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  1. 1. Module 1 Introduction to Business Ethics
  2. 2. Ethics in Managing  Ethics is derived from the greek word ethikos meaning custom or character.  Ethics is defined as the discipline dealing with what is good and bad and with moral duty and obligation.  Personal ethics are referred to as the rules by which an individual lives his or her personal life. E.g. honesty, fairness, preventing harm to others etc.  Accounting Ethics pertains to the code that guides the professional conduct of accountants.  Business Ethics is concerned with truth and justice and other aspects like expectations of the society, fair competition, advertising, Public Relations, social responsibility etc. in a corporate environment.
  3. 3. What is ethics?  Ethics is the branch of philosophy that focuses on morality and the way in which moral principles are applied to everyday life. Ethics has to do with fundamental questions such as “What is fair?” “What is just?” “What is the right thing to do in this situation?” Ethics involves an active process of applying values, which may range from religious principles to customs and traditions.
  4. 4. What is Ethics? Ethics: • is a branch of philosophy. • is a normative science because it is concerned with the norms of human conduct. • as a science, it must follow the same rigours of logical reasoning as other sciences. • as a science, involves systemizing, defending and recommending concepts of right and wrong behaviour.
  5. 5. What is business ethics?  Business ethics focuses on what constitutes right or wrong behavior in the world of business. Corporate business executives have a responsibility to their shareholders and employees to make decisions that will help their business make a profit. But in doing so, businesspeople also have a responsibility to the public and themselves to maintain ethical principles.
  6. 6. Business Ethics  Although ethics provides moral guidelines, individuals must apply these guidelines in making decisions. Ethics that applies to business (business ethics) is not a separate theory of ethics; rather, it is an application of ethics to business situations. Although all people have ethical responsibilities, higher ethical standards are imposed upon professionals who serve as social models, such as physicians, attorneys, and business people.
  7. 7. What is Business Ethics? Business ethics is the application of general ethical ideas to business behaviour. It is based on the principle of integrity and fairness and concentrates on the benefits to the stakeholders, both internal and external. Stakeholder includes those individuals and groups without which the organization does not have an existence. It includes shareholders, creditors, employees, customers, dealers, vendors, government and the society.
  8. 8. What is not Business Ethics? 1. Ethics is different from religion. 2. Ethics is not synonymous to law. 3. Ethical standards are different from cultural traits. 4. Ethics is different from feelings. 5. Ethics is not a science in the strictest sense of the term. 6. Ethics is not just a collection of values.
  9. 9. The Relationship Between Law and Ethics  The law is an expression of the ethical beliefs of our society.  Law and ethics are not the same thing. The question, “Is an act legal?” is different from the question, “Is an act ethical?” The law cannot codify all ethical requirements. Therefore, an action might be unethical, yet not necessarily illegal. For example, it might be unethical to lie to your family, but it is not necessary illegal.
  10. 10. The Relationship Between Law and Ethics  Similarly, just because an act is illegal does not necessarily mean it is immoral. Rosa Parks was acting illegally when she refused to give up her seat on the bus to a white male, but that does not necessarily mean she was acting unethically. Should an individual obey the law even if it would be unethical to do so? Under the theory of civil disobedience espoused by Martin Luther King, Mahatma Ghandi and others, an immoral law deserves to be disobeyed. Can you think of any examples of acts that would be illegal, yet arguably ethical? Storepicking food for a hungry starving child , Driving faster than the posted speed limit, Ethical but illegal would be paying ransom to save a life. We do this because of the big picture, to prevent the future kidnappings that might happen
  11. 11. Ethical Decisions in the Workplace  Harassment  Physical  Emotional  Sexual  Misrepresenting/ Fraud  Theft  Customer Relations  Whistle Blowing
  12. 12. Principles of Personal Ethics  Concern and respect for the autonomy of others;  Honesty and willingness to comply with the law;  Fairness and ability not to take undue advantage of others;  Benevolence and preventing harm to any creature.
  13. 13. Motivation for being ethical  Most people want to maintain a clear conscience and would like to act ethically under normal circumstances.  It is natural for people to ensure that their actions do not cause any injury, whether physical or mental to others.  People are obliged to obey the laws of land/countries’ constitutional laws.  Social and material well-being depends on one’s ethical behaviour in society.
