What is Business Ethics? Definition, Characteristics, Relevance, Creating Ethical Environment, Leadership

What is Business Ethics?

Business ethics refers to the application of ethical principles and values to the business world. It involves examining the ethical and moral implications of business decisions, actions, and practices, and ensuring that they are consistent with social norms and values.

Definitions of Business Ethics

As discussed earlier, ethics deal with moral principles and a code of conduct for people. In business context, ethics are all about conducting business based on a set of principles and standards for the welfare of all associated.

The following are some definitions of business ethics:

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

According to Raymond C. Baumhart, the ethics of business is the ethics of responsibility. The business man must promise that he will not harm knowingly.

The implementation of ethics in business is essential so that trust can be built between an organisation and its stakeholders. Moreover, ethical business practices help in preventing ethical issues, such as insider trading, corporate governance, bribery, discrimination, corporate social responsibility and fiduciary responsibilities.

An organisation without ethics can earn a profit in the short run, but it can be harder for the organisation to sustain in the market in the long run.

On the other hand, an organisation following ethics may face losses in the short run, but in the long run it can lead the market by delivering values.

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Characteristics of Business Ethics

Business ethics deal with ethical principles or problems that can arise in a business environment. The following are the characteristics of business ethics:

Discipline of Moral Values

Business ethics are the guiding values related to the functioning of a business. It is the information through which human behaviour is assessed in a business situation. A business affects society to a large extent, thus having a number of responsibilities to fulfil for society.

Businesses must ensure a regular supply of quality goods and services at reasonable prices to their consumers. Unfair trade practices, such as adulteration, promoting misleading advertisements and black marketing, must be avoided by businesses.

They must ensure the payment of fair wages and provide good working conditions for workers. In addition, business firms must pay all their taxes and duties regularly to the government.

Relative Term

Ethics is a relative term for morality and immorality. It deviates from one person to another or from one society to another. For example, something that is considered moral in one society may be immoral in another society. Thus, ethics is a broader concept and is not universally applicable in the same sense or in the same situation.

Study of Objectives and Means

As stated earlier, business ethics segregates between fair and unfair. Business ethics ensures that the means opted for satisfying objectives are rational and justified. It is essential that goals and means be based on moral principles.

Interest of Society

Business ethics explain the importance of business in society. They lay emphasis on the fact that a business should first do well to society and then to itself. A business has a social responsibility to guard the interests of all its stakeholders.

Greater Than Law

Business ethics cannot be obligatory by law or by force. It must be acknowledged as self-discipline by business organisations. Businessmen should opt for ethical trade practices by themselves and not by the pressure of law.

Though the law imparts many social decisions, it cannot be considered greater than ethics. Law is generally related to the bare minimum control of communal customs, whereas ethics impart greater significance to individual and social welfare deeds.

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Relevance of Business Ethics

As already discussed, a business that adopts ethical practices is able to sustain in the market by delivering value to various stakeholders.

The importance of business ethics is explained in the following points:

Creating a Good Image

A business firm following a code of conduct (ethics) is able to create a good image of the business in the minds of its customers. A good public image helps business firms to lead the market.

Stopping Business Malpractices

As discussed earlier, business ethics examines various ethical problems such as insider trading, corporate governance, bribery, discrimination, corporate social responsibility and fiduciary responsibilities.

Improving Customers’ Confidence

Once customers are aware of the ethical values of a concerned organisation, they start building trust towards that organisation. Moreover, an organisation with customer loyalty is always able to emerge as a brand.

Safeguarding Consumers’ Rights

As per the Consumer Act, 1986, a consumer has a right to safety, right to be informed, right to choose, right to be heard and right to redress. Business ethics ensure that the concerned business organisation is respecting all these rights of its consumers.

Protecting Other Stakeholders

It is not only the consumer segment that should be treated well by organisations, there are many other stakeholders as well that require fair treatment by organisations. For example, an organisation that treats its employees fairly is able to get loyalty quotient from employees in return.

Competing With Healthy Approach

Competition is inevitable, but a healthy approach towards competitors helps in building a cordial atmosphere. Business firms should try to provide equal opportunities to small-scale businesses such as taking raw materials from small-scale suppliers. They must ignore the formation of monopolies as it degrades consumer sovereignty.

Developing Good Relations

An organisation maintaining a code of conduct is able to earn respect in return, thereby developing good and friendly relations between the organisation and society. This would help businesses in earning profits, which would lead to the growth of economy.

