Business ethics: principles, practices, and organizational impact

Business Ethics

The issue of business ethics has been front and center for over a decade, following on the heels of the accounting scandals that led to the passage of the Sarbanes-Oxley Act. That those scandals came in such rapid succession and occurred in such large companies shocked the financial world out of its complacency with respect to ethics.

But the issue of business ethics has been around longer than that -- note the true moral dilemma posed by bribery in foreign countries, an issue that spawned the Foreign Corrupt Practices Act to curtail the practice. There are other issues, too, in business ethics, not just high level accounting scandals. They do not always involve criminal acts, either. In many cases, businesses are posed with a choice between doing two things that are perfectly legal, but where at least one of the options violates some sense of ethics. I feel that learning more about ethical frameworks helps me in my future role as a manager to understand the nature of these dilemmas, and that this will allow me to handle them better.

Fundamentally, a lot of people in business are basically laissez-faire people, who take the assumption that the free market will resolve all ethical issues in its own way. In one sense, they are right. Enron's stock collapsed and the company went under, for example. The problem is that it took a lot of people with it. Interventions exist to help avoid such collateral damage. Businesses' unethical behavior can ruin lives, and in the case of the recent recession, can cripple the global economy. The reality is that even with the laws we have in place and the frequent dialogue, the current climate for business ethics is not strong.

In many instances ethical dilemmas arise from conflict between two stakeholder. When Milton Friedman famously argued that the role of business was to increase its profits, he was essentially putting forth the idea that of all stakeholder groups only the shareholders mattered. He specifically noted that businesses should operate within the bounds of law, but he did not address situations where such laws are inadequate. Business can, therefore, offload negative externalities on other stakeholders when the opportunity to do so presents itself.

The stakeholder view is a bit more comprehensive. While businesses are indeed a vehicle for economic growth -- for earning returns for shareholders - they are also vehicles for producing things that society finds useful, and they are vehicles for producing employment. In some cases, companies clearly get by without producing anything of discernable value -- can anyone really advocate with a straight face for the societal benefits of Taco Bell? -- but that does not mean that business has abdicated this role. Business produces useful goods and services that benefit society, and need only earn enough profit to continue that in order to have a net benefit. Furthermore, the employees of a business clearly have a long-run stake in its survival. It is unethical for managers to only focus on the shareholders, because the business is not built solely with capital but from a variety of different resources, including human capital.

This brings into light one of the interesting issues of business ethics, the choice between long-run and short-run gains. Public companies are motivated at least in part by the need to increase shareholder wealth, and this is measured in quarterly reports. This approach, however, creates agency problems. Even if management is oriented solely to the needs of the shareholders, the choice between short-term gains and long-term gains can something lead to unethical behavior. In studying ethics, it is interesting to recognize that these sorts of issues are exactly where people end up compromising their values -- they receive more benefits from short-term performance than long-term performance, leading to decisions that are destructive in the long run.

This brings up the issue of creating an ethical organization. Even if we assume that all employees have a strong orientation to obeying the law, this is not sufficient. Organizations need to build a strong organizational culture that supports ethical behavior, and provides clear guidance within the framework of that culture for what that ethical behavior might look like. In addition, the company should have training for employees to provide further guidance. The more clarity the organization can provide about how it wants its employees to conduct themselves, the less likely that employer is to have ethical issues on its hands. Whatever ethical framework the company wants to pursue, this leads to be clear at all levels of the organization from the first day of employment, and ideally would also be clear to external stakeholders as well, so that they can help the company to make the right ethical choices when those moments of truth arrive.

I also find it useful to think about the organization's ethical infrastructure. Companies need things like ethics hotlines for advice, and whistleblower protections. There needs to be multiple platforms for someone to report unethical behavior and not be punished for this -- the organization needs to be fully committed to weeding out unethical behavior in its ranks.

One of the things about being a professional is that in business, you need to have a sense of not only what you want to accomplish, but how you intend to accomplish it. The how is important, because unethical behavior can come with tremendous costs. Managers are responsible for defining, promoting and maintaining the ethical culture within the organization. I feel that perhaps too many managers are ill-equipped with respect to this. Many for whom I have worked had a sense of ethics, but it was their own; there was no common organizational ethical culture that was consistent throughout the employee ranks. That is probably the objective for a company that truly wants to be an ethical leader -- to have consistent ethics at all levels, where everybody in the company knows how a situation will be resolved, and there is enforcement of ethical standard.

Based on my experiences and what I have read in this course, there does not need to be a trade-off between profits and ethics; this is a false dichotomy and the two are not mutually exclusive. One of the roles that an ethical manager can play is business is to find the synergy between ethical behavior and financial objectives. Ethical behavior protects the business, so it only makes sense for a manager acting as agent for the shareholders to take all the steps necessary to ensure the highest level of ethical behavior.