  14. 14. Making an Ethical Decision How do you deal with them? Address this issue first Determine who is effected What is the ethical concern of this issue What do others think?
  15. 15. Ethical Decisions Companies need to be trustworthy and honest  Effects Stakeholders, customers, employees, and community  Ethics and Business go together Create the environment where people feel safe enough to speak up Get Facts  Which solution will be for the greater good of the company and create the least harm  Which solution respects the rights of everyone
  16. 16. Ethical Dilemmas  Conflict of interest  Situation in which a business decision may be influenced for personal gain.  Honesty and integrity  Telling the truth and adhering to deeply felt ethical principles in business decisions.  Whistle blowing  Employee’s disclosure of illegal, immoral, or unethical practices in the organization.  Loyalty Vs truth  Businesspeople expect employees to be loyal and truthful, but ethical conflicts may arise.
  17. 17. Why should Businesses act Ethically? The reasons for an organization to be ethical include: • To protect its own interest, • To protect the interests of the business community as a whole so that the public will have trust in it, • To keep its commitment to society to act ethically, and • To meet stakeholder expectations.
  18. 18. Why should Businesses act Ethically? (contd.) The reasons for an organization to be ethical include: • To prevent harm to the general public, • To build trust with key stakeholder groups, • To protect themselves from abuse from unethical employees and competitors, • To protect their own reputations, • To protect their own employees, and • To create an environment in which workers can act in ways consistent with their values.
  19. 19. Ethical Decision-making Norman Vincent Peale’s and Kenneth Blanchard’s suggestions to conduct ethical business. • Is your decision fair? • Is it a win-win situation for all? • Is your decision legal? If it is not legal, it is not ethical.
  20. 20. Institutionalising Ethics through MDP  Business ethics are increasingly addressed in seminars and at conferences. Managers, especially top managers do have a responsibility to create an organizational environment that fosters ethical decision making by institutionalizing ethics. This means applying and integrating ethical concepts with daily actions. This can be accomplished in three ways:  by establishing an appropriate company policy or a code of ethics,  by using a formally appointed ethics committee, and  by teaching ethics in management development programmes;
  21. 21. Simply stating a code of ethics is not enough, and the appointment of an ethics committee, consisting of internal and external directors, is considered essential for institutionalizing ethical behaviour. The functions of such committees may include:  holding regular meetings to discuss ethical issues.  dealing with grey areas.  communicating the code to all members of the organization  checking for possible violations of the code  enforcing the code  rewarding compliance and punishing violations,  reviewing and updating the code, and  reporting activities of the committee to the board of directors.
  22. 22. Ethical Programs  Ethical programs globally are designed keeping four things in mind:  Considering oneself and the organisation as part of the larger social framework.  Considering the development and welfare of others (internal and external customers) to the extent possible.  Respecting the traditions / rituals (organisational diversity) of others.  Evaluating a situation objectively and the consequences thereof.  The benefits of ethics programs include decreased misconduct and additional defence to the organisation against complaints from the employees, when the latter perceives that the organisation is being unjust to him / her. However in order for the ethics programs to be successful managerial support and role modelling is very important. In fact there is a whole body of research that proves that organisations are increasingly documenting their ethics programs to align behaviours within the organisation and also going ahead to develop systems for implementation of the same.
  23. 23. How Corporations Observe Ethics in Their Organizations? • Publish in-house codes of ethics to be strictly followed by all their associates. • Employ people with a reputation for high standards of ethical behaviour at the top levels. • Incorporate consideration of ethics into performance reviews. • Give rewards for ethical behaviour.
  24. 24. How Corporations Observe Ethics in Their Organizations? (contd.) • SEBI, CII and such other organizations representing corporations issue codes of best practices and enjoin their members to observe them. • IIMs and highly rated B-schools give extensive and intensive instruction in business ethics, corporate social responsibility and corporate governance as part of their curriculum. • Conduct an Ethics Audit.