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Embedding Ethics in Organisational Culture

Ethics are the norms and beliefs that guide and control the actions of an individual. Businesses nowadays have adopted a proactive approach towards solving ethical problems. An organisation must explore its internal business environment for ensuring that set ethical norms are being followed.

For creating an ethical environment in an organisation, it should be ensured that the ethics of the organisation are embedded in its culture. Let us now discuss how ethics can be embedded in organisational culture in the next section.

Embedding ethics in the culture is an essential requirement to build an ethical organisation. An organisation that has ethics embedded in its culture can ensure the ethical behaviour of its employees. There are certain steps and procedures that an organisation must follow to make the organisation an ethical one. These steps are:

Getting Commitment From Top Management

The top management of an organisation includes all individuals that have power to make strategic decisions. Any action taken at the top level trickles down to the bottom. Therefore, an ethical environment can be created in the organisation if the top management takes an initiative towards adopting ethical practices.

Setting a Code of Ethics

To build and ensure an ethical and moral behaviour in an organisation, formal codes must be developed. These codes can be altered from time to time as per business and human resource requirements.

Such codes of conduct state the norms and behaviour expected by the organisation in an explicit manner. However, implicit norms also exist in the organisation that are not stated anywhere but are followed throughout the organisation.

Communicating Ethics

After the codes of ethics are created, it is important that they are communicated across in detail. Successful implementation of any code depends on how well it is communicated to people.

In this regard, it is advisable that the top management should hold meetings with employees on a regular basis to inform them about existing or upcoming codes of ethics.

Providing Training on Ethics

As stated earlier, communicating the codes of ethics is important for an organisation. However, assuming that employees will be able to fully practise these codes is an overstatement.

Employees may think that they are wellinformed about the code of ethics, but in reality, it may not be so. Therefore, it is in the interest of the employees to attend and imbibe ethical training sessions conducted by the organisation.

Designating an Ethics Officer

An ethics officer guides employees in imparting ethical conduct and the right decision-making. He/she is a permanent employee of an organisation and a part of the top management. If employees get to know about any wrong practices being carried out in their organisation, they can inform the ethics officer about it.

The ethics officer guides about what constitutes moral behaviour and moral choice-making. In some cases, there is a whole panel that is dedicated to ethics.

The activities that are performed by the ethics panel include the following:

• Organising regular meetings to discuss ethical issues
  
  
• Detecting areas where ethical codes are violated
  
  
• Communicating the codes of conduct to all members of the organisation
  
  
• Recognising employees who show ethical behaviour and punishing those who violate the stated codes.

Checking Response and Ensuring Enforcement

For an organisation, enforcing the codes of ethics throughout the organisation is a major issue, which is also a difficult move. The positive response of employees must be rewarded, while the unethical and violating behaviour of employees must be curbed.

Performing Audits, Revisions and Refinement

To ensure that the code of ethics is being implemented and administered successfully, reviews and audits are conducted. Such audits include itemised examination of any potential infringement of laws/regulations.

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Guidelines for Ethical Behaviour in Business Organisations

Business ethics is a term that is relevant to all organisations. A dishonest and unethical worker is not beneficial for an organisation in any manner. Organisations must make provisions so that employees indulge in an ethical behaviour. To encourage and enforce ethical behaviour in an organisation, various guidelines can be followed.

These guidelines are as follows:

Making Managers as Role Models

Employees learn best by seeing what their superiors are practising. Therefore, managers must demonstrate utmost ethical behaviour and emerge as role models. To enforce moral conduct, managers must set examples. If supervisors stick to ethics, employees will feel less hesitant to contradict the rules laid out for ethical conduct.

Taking Disciplinary Actions for Unethical Behaviour

The management and all the individuals, who are entrusted with the responsibility of maintaining ethical behaviour, must lay down a foundation for ethical behaviour in the organisation. It is the duty of management to condemn misbehaviour or deceptive conduct on the part of employees.

It is also important that the management takes steps to punish and/or penalise those who indulge in unethical practices so that other employees can have a clear idea of the consequences of improper conduct.

Rewarding Ethical Behaviour

When an employee is rewarded for positive conduct, it serves as a motivation tool for other employees. Thus, it is essential that managers should recognise employees whose actions and behaviour are in line with the ethical standards in either supportive or hostile circumstances.

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Ethical Leadership

In an organisation, leadership is a practice of motivating others to work with confidence and develop zeal to attain the pre-determined goals of an organisation. This can be possible if a leader behaves ethically and make ethical decisions. Ethical leadership is a leadership that lays emphasis on ethical beliefs and values of individuals.

