CHAPTER 1
The Importance of Business Ethics
SUMMARY
This chapter provides an overview of business ethics. It develops a definition of business ethics and
discusses why it has become an important topic in business education. Next, it examines the evolution of
business ethics in North America and explores the benefits of ethical decision making in business.
Finally, the chapter provides a framework for examining business ethics in this text.
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
This Ethical Dilemma focuses on salespeople reporting their expense accounts. Sophie had just
completed a sales training course stressing the importance of accurately filling out expense vouchers. Yet
while filling out her first weekly expense vouchers, Sophie’s mentor Emma encouraged her to pad the
expense account. Emma explained the accounting department supervisor was unsympathetic to
salespeople and refused to change the expense voucher forms to include a place for tips, making tips an
out–of-pocket expense. Emma explained how even though padding violated company policy, it was an
accepted practice in the sales department and she was encouraged to do the same by her mentors. Emma
showed Sophie how most salespeople use blank cab fare receipts when padding in waiter, bellhop, and
LECTURE OUTLINE
I. Business Ethics Defined
A. Business ethics is a complicated and controversial topic. Highly visible business ethics issues
influence the public’s attitudes toward business and can destroy trust.
2. Business ethics is controversial, and there is no universally accepted approach for resolving
ethical issues.
3. Values and judgments play a critical role in the making of ethical decisions.
B. Morals refer to a person’s personal philosophies about what is right or wrong.
2 Chapter 1: The Importance of Business Ethics
C. Business ethics comprises organizational principles, values, and norms that may originate from
individuals, organizational statements, or from the legal system that primarily guide individual
and group behavior in the world of business.
D. Principles are specific and pervasive boundaries for behavior that should not be violated.
E. Values are enduring beliefs and ideals that are socially enforced.
II. Why Study Business Ethics?
A. A Crisis in Business Ethics
1. Ethical misconduct is a major business concern, and organizations are under greater
scrutiny than ever by stakeholders.
B. Specific Issues
1. Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of
interest, defective products, bribery, and employee theft are all problems cited as evidence
of declining ethical standards in business and in other areas like government or sports.
C. The Reasons for Studying Business Ethics
1. Studying business ethics is valuable for several reasons.
a. Business ethics is not merely an extension of an individual’s own personal ethics—an
individual’s personal values and moral philosophies are only one factor in the ethical
decision-making process.
b. Being a good person with sound personal ethics is not sufficient to handle the ethical
2. Studying business ethics helps businesspeople begin to identify ethical issues, recognize the
approaches available to resolve them, learn about the ethical decision-making process and
III. The Development of Business Ethics
A. Before 1960: Ethics in Business
1. Prior to 1960, the United States went through several phases questioning the concept of
capitalism.
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a. In the 1920s, the progressive movement sought to provide citizens with a “living
wage,” or income sufficient for education, recreation, health, and retirement.
2. Until 1960, ethical issues related to business were discussed within the domain of theology
or philosophy.
a. Catholic social ethics included concern for morality in business, workers’ rights, and
living wages; for humanistic values; and for improving the conditions of the poor.
B. The 1960s: The Rise of Social Issues in Business
1. American society turned to causes such as consumerism. An antibusiness attitude developed
as critics attacked the perceived vested interests that controlled both the economic and
political sides of society—the so-called military-industrial complex.
4. The modern consumer movement has roots in 1965 and Ralph Nader’s Unsafe at Any
Speed. His group fought successfully for consumer-protection legislation.
5. President Johnson’s Great Society told the business community that the U.S. government’s
C. The 1970s: Business Ethics as an Emerging Field
1. Business professors began to teach and write about corporate social responsibility, an
organization’s obligation to maximize its positive impact on stakeholders and to minimize
its negative impact.
5. Major business ethics issues emerged by the late 1970s, such as bribery, deceptive
advertising, price collusion, product safety, and ecology.
6. Academic researchers sought to identify ethical issues and to describe how businesspeople
1. Business ethics became a legitimate field of study. Membership in business ethics
organizations increased, while centers of business ethics provided publications, courses,
4 Chapter 1: The Importance of Business Ethics
a. Stakeholder theory, pioneered by R. Edward Freeman, had a major impact on strategic
management and corporations’ views of their responsibilities.
b. Many firms established ethics and social policy committees to address ethical issues.
2. The Defense Industry Initiative on Business Ethics and Conduct (DII) was developed to
guide corporate support for ethical conduct. The DII includes six principles:
a. Development and distribution of understandable, detailed codes of conduct.
b. Provision of ethics training and development of communication tools to support the
periods between training.
3. The Reagan/Bush era ushered in the belief that self-regulation, rather than regulation by
government, was in the public’s best interest. The rules of business were changing at a
phenomenal rate because of less regulation.