  25. 25. Ethical Theories in Business Ethics is a normative study, i.e., an investigation that attempts to reach normative conclusions. It aims to arrive at conclusions about what things are good or bad, or what actions are right or wrong. E.g ‘companies should follow corporate governance standards’ or ‘managers ought to act in a manner to avoid conflict of interest.’ Ethical Normative theories include in business include: • Consequentialist normative theory: Normative themes—egoism, utilitarianism, Kantian ethics. • Non-consequentialist normative theory: Non-consequentialist normative themes—duties, moral rights, and prima facie principles
  26. 26. Examples of Indian companies incorporating Business Ethics  Wipro and Tata Steel have been recognised by the Ethisphere Institute, a global leader in defining and advancing the standards of ethical business practices, as one of the world’s most ethical companies.  Wipro chairman Rishad Premji said, “At Wipro, ethical and responsible conduct has been an integral part of the way we think and act, since inception. In the world we live in today, a corporation that does not commit itself in letter and spirit to a more sustainable, just and equitable world, will be failing in its primary duty. At Wipro, our attempt has always been to go beyond what is required by compliance and to do the right things both at our workplace and in our communities outside.”
  27. 27. Classification of Normative Themes in Ethics (Deontological – Duty-based) Consequentialist Kantian ethics Non-consequentialist Normative Themes Egoism Utilitarianism
  28. 28. Consequentialist  In ethics, normative theories propose some principle or principles for distinguishing right actions from wrong actions. These theories can, for convenience, be divided into two kinds: consequentialist and nonconsequentialist.  According to consequentialist theories, the moral rightness of an action is determined solely by its results. If its consequences are good, then the act is right; if they are bad, the act is wrong. Consequentialists (moral theorists who adopt this approach) determine what is right by weighing the ratio of good to bad that an action will produce. The right act is the one that produces (or will probably produce) at least as great a ratio of good to evil as any other course of action open to the agent.  Two Types
  29. 29. Nonconsequentialist  By contrast, nonconsequentialist (or deontological) theories contend that right and wrong are determined by more than the likely consequences of an action. Nonconsequentialists do not necessarily deny that consequences are morally significant, but they believe that other factors are also relevant to the moral assessment of an action. For example, a nonconsequentialist would hold that for Kevin to break his promise to Cindy is wrong not simply because it has bad results (Cindy’s hurt feelings, Kevin’s damaged reputation, and so on) but because of the inherent character of the act itself. Even if more good than bad were to come from Kevin’s breaking the promise, a nonconsequentialist might still view it as wrong.  KANtian theory
  30. 30. Normative Themes Egoism • It asserts that the only moral obligation we have is to ourselves, though it does not openly suggest that we should not render any help to others. • contends that an act is morally right if and only if it best promotes an agent’s long-term interests • makes use of self-interest as the measuring rod for actions performed • is equated with an individual’s personal interest but it is equally identified with the interest of an organization or society • intends to provide positive consequences to the party’s interest without considering the consequence to the other parties • It does not mean that an egoist may work against the interest of society. They may be able to safeguard their interest without hurting the interest of others. • They assert that all actions of men are self motivated by self interest. Even the act of whistle-blowing is an attempt to take revenge or to become a celebrity. • SPAIN HOLIDAY------ versus a teacher (Not selfish train set /car set)
  31. 31. Normative Themes: Egoism (Contd.) Philosophers distinguish between two kinds of egoism: personal and impersonal. • Personal egoism: One should pursue his/her long-term interest and not dictate what others should do. • Impersonal egoism: Everyone should follow their best long- term interest. Criticism: • It is not a moral theory at all. • It assumes that all actions of men are self motivated and It undermines the human tendency to rise above self interest in the times of calamities like flood, earthquake etc. • It ignores blatant wrongdoings like bribery, pollution, gender discrimination etc.
  32. 32. Psychological Egoism  Psychological egoism, people are, as a matter of fact, so constructed that they must behave selfishly.  Psychological egoism asserts that all actions are selfishly motivated and that truly unselfish actions are therefore impossible. Even such apparently self sacrificial acts as giving up one’s own life to save the lives of one’s children or blowing the whistle on one’s organization’s misdeeds at great personal expense are, according to psychological egoism, done to satisfy the person’s own self interested desires.
