CHAPTER 1

INTRODUCTION TO BUSINESS ETHICS

Introduction
The business world is littered with the consequences of ethical failures,
for example:
Country Business
US Enron, Arthur Andersen,
WorldCom and Lehman
Brothers
India Satyam
Hong Kong Akai Holdings
Australia HIH Insurance, Storm Financial
and Centro

These businesses are all sobering reminders of the consequences of

ethical failure. There are, however, many more that are fully
operational but grappling with key ethical issues.
Enron:
1. Accounting Fraud: Enron's top executives engaged in accounting fraud by manipulating the company's financial
statements to hide debt and losses. They used special purpose entities (SPEs) to keep debt off the balance sheet
and artificially inflate profits.
2. Insider Trading: Executives at Enron sold their own stock while encouraging employees and investors to buy, even
as they knew the company was in serious financial trouble.
3. Lack of Transparency: Enron's financial statements were extremely complex and difficult to understand, making it
challenging for investors and regulators to detect the fraudulent activities.

Arthur Andersen:
4. Shredding of Documents: Arthur Andersen, Enron's auditing firm, was implicated in the scandal for its role in
approving Enron's fraudulent financial statements. Andersen employees were found to have destroyed a
significant number of documents related to the Enron audit, which raised serious questions about their ethical
conduct.
5. Conflict of Interest: Andersen was providing both auditing and consulting services to Enron, which created a
conflict of interest and compromised their independence as auditors.

WorldCom:
6. Accounting Fraud: WorldCom engaged in one of the largest accounting frauds in corporate history by inflating its
profits through improper accounting practices. Expenses were treated as capital investments, leading to the
overstatement of assets and profitability.
7. Lack of Corporate Governance: WorldCom's board of directors failed to exercise proper oversight, and the
company's internal controls were weak, allowing the fraud to go undetected for an extended period.
Lehman Brothers:
8. Misuse of Repo Transactions: Lehman Brothers used questionable accounting practices involving repurchase
agreements (repos) to temporarily remove debt from its balance sheet, making the company appear less
leveraged than it was.
9. Lack of Transparency: Lehman Brothers did not fully disclose the extent of its exposure to risky assets, such as
subprime mortgages, leading to a lack of transparency about the company's financial health.
10. Failure of Risk Management: The firm's risk management practices were insufficient to identify and address the
Satyam Computer Services, once one of India's leading IT
services companies, faced a major corporate scandal in 2009.
The primary issue with Satyam was a massive accounting fraud
perpetuated by its founder and then-chairman, Ramalinga Raju

Akai Holdings, a Japanese electronics company, faced a major

corporate scandal in the early 2000s. The primary issues with
Akai Holdings were financial irregularities and fraudulent
activities that eventually led to its downfall.

HIH Insurance, Storm Financial, and Centro were all involved in

significant corporate scandals that had a negative impact on
investors, stakeholders, and the broader financial markets
Ethical issues in industry sectors
• The banking and finance sector – the European Union (EU) fined six
of the world's top financial institutions a record 1.7 billion Euros for
rigging financial benchmarks.

• The retail industry – Marks and Spencer were accused of selling

clothes made by child labour. Similarly, Walmart and Walt Disney
have also been in focus regarding labour abuses in Bangladeshi
factories.

• The automobile industry – Firestone tyres used on a Ford Explorer

were found to be faulty and potentially lethal.
Ethical issues in industry sectors
• The electronics industry – has refused to accept European legislative
proposals for companies to take responsibility for old and unwanted
electronic products.

• The food and drink industry – Starbucks have been challenged in the
UK for their tax minimisation strategies and previously criticised over
its labour standards.

• The hotel industry – hotel giant Six Continents, which owns brands
such as Holiday Inn, Intercontinental and Crown Plaza, published its
first environmental and social report in 2002.
Current views about business ethics
Many believe that the term Business Ethics is an oxymoron, that it is a
contradiction in terms with the two words, ‘Business’ and ‘Ethics’,
being at opposing ends of a continuum, such as, jumbo shrimp, old
news.
Current views about business ethics
Research – a survey conducted in 2011 found ethics in business is
at its weakest point since 2000, and that, in the previous two
years, 45 per cent of US employees had observed a violation of
the law or ethics standards at their place of employment.

It appears that:
• 3 out of 5 managers in the UK have felt pressure to behave
unethically at work
• 9% of managers have been asked to break the law at some point
in their career
• One in ten have left their jobs as a result of being asked to do
something that made them feel uncomfortable.
Current views about business ethics
Generational attitudes
Gen Y or Millennials (born
between 1981 and 2000),
who are the youngest
workers, are significantly
more likely than their older
colleagues to feel pressure
from others to break ethical
rules, with pressure easing
as workers spend more time
in the workforce and learn
ways of coping with their
work environment.
Current views about business ethics
Millennials - younger workers observed more ethical misconduct in
the workplace during the previous year than their older colleagues,
with Millennials observing the highest incidence of all generations.

