Business Ethics Chapter 1 Introduction to Business Ethics

What is Business Ethics? • Ethics: refer to society’s perception of what is right or wrong • Business ethics: refer to the principles and standards that guide business • Discussion questions: • What do you consider some of the most critical business ethics issues? • Why do you consider such issues to be critical to business ethics? • What are some examples of current unethical behaviors in the world today? © 2019 Taylor & Francis

What is Business Ethics? • Business ethics cover the range of business issues that are within the realm of right or wrong • It includes many key issues such as false advertising, sexual harassment, bribery, etc. • Consider the Preview Business Ethics Insights in the text: • Enron and World. Com for massive fraud • Similar cases exist worldwide: • Consider the case of Satyam Computers in India • Company executives manipulated earnings to create a positive situation for the company © 2019 Taylor & Francis

Introduction to Business Ethics • Do you think unethical behavior is very prevalent worldwide? • What are some of the major types of unethical behaviors? • Why do unethical behaviors occur so frequently? © 2019 Taylor & Francis

How Prevalent Are Unethical Behaviors Worldwide? • Transparency International (TI): one of the most well-known organizations promoting ethical behavior worldwide • TI created to eradicate corruption worldwide • Provides information on extent of corruption worldwide © 2019 Taylor & Francis

How Prevalent Are Unethical Behaviors Worldwide? • Bribe Payers Index (BPI): measured by asking executives the degree to which they expected companies in their countries to engage in bribery with their own companies • Bribery: refers to the degree to which individuals have to be provided with some compensation to influence the individual. • E. g. , money, gifts, etc. © 2019 Taylor & Francis

Exhibit 1. 1 CPI by Country Corruption Perception Index Paraguay Tunisia Nigeria India Kenya Mauritius Philippines Belgium United Kingdom Mexico Taiwan France Iceland Netherlands Sweden Denmark Ireland Uruguay Norway Chile 20 30 40 50 60 70 80 90 © 2019 Taylor & Francis

Exhibit 1. 2 Observe Misconduct Percentage of Workers Pressured to Compromise/Observed Misconduct 50 45 40 35 30 25 20 15 10 5 0 Spain Mexico Japan China South Germany Korea USA Pressure to Compromise UK Italy France Russia India Brazil Observed Misconduct © 2019 Taylor & Francis

Conclusion of TI Studies • Transparency International studies show that unethical behaviors occur to some degree in most societies • Is bribery limited only to poorer nations? • NO! © 2019 Taylor & Francis

United Nations Global Compact • Not all organizations are focused on unethical behavior • The United Nations Global Compact has ten key principles. • Companies should: • respect international human rights • not participate in human rights abuses • allow workers to unionize • not force compulsory labor © 2019 Taylor & Francis

United Nations Global Compact • Companies should: • Not employ child labor • Eliminate discrimination • Support environmental causes • Encourage environmentally friendly technologies • Work against corruption © 2019 Taylor & Francis

Association of Certified Fraud Examiners • ACFE based its survey on over 2410 cases of occupational fraud in 114 countries worldwide. Major findings include: • Participants report that their companies lose approximately $6. 3 billion • The typical company loses 5% of its revenues to occupational fraud • More than 23% of occupational fraud resulted in losses over $1 million © 2019 Taylor & Francis

Occupational Fraud • Occupational fraud: the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets • E. g. , skimming, billing, expense reimbursement, and payroll © 2019 Taylor & Francis

Exhibit 1. 4 Median Fraud Median Loss as Result of Occupational Fraud (US$) Asia Pacific Southern Asia Sub-Saharan Africa Middle East/North Africa Latin America/Carribean Eastern Europe/Central Asia Western Europe Canada USA 50000 100000 150000 200000 250000 300000 © 2019 Taylor & Francis

Conclusion of All Studies • Unethical behaviors occur in most societies • Unethical behaviors occur in most occupations • Unethical behaviors can take many shapes and forms • Unethical behaviors can also be very costly for companies © 2019 Taylor & Francis

Discussion Questions • Read Siemens and bribery Global Business Ethics Insight • What were some of the unethical practices Siemens employees were engaged in? • What have been the consequences to Siemens of being involved in such activities? • What are some of the financial consequences they had to deal with? • Are there some advantages to being ethical? © 2019 Taylor & Francis