E. The 1990s: Institutionalization of Business Ethics
2. The Federal Sentencing Guidelines for Organizations, which were based on the six
principles of the Defense Industry Initiative, codified into law incentives to reward
organizations for taking action, such as developing effective internal legal and ethical
compliance programs, in order to prevent misconduct.
a. The guidelines mitigate penalties for businesses that strive to minimize misconduct
and establish high ethical and legal standards.
b. Under the FSGO, if a company lacks an effective ethical compliance program and its
F. The Twenty-First Century of Business Ethics
1. New evidence emerged in the early 2000s that more than a few business executives and
managers had not fully embraced the public’s desire for high ethical standards.
2. To address a loss of confidence in financial reporting and corporate ethics, Congress passed
the Sarbanes-Oxley Act in 2002, the most far-reaching change in organizational control
and accounting regulations since the Securities and Exchange Act of 1934. The law:
a. Made securities fraud a criminal offense and stiffened penalties for corporate fraud.
b. Created an accounting oversight board that requires corporations to establish codes of
3. Amendments to the FSGO require a business’s governing authority to be well informed
about its ethics program with respect to content, implementation, and effectiveness.
4. President Obama has led the passage of legislation to stimulate an economic recovery from
5. To address lingering issues related to the financial crisis, the Dodd-Frank Wall Street
6. Around the world, the basic assumptions of capitalism are under debate in the wake of the
IV. Developing an Organizational and Global Ethical Culture
A. Compliance and ethics initiatives in organizations are designed to help establish appropriate
conduct and core values.
1. The ethical component of a corporate culture relates to the values, beliefs, and established
B. The term ethical culture is acceptable behavior as defined by the company and industry. The
goal of an ethical culture is to minimize the need for enforced compliance of rules and maximize
the use of principles that contribute to ethical reasoning in difficult or new situations.
C. Globally, businesses are working more closely together to establish standards of acceptable
behavior. Many companies demonstrate their commitment to acceptable conduct by adopting
globally recognized principles, such as the United Nations’ Global Compact.
1. Companies that choose to abide by ISO 19600—a global compliance management
standard—can use it to improve their approaches to compliance management, which can
V. The Benefits of Business Ethics
A. The field of business ethics is rapidly changing as more firms recognize the benefits of
improving ethical conduct and the link between business ethics and financial performance.
B. Among the rewards for being more ethical and socially responsible in business are increased
efficiency in daily operations, greater employee commitment, increased investor willingness to
entrust funds, improved customer trust and satisfaction, and better financial performance.
C. Ethics Contributes to Employee Commitment
1. Employee commitment comes from employees who believe their future is tied to that of the
organization and their willingness to make personal sacrifices for that organization.
a. The more a company is dedicated to taking care of its employees, the more likely it is
that the employees will take care of the organization.
2. Employees’ perception of their firm as having an ethical environment leads to performance-
enhancing outcomes within the organization.
a. An organization with a strong, ethical corporate culture helps to increase group
3. Research indicates that the ethical climate of a company matters to employees.
D. Ethics Contributes to Investor Loyalty
1. Investors today are increasingly concerned about the ethics, social responsibility, and the
reputation of companies in which they invest.
a. Investors recognize that an ethical climate provides a foundation for efficiency,
productivity, and profits, while negative publicity, lawsuits, and fines can lower stock
E. Ethics Contributes to Customer Satisfaction
1. Customer satisfaction is one of the most important factors in successful business strategy.
a. By focusing on customer satisfaction, a company continually deepens the customer’s
dependence on the company, and as the customer’s confidence grows, the firm gains a
2. Research indicates that a majority of consumers prefer companies that give back to society
in a socially responsible manner.
3. A strong organizational ethical environment usually focuses on the core value of placing
customers’ interests first.
F. Ethics Contributes to Profits
1. A company cannot nurture and develop an ethical organizational climate unless it has
achieved adequate financial performance in terms of profits.
a. Ethical conduct toward customers builds a strong competitive position that has been
2. Ethics is becoming part of management’s efforts to achieve competitive advantage.
VI. Our Framework for Studying Business Ethics
A. Part One provides an overview of business ethics and explores the development and importance
of this critical business area, as well as the role of various stakeholder groups in social
D. Part Four explores systems and processes associated with implementing business ethics into
global strategic planning.
1. The more you know about how individuals make decisions, the better prepared you will be
2. It is your job to make the final decision in an ethical situation that affects you. Sometimes
that decision may be right; sometimes it may be wrong.
DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will argue
for the opposing view. The purpose is to get students to realize that there are no easy answers to many of
these issues. This issue deals with whether ethical companies are more profitable. Those who argue that
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
The instructor may wish to ask which students see this as an ethical issue and which see it as a legal issue.
Is there a difference of opinion between business and nonbusiness-major students? The instructor can add
additional pressures through providing different scenarios such as assuming that Lael had personally
encountered sexual harassment in the past, has financial difficulties and needs this job to pay off student
loans, learns that Nikhil is very sick and will soon be leaving the company or that Nikhil’s father
condoned his actions, etc.
The instructor may wish to discuss where the line is between loyalty to the company and loyalty to the
staff you manage. Given the nature of the franchise Best East Motels operates under, Nikhil is breaking