Type of misconduct % misconduct observed

Personal business on company time 26

Lying to employees 22

Abusive behaviour 21

Company resource abuse 21

Discrimination 18
Four levels of business ethics

International
Level

Personal Level

Organisational
National Level
Level
 Four levels of business ethics
Level Ethical experience at that level

Personal level Each of us has to routinely engage in ethical decision-making as

we grapple with what is the right thing to do in a range of
business circumstances.

Organisational level Ethical actions of the firm

National level Collective expectations of society, the shared norms and values
that guide ethical business behaviour, as well as the end-state
effects on a country as a result of corporate behaviour, for
example, the presence of corruption and bribery.

International level Co-ordinated efforts cross-nationally to address issues that arise

as a result of globalisation as well as prominent societal
concerns. Examples are international sustainability efforts, tax
minimisation and fair trade.
Defining business ethics
Business ethics are rules, standards, codes or principles which provide
guidelines for morally right behaviour in specific business situations.

Unethical behaviour has been defined as acts of omission, or

commission, by individuals, groups of individuals and organisations
which violate socially-constructed norms, regulatory, and/or legal
structures.
Differentiating business ethics
Legality and ethics
On 3 December 1984, an accidental leak of
Methyl Isocyanate gas occurred in the Indian
city of Bhopal, killing 2400 people and injuring
200 000; yet, given inadequacies in the
legislative framework, apparently no law was
violated. It would appear that Union Carbide,
the company involved, while not legally
culpable, was certainly morally responsible.
Conversely, an activity may be legal but
ethically questionable, as we’ve seen with
Apartheid in South Africa, animal testing, and
labour abuses in developing countries.
Differentiating business ethics
The law
• attempts to ensure social
The law
stability
• embodies ideals that are Ethical grey area

considered inviolable Ethical grey area

• is codified and written down Ethical grey area

• sets the minimum acceptable Ethical grey area

standards.

Ethics is predominantly in the

grey area where the legislation
runs out.
Differentiating business ethics
White collar crime – any non-violent act committed for financial gain,
regardless of one’s social status. It is not unusual to see the terms
‘financial crime’, ‘white collar crime’ and ‘fraud’ used interchangeably.

White collar criminals have often been found to be wealthy, highly

educated, socially connected and, typically, employed in legitimate
organisations.
Differentiating business ethics
• Financial crime generally describes a range of crimes, including:
• unlawful conversion of property belonging to another
• crimes from which there are a personal benefit.
• Examples of these crimes are:
• fraud
• bribery
• corruption
• money laundering
• embezzlement
• insider trading
• tax violations
• cyberattacks.
Differentiating business ethics
Morality and ethics
Morality refers to principles of right and wrong. Morality consists of
what a person ought to do in order to conform to society’s
behavioural norms.

Ethics is the philosophical reasoning for or against the morality that

society stipulates.
Differentiating business ethics
Morality is comprised of moral principles that are general rules,
such as rights, justice and utility, which are used to establish moral
norms.

Moral norms are expectations of behaviour that require, prohibit or

allow certain behaviour, such as showing respect and being honest.

Moral standards are derived from these moral norms and are
supposed to override self-interest, but, given emotional
considerations, they are the criteria that individuals use to guide
their decision-making.
Components of morality

Moral Moral norms Moral

principles • Expectations standards
• General rules of behaviour • Acceptability
used to which require, criteria to
evaluate. prohibit or guide
For example, allow certain decision-
rights, equity, behaviour. making.
utility.
Differentiating business ethics
Morality and ethics
Morality could be viewed as the foundation on which ethics rests.

Ethics, however, is more proactive and seeks to critique moral

principles as time passes.

For example, racial segregation has in the past been an acceptable

(and legal) norm of human conduct, but, has fortunately been
modified and deemed inappropriate through the process of ethical
reasoning, particularly with reference to equity and justice.
Differentiating business ethics
Ethics is the discipline of actually dealing with what is good and bad,
right and wrong, with moral duty and obligation.

Ethics is the more pragmatic side of morality where norms and values
are put into action through ethical reasoning (the rationale and
thinking process a person engages in when they deal with an ethical
dilemma).

Ethics can be described as the practice of morality; and business ethics

is morality as it applies to business behaviour.
Differentiating business ethics
Corporate morality is not the same as the personal morality of its top
executives or CEO.

Running a conscientious corporation requires values to be

institutionalised – it is not enough for the values to be contained in
one part of the organisation.
Differentiating business ethics
Examples of moral principles

• Honesty – being truthful

• Fidelity – keeping promises
• Reparation – setting the wrong right
• Justice – ensuring consistency, and fairness
• Beneficence – making things better for others
• Non-maleficence – not harming others
• Gratitude – providing appropriate honour and recognition
Differentiating business ethics
Personal character and integrity
Think about the best boss you have
ever worked for, even if it was a part-
time job. What were the top 5 personal
characteristics of that individual?

Now think of the worst boss you have

ever worked for and list their top 5
personal characteristics.
Differentiating business ethics
Leadership traits
What are the most important traits
for a leader of white collar employees
in the USA?