  33. 33. Utilitarianism The proponents were: Jeremy Benthan (1748–1832) John Stuart Mill (1806–1873) •Utilitarian principle: An action is ethically right only if the sum total of utilities produced by that act is greater than the sum total of utilities produced by any other act that could have been performed in its place. •Ethics is the art of directing the actions of men so as to bring about the greatest possible happiness to all those who are concerned with these actions. •It provides an objective means of resolving conflicts of self-interest with the action for common good. •The theory provides a flexible, result oriented approach to ethical or moral decision making. •JIO/LSD
  34. 34. Utilitarianism Criticism  The major problem is the measurement of utility. Since utility differs from person to person, place to place, and time to time.  The second problem concerns the intractability to measurement that arise while dealing with certain benefits and costs. E.g. how can one measure the value of life or health?  Lack of predictability of benefits and costs.  Lack of clarity in defining what constitutes benefits and what constitutes cost.
  35. 35. Kantian Ethics Proponent: Immanuel Kant (1724–1804) • This theory introduces an important humanistic dimension to business decisions, which is to behave in the same way that one would wish to be treated under the same circumstances and to always treat other people with dignity and respect. • Stressed that action must be undertaken for duty's sake and not for some other reason. Ethics is based on reason alone and not on human nature. Only when we act from duty does our action have moral worth. • Opined that the imperatives of morality are not hypothetical but categorical. The core idea of this categorical imperative is that an action is right if and only if it will become a universal law of conduct. It means we must never perform an action unless we can consistently will that it can be followed by everyone. • Lying is an example, no matter how much good it may result from the act, lying is always wrong. • The theory proposes to act only in ways that one would wish others to act when faced with the same circumstances. • It also proposes that always treat other people with dignity and respect.
  36. 36. Normative Theories of Business Ethics: Classification Normative Theories Stockholder Theory Stakeholder Theory Social Contract Theory
  37. 37. Stockholder Theory • It expresses business relationship between stock owners and their managers running the day-to-day business of the company. As per the theory, managers should pursue profit only by all legal, non-deceptive means. • Also known as shareholder theory, according to which businesses are merely arrangements in which one group of people i.e. the shareholders advance capital to another group i.e. the managers to realize certain ends which are beneficial to them. • The managers are empowered to manage the capital advanced by the shareholders and are duty bound by their agency relationship to carry on the business exclusively for the purpose outlined by their principals. • The theory has been summarized by Milton Friedman who asserted that there is one and only one social responsibility of business- to use its resources and engage in the activities designed to increase its profit so long it stays within the rules of the rules of the game, i.e. to stay engaged in open and free competition without deception or fraud. • imagine an automobile company that has recently gone public. Naturally, the shareholders want to see their stock values rise, and the company is eager to please those shareholders because they have invested money into the firm
  38. 38. Criticism of Stockholder theory  It has been described as part of corporate law which has lost its importance in modern times. It is regarded as impractical and foolish by many ethicists which cannot be relied upon to secure the common good.  In today’s world government plays an important role in collecting taxes from the corporates which is used henceforth for the public good. Therefore there is no true free market in the economy prevailing these days.  It is based on false analogy. If government of democratic societies have a moral justification to spend the taxpayers money for promoting the common welfare of people without taking their consent, it might mean, that businesses are also justified in carrying out social welfare activities without the consent of the shareholders. This is based on a wrong and far-fetched assumption.
  39. 39. Stakeholder Theory • This theory argues that a corporate’s success in the marketplace can best be assured by catering to the interests of all its stakeholders (shareholders, customers, employees, suppliers, management and the local community). This objective is achieved when corporations adopt policies that ensure an optimal balance among all stakeholders. • It stresses that regardless of the fact whether the management achieves improved financial performance or not, managers should promote the interests of all stakeholders. • It considers a firm to be an instrument for coordinating stakeholders interests and considers managers as having a fiduciary responsibility not only to the shareholders but all of them.
  40. 40. Stakeholder Theory • Principles that guide corporations are: • First principle is Principle of corporate legacy- according to this the corporation should be managed for the benefit of its stakeholders: its customers, suppliers, owners, employees and the local community. The rights of these groups must be ensured and further the groups must participate in decisions that substantially affect their welfare. • Second Principle is the stakeholder fiduciary principle that asserts that management bears a fiduciary relationship to the stockholders and to the corporation as an abstract entity. It must act in the interests of the corporation to ensure the survival of the firm, safeguarding the long-term stakes of each group.
