the laws that govern labeling practices.

Some competitors’ advertisements tout high-fiber cereals that have the potential to reduce the risk of some types of cancer. The cereal company in question wants to gain more market share, but the marketing department cannot make dubious health claims on cereal boxes without the risk of litigation and fines. Even though competitors with larger market shares of the cereal industry use shady labeling practices, that doesn’t mean every manufacturer should engage in unethical behavior.

For another example, consider the matter of quality control for a company that manufactures electronic components for computer servers. These components must ship on time, or the manufacturer of the parts risks losing a lucrative contract. The quality-control department discovers a possible defect, and every component in one shipment faces checks.

Unfortunately, the checks may take too long, and the window for on-time shipping could pass, which could delay the customer’s product release. The quality-control department can ship the parts, hoping that not all of them are defective, or delay the shipment and test everything. If the parts are defective, the company that buys the components might face a firestorm of consumer backlash, which may lead the customer to seek a more reliable supplier.

Nature of Business Ethics

The characteristics or features of business ethics are:

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

Scope 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. The motivation for being compliant could be to do the right thing out of the fear of being caught rather than a desire to be abiding by the law. An ethical climate in an organization ensures that compliance with law is fuelled by a desire to abide by the laws. Organizations that value high ethics comply with the laws not only in letter but go beyond what is stipulated or expected of them.

2. Ethics in Finance

The ethical issues in finance that companies and employees are confronted with include:

  • In accounting: window dressing, misleading financial analysis.
  • Related party transactions not at arm’s length
  • Insider trading, securities fraud leading to manipulation of the financial markets.
  • Executive compensation.
  • Bribery, kickbacks, over billing of expenses, facilitation payments.
  • Fake reimbursements

3. Ethics in Human Resources

Human resource management (HRM) plays a decisive role in introducing and implementing ethics. Ethics should be a pivotal issue for HR specialists. 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.
  • Affirmative Action.
  • Issues surrounding the representation of employees and the democratization of the workplace, tradeization.
  • 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.
  • Occupational safety and health.

Companies tend to shift economic risks onto the shoulders of their employees. The boom of performance-related pay systems and flexible employment contracts are indicators of these newly established forms of shifting risk.

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.
  • Children and marketing.
  • Black markets, grey markets.

5. 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. Some of the more acute dilemmas in this area arise out of the fact that there is usually a degree of danger in any product or production process and it is difficult to define a degree of permissibility, or the degree of permissibility may depend on the changing state of preventative technologies or changing social perceptions of acceptable risk.

  • Defective, addictive and inherently dangerous products and
  • 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.

The most systematic approach to fostering ethical behaviour is to build corporate cultures that link ethical standards and business practices.