These values can be integrity, honesty, fairness and so on. According to Brown, Trevino & Harrison, ethical leadership is defined as the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers through two way communication, reinforcement, and decision-making.

Ethical leaders are known for their honesty, principles and impartial approach to decision making. In addition, they clearly communicate the codes of ethics to their followers and use rewards and punishments to maintain ethical standards.

The following are the characteristics of ethical leaders:

• Promoting development of leadership skills in others
  
  
• Taking accountability for the accepted roles and responsibilities
  
  
• Taking into account the interests of the organisation, people and society
  
  
• Encouraging and inviting feedback, opinions and suggestions from followers
  
  
• Guiding people towards the right direction

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4 V Model of Ethical Leadership

Dr. Bill Grace developed the 4-V Model of Ethical Leadership based on his leadership research and personal passion for ethics. The model is a framework that aligns the beliefs and values of individuals with their behaviours and actions for the purpose of ethical leadership.

Four Vs in the 4-V Model of Ethical Leadership represent Values, Vision, Virtue and Voice. The presence of these characteristics in a leader ensures ethical leadership.

The four Vs of ethical leadership are discussed as follows:

Values

These are the core standards of an organisation. Ethical leadership can be developed easily by understanding core values.

Vision

It implies planning actions to achieve organisational objectives. Ethical leaders outline their actions towards the successful accomplishment of organisational objectives.

Voice

Communicating the vision is necessary for its effective implementation. A strong, convincing and motivational approach is required from an ethical leader for articulating the vision to others.

Virtue

An ethical leader can achieve a common goal by identifying what is right and what is wrong. He/she should practice virtuous behaviour that depicts moral excellence.

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Case Study: Ethical Misconduct by General Motors

General Motors Company (GM) is an American MNC whose headquarters is at Detroit, Michigan. GM designs, produces, promotes and distributes automobiles and their parts, and also deals in automotive financial services. GM was originally a holding company operating for McLaughlin Carriage Company and was established in September 1908.

GM is currently embroiled in a major ethical issue of knowingly selling cars with faulty ignition switches. As early as March 2005, problems were being reported about the stalling of cars indicating a faulty ignition switch.

However, GM did not take any corrective action even after internal tests validated the customers’ complaints in September 2005. The fault was researched upon by the engineering department of GM, and it was estimated that the cost of changing the switch would be $0.90 per car and around $400,000 would be needed to be invested in the production machinery to rectify the problem.

This information was dispersed within the company, and the decision was made to not recall or repair any cars already sold in order to save costs.

Later on in 2006, the engineers who had designed the ignition switch requested the parts supplier to change the switch design without changing the part number. The records for these requests were not discovered until 2013 by an internal investigation led by the new GM CEO, Mary Barra.

The investigation also found out that if the driver’s knee touched the ignition switch, it could cause it to switch off, leading to failures in critical systems of car such as braking, steering and deployment of airbags. GM was fined US$35 million by the U.S. Department of Transportation as it did not immediately inform about the safety concerns regarding its cars to the National Highway Traffic Safety Administration (NHTSA).

Mr. David Friedman, the Acting Administrator of NHTSA, stated, GM engineers knew about the defect. GM investigators knew about the defect. GM lawyers knew about the defect. But GM did not act to protect Americans from that defect.

Mary Barra, the current CEO of General Motors, was informed about the scandal before she was appointed for her current position in December 2013. GM recalled 1.6 million defective vehicles in February 2014, which grew to 2.6 million subsequently, to repair the faulty ignition switches.

Attorney Kenneth Feinberg, who is responsible for GM’s compensation fund, revealed that their ignition switches caused 124 deaths and 275 injuries. GM has set aside US$625 million, out of which each family who lost a member would receive at least US$ 1 million. As per recent developments in this scandal, GM has reached a deal with the federal prosecutors. Two criminal charges would be dismissed if GM complies with the terms of the agreement over a period of next three years.

Moreover, the company has agreed to provide compensation amounting to US$900 million to the US government. GM has also said that it would spend another US$575 million to settle various civil lawsuits filed against the company.

This real-life scenario illuminates us about the importance of having an open and ethical culture in a company and regularly assessing the same so that problems can be solved without them escalating. GM has started a programme ‘Speak Up for Safety’ as a solution to counter this big issue.

The programme’s objective is to motivate employees to come forward and inform about problems rather than staying silent. According to Mary Barra, GM must embrace a culture where safety and quality come first. GM employees should raise safety concerns quickly and forcefully, and be recognised for doing so.