In this lesson, you’ll learn about business ethics – the concept, its history, and how it has evolved over time.
Often, ethics is applied to questions of correct behavior within a relatively narrow area of professional activity. The so called “professional ethics” is the professionally accepted standard of values and principles that govern the behavior of organizations and persons in performing their job.
One of the earliest examples of professional ethics is the Hippocratic oath to which medical doctors still adhere to this day.
For the purpose of this lesson, we will focus on the ethics governing the business environment, also called “business ethics”.
In a broader view, business ethics encompasses relationships that result in potential controversial issues involving all the corporate stakeholders, including the company, its employees, shareholders, suppliers, customers, neighbors etc.
Most of these controversial issues revolve around a profit-maximizing behavior of the companies’ high management.
Therefore, corporate entities also have independent ethical responsibilities.
• misuse of company time or resources
• creating conflicts of interest within an organization
• corporate social responsibility and environmental issues
• fiduciary responsibilities*
• political contributions
• fairness in trading practices
• misleading financial analysis
• securities fraud
* Fiduciary Responsibilities: involving trust, especially with regard to the relationship between a trustee and a beneficiary.
Although the term “business ethics” came into common use in the American corporate environment in the early 1970s, international business ethics did not emerge until the late 1990s.
Interest in business ethics accelerated dramatically during the 1990s due to globalization and the multinationals’ predatory way of doing business, which includes practices of taking advantage of international differences – i.e., outsourcing production and services to low-wage countries, and dumping* to the detriment of less economically advanced companies.
As a consequence, firms began to promote their commitment to non-economic values under headings such as ethics codes and social responsibility charters, possibly in an attempt to distance themselves from the business scandals.
There were numerous corporate accounting scandals in the U.S.– e.g., Enron, WorldCom, Tyco, Lehman Brothers, Bernie Madoff, Satyam etc. – and most of them used “creative accounting” tools to intentionally manipulate corporate financial statements.
The illegal mechanisms were adopted with the agreement of the companies’ executives and they included practices such as inflation of the company income and assets, stock price manipulation, expense deferrals, and hiding over loans disguised as sales.
• Bonuses: managers would reward themselves with higher bonuses if they achieved certain financial results.
• Dividends: the distribution of enormous amount of dividends would meet shareholder expectations who would keep investing in the company.
• Stock Price: by increasing the company earnings, the expectation from the investment community would be met.
• Competitors: good financial results would potentially increase the competitive advantage over other businesses.
Many small- and mid-sized companies also began to appointethics officers. Often reporting to the Chief Executive Officer (CEO), on one hand, they focus on preventing unethical actions by making recommendations on ethical policies and disseminating information to employees; on the other hand, they focus on uncovering unethical and illegal actions.
In addition to ethics officers, companies also began to designate a board committee to oversee ethics issues.
Typically called “corporate codes of ethics”, they are meant to identify the company’s expectations of workers and to offer guidance on handling some of the more common ethical problems that may arise while doing business.
All of the above measures are important elements of companies’ ethics and integrity which are at the core of sustainable long-term success.