What Are the Benefits of Being Ethical? • Corporate social responsibility: represents a strategic approach to managing ethics in an organization • Ethical companies do perform better financially than unethical companies • Strong link of benefits with ethics © 2019 Taylor & Francis

What Are the Benefits of Being Ethical? • Financial benefits: • Better firm financial performance • Stronger firm market values • Better stock market value • Stronger stock market returns • Perceived future financial performance © 2019 Taylor & Francis

Benefits of Business Ethics Worldwide • Positive findings from other studies: • Business ethics program resulted in higher levels of accounting-based performance measurements • Firms displaying social behaviors had higher stock market values • Companies with strong ethical corporate values had higher levels of performance © 2019 Taylor & Francis

Benefits of Business Ethics Worldwide • Positive findings from studies: • Companies that displayed ethical commitment had higher stock valuation • Socially responsible funds performed better and were less risky than other funds © 2019 Taylor & Francis

How Do Good Ethics Benefit a Company? • Through employees, customers, suppliers, and investors, among others • Are consumers willing to pay higher prices? • Yes – according to a study by Trudel, Remi & Cotte (2009) • Consumers are willing to not only reward more ethical companies, but also punish unethical companies • Study shows that consumers respond to more ethical companies © 2019 Taylor & Francis

Approaches to Business Ethics Contrasting views: • Stockholder theory: shareholders or owners have the right to control and earn residual earnings • Shareholders own companies and should therefore have the right to profits • Consistent with Milton Friedman’s assertion that the sole responsibility of companies is to make profits © 2019 Taylor & Francis

Discussion Questions • Do you think companies should only make profits and be responsible to shareholders? • Why? • Some support for this view: • An executive is an employee of the owners of a business – he/she is directly responsible to his employers • “Make as much money as possible while conforming to the basic rules of society” • Executives don’t have the knowledge to exercise social responsibility © 2019 Taylor & Francis

Stakeholder Theory • However, the current business climate requires that companies go beyond just satisfying shareholders • Need to operate within legal boundaries • Companies should satisfy all stakeholder needs • Different stakeholders have different legal requirements and needs © 2019 Taylor & Francis

Stakeholders and Ethical Issues • Employees: • • • Employee conflict of interest Honesty and integrity Discrimination, diversity and sexual harassment Compensation and benefits Employee screening and privacy © 2019 Taylor & Francis

Stakeholders and Ethical Issues • Customers: • • • Fairness in pricing and marketing Advertising content and truth in advertising Customer privacy Dealing with customer complaints Product safety and quality © 2019 Taylor & Francis

Stakeholders and Ethical Issues • Shareholders: • • • Shareholder interests Transparency in accounting Transparency in shareholder communications Executive salaries and compensation Corporate governance © 2019 Taylor & Francis

Stakeholders and Ethical Issues • Suppliers: • Enforcing contracts • Supplier diversity in terms

Stakeholders and Ethical Issues • Government: • Respecting rules and regulations • Practices in foreign nations with weak governments • Lobbying • Community: • Corporate social responsibility • Pollution and environmental degradation issues • Donation to local community charities and organizations © 2019 Taylor & Francis

Ethical Practices in South African Firms Ethical behavior is publicly recognized Consequences of misconduct communicated in writing Consequences of misconduct communicated verbally Anonymous reporting options are offered Inclusion of ethical standards in employment contract Training new employees on ethics Code of conduct Generic set of rules Ethics training Communication of ethical issues in emails, newsletters and website Encouraging of discussion of ethical issues Values publicly displayed on company premises 20 30 System being perceived as useful (percentage of firms) 40 50 60 70 80 90 Adoption (Percentage of Companies) © 2019 Taylor & Francis

Strategic Approach • Strategic approach: a company will integrate business ethics issues across all of its operations and activities • Need a holistic approach where companies integrate ethics in strategy © 2019 Taylor & Francis

Conclusion • Business ethics represent very critical issues and debates for companies • Companies that succeed are the ones that are ethical • Chapter 1 shows the benefits of behaving ethically • Chapter 1 also provides numerous examples of unethical behaviors and their consequences © 2019 Taylor & Francis