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
Sophie must decide if she should follow policy or follow Emma’s instruction and pad her expense
accounts. Should Sophie speak up and voice her concern on this matter? Everyone else seems fine with
the arrangement. Why should Sophie have a problem? If Sophie pads her accounts then she will have to
continue padding her accounts for the rest of her employment. Is she willing to do this? If Sophie does
not pad her accounts then all tips will come out of Sophie’s pocket. In addition, her sales manager may
ask why her expense account is lower than all the other sales rep’s. Sophie’s co-workers may view her as
a troublemaker if she speaks up. How do students feel about this issue? Would they report their actual
expenses or would they pad their expense accounts?
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. Some special aspects must be considered when applying ethics to business.
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1. Investors, employees, customers, interest groups, the legal system, and the community often
determine whether a specific action is right or wrong and ethical or unethical.
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. 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.
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
ways to promote ethical behavior, and begin to understand how to cope with conflicts
between personal values and organizational values.
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.
a. In the 1920s, the progressive movement sought to provide citizens with a “living
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.
Chapter 1: The Importance of Business Ethics 3
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.
2. The 1960s saw the decay of inner cities and the growth of ecological problems.
3. The rise of consumerism—activities undertaken by independent individuals, groups, and
5. President Johnson’s Great Society told the business community that the U.S. government’s
responsibility was to provide the citizen with some degree of economic stability, equality,
and social justice. Activities that could destabilize the economy or discriminate against any
class of citizens began to be viewed as unethical and unlawful.
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.
2. Philosophers applied ethical theory and philosophical analysis to structure the discipline of
business ethics.
D. The 1980s: Consolidation
1. Business ethics became a legitimate field of study. Membership in business ethics
organizations increased, while centers of business ethics provided publications, courses,
conferences, and seminars.
a. Stakeholder theory, pioneered by R. Edward Freeman had a major impact on strategic
management and corporations’ view 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.
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f. Adoption of a philosophy of public accountability.
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
1. The Clinton administration continued to support self-regulation and free trade, although it
strengthened regulation in some areas like health-related social issues.
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
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:
3. Amendments to the FSGO require a business’s governing authority 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
the greatest recession the world has experienced since the 1930s. The legislation focused on
social concerns.
intervention is worrisome to free-market capitalists.
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. To develop more ethical corporate cultures many businesses communicate core values to
their employees via ethics programs and appointing ethics officers to oversee them.
Chapter 1: The Importance of Business Ethics 5
2. The ethical component of a corporate culture relates to the values, beliefs, and established
and enforced patterns of conduct that employees use to identify and respond to ethical
issues.
B. The term ethical culture is acceptable behavior as defined by the company and industry. The
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.
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
the firm.
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
better understanding of how to serve the customer.
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b. Successful businesses provide an opportunity for customer feedback, which can
engage the customer in cooperative problem solving.
2. Research indicates that a majority of consumers prefer companies that give back to society
in a socially responsible manner.
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 towards customers builds a strong competitive position that has been
2. Ethics is becoming one of the management issues within the effort 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
responsibility and corporate governance.
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
to cope with difficult ethical decisions.
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
ethical businesses are more profitable could point to the different studies showing a positive correlation
between ethics and profitability, the goodwill gained from ethical conduct, and the additional customer
Chapter 1: The Importance of Business Ethics 7
“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
the agreement set out in the franchise employee handbook and should be reported, but to whom?