Out in front were:

• integrity
• morals
• ethics
• caring and compassion
• fairness
• good relationships with employees
• approachability
• listening skills.
Differentiating business ethics
Personal character and integrity
Personal character is comprised of the moral qualities distinctive to an
individual, and they are the personal attributes exhibited by those you
work with, your superiors and colleagues, and the behaviour that you
yourself exhibit.

Demonstrating integrity means consistently adhering to strong moral

principles.

It is not just enough to possess moral principles and values; they need
to be supported by action.
Differentiating business ethics
Four dimensions of one’s ethical self:

1. Holding of Values and a Concern for Those Values (Moral Claims):

This dimension involves the development and maintenance of a set of
ethical principles or values. It's about having a sense of what is right
and wrong, and a commitment to those beliefs. Individuals with a strong
ethical self have a clear understanding of their values and a genuine
concern for upholding and promoting them in their actions and
decisions.

2. Capacity to Reflect (Self-Criticism): Reflecting on one's actions and

beliefs is essential for ethical growth. This dimension involves the ability
to engage in self-criticism and introspection. It means taking a step
back to assess whether your actions align with your values and making
adjustments when necessary. Self-criticism allows for personal growth
and the refinement of one's ethical framework.
Differentiating business ethics
Four dimensions of one’s ethical self:

3. Sense of Community and Belief in a Public Good (Not Pure Self-

Interest): Ethical individuals recognize the importance of community
and the common good. This dimension implies that ethical behavior
extends beyond pure self-interest. It involves a commitment to actions
and decisions that benefit not only oneself but also the broader
community or society. This sense of community and concern for the
public good reflects a more altruistic and socially responsible approach
to ethics.
4. Willingness to Act Consistently on Those Values (Moral Courage):
It's one thing to hold ethical values; it's another to act on them
consistently, especially when facing challenges or adversity. Moral
courage is the ability and determination to do what is right, even in the
face of opposition, risk, or personal discomfort. It's about standing up
for one's principles and values, regardless of the consequences.
Differentiating business ethics
Values are deeply held beliefs
about what is important and
highly valued.

There are two types of values:

• individual values (those that a
person holds strongly)
• organisational values (those
that a specific company
endorses and promotes).
Differentiating business ethics
Kohlberg’s Theory of Moral Development
Ethical reasoning becomes increasingly sophisticated as individuals
move through three broad categories of moral development, which
have been further classified into six stages.

The theory can also apply usefully to organisations.

Differentiating business ethics
Kohlberg’s stages of moral development
Pre-conventional (Child)

Stage 1: Avoidance of punishment, obedience to authority and fear.

Stage 2: Motivated by self-interest, what’s in it for me, or an expectation of
reward or satisfaction.
Conventional (Adolescent)

Stage 3: Awareness of others, seeking approval of group norms.

Stage 4: Loyalty and belonging and a justification of ‘everyone does it’.
Post-conventional (Adult)

Stage 5: A broader view of right and wrong, not depending on the norms of the
group, but concerned for standards of society.
Stage 6: Broad ethical principles are in place, with universal reasoning. Decisions
are based on conscience.
Differentiating business ethics
An organisational perspective on Kohlberg’s theory
Pre-conventional (Defensive)
Stage 1: Motivated to be ethical for fear of being sanctioned or prosecuted.
Stage 2: Motivated to be ethical solely because of the positive reputational and brand
effect.
Conventional (Developing)
Stage 3: Motivated to be ethical because of the need to adhere to professional/
industry codes of conduct.
Stage 4: Motivated to be ethical because of broad industry standards and ethical
norms/expectations
Post-conventional (Integrated)
Stage 5: Motivated to be ethical because of expectations from society and a broad
group of its members, that is, lobby groups, customers etc.
Stage 6: Committed to ethical principles being in place irrespective of what others are
doing because of a conscientious and internalised belief this is how it should be.
Drivers promoting ethical awareness in
business

Market drivers

Government Social
drivers drivers
Drivers promoting ethical awareness in
business
Market drivers:

• Market infrastructure
• Consumers
• Investors and owners
• Shareholders
• Employees
• Other stakeholders
Drivers promoting ethical awareness in
business
Social drivers:

• National advocates
• Individual activists
• Local community
• Main stream media
• Social media
• International lobby groups
• Business and professional associations
• Educational institutions
• Non-government organisations (NGOs)
Drivers promoting ethical awareness in business

Government drivers:

• Formal legislation
• Regulatory bodies
Conclusion
The good and the bad
A lot of the discussion about ethics concerns unethical practices, but it
is important to note that ethics in business is about good business
practice.

We should be looking at what should be done right, as well as what is

being done wrong.
Conclusion
Good for business
Research from the US Ethics Resource Centre (2013) demonstrates that
strong ethics and compliance, and ethical cultures result in:

• elevated standards
• lower levels of observed misconduct, increased rates of reporting
unethical conduct
• decreased levels of retaliation against those who report unethical
conduct.
Ethics at the movies
* The Wolf of Wall Street

Starring Leonardo DiCaprio, Jonah Hill and Jon Favreau.

Based on the true story of the stockbroker, Jordan Belfort, and his infamous
unethical work practices.

The Wolf of Wall Street, 2013, motion picture trailer, M. Scorsese, <
[Link]

* Author’s pick