  41. 41. Stakeholder Theory - Criticisms  It is not applicable in practice by corporations.  There is comparatively less empirical evidence to suggest a linkage between stakeholders concept and corporate performance.  The major problem with this theory stems from the difficulty of defining the concept, like who really constitutes the genuine stakeholders. There is an expansive list of stakeholders.  It is also argued further that intent of the theory is better achieved by relying on the hand of management to deliver social benefit where it is required rather than suggesting a wide range of stakeholders.  Stakeholder model also stands accused of opening up a path to corruption and chaos; since it offers opportunity to divert wealth away from shareholders.  It can also be criticized on the ground that it extends the rights of the stakeholders far too much.
  42. 42. Social Contract Theory • This is based on the principles of “social contract”, wherein it is assumed that there is an implicit agreement between the society and any created entity such as a business unit, in which the business recognizes the existence of a condition that it will serve the interest of the society in certain specified ways. • This theory is drawn from the model of political-social theories propounded by Thomas Hobbes, John Locke, and Jean Jacques Rousseau. • The theory is based on an assumed contract between businesses and members of the society who grant them the right to exist in return for certain specified benefits that would accrue to them. These benefits are a result of the functioning of these businesses, both for their own sake and for that of the larger society. • When members of the society give the firms legal recognition, the right to exist, engage them in any economic activity and earn profit by using the society’s resources such as land, raw materials, and skilled labour, it obviously implies that the firms owe an obligation to the society. This would imply that business organizations are expected to create wealth by producing goods and services, generate incomes by providing employment opportunities, and enhance social welfare.
  43. 43. Social Contract Theory  As consumers members of the society benefit from the establishment of the business firms in three ways:  Business firms provide increased economic efficiency, by enhancing the advantages of specialization, improving decision making resources and increasing the capacity to acquire and utilize expensive technology and resources;  They offer stable levels of production and channels of distribution;  They provide increased liability resources, which could be used to compensate consumers adversely affected by their products and services.
  44. 44. Social Contract Theory  Business Firms are likely to produce the social welfare element of social contract and enjoin the business firm should act in such a manner so as to  Benefit consumers to enable them reach maximisation of their wants;  Benefit employees to enable them secure high incomes and other benefits that accrue by means of employment;  Ensure that pollution is avoided, natural resources are not fast depleted and workers’ interest are protected.
  45. 45. Social Contract Theory – Criticisms  Critics argue that social contract is no contract at all. Legally speaking a contract is an agreement between two or more persons which is legally enforceable provided certain conditions are observed.  A contract implied meeting of minds, which does not exist in so called social contract. It is neither an explicit nor an implicit contract.
  46. 46. Ethics and Religion The world’s great religions—Christianity, Hinduism and Islam—have all left their indelible marks on morality and the conduct of people in every aspect of human endeavor, including business. Every religion has provided its followers its own set of catechisms, moral instructions, beliefs, values and virtues, traditions and commitments.
  47. 47. Teachings of the Church The Church always supports and promotes the welfare of the poor. People often think how we can relate business and ethical teachings of the Church. But now the trend has changed and organizations and institutions relate business to religion and ethics. This transition is due to the increased importance of ethics in business. The Church’s concerns and ethical teachings are found in several papal encyclicals, i.e., letters the pope writes to his followers. Rerum Novarum Since the late 19th century, there has developed a strong tradition of reflective thought on economic issues within the Catholic Church. This concern on economic issues effectively started in May 1891, with the publication of Rerum Novarum, an encyclical by Pope Leo XIII. The central theme of the letter was the relationship among the State, employers and workers. Features of encyclical • Directs the State and organizations to perform their duties to the working class to avoid corruption or unethical behaviour in the society. • When man is deprived of dignity and equality they will indulge in unethical practices. Mutual support in the society and organization will help individuals to perform their best for productivity and profit
  48. 48. Indian Ethical Traditions • The Hindu scriptures such as the Gita and the Upanishads speak of the performance of right duty, at the right time in the right manner. The rich Indian tradition has always emphasized the dignity of human life and the right to live in a respectful manner. • The Bhagawad Gita cites numerous instances of how moral values and ethics can be incorporated into one's work life. Many of its verses are directly significant for the modern manager who may be confused about his direction and struggling to find an answer to ethical dilemmas. The Lord reiterates that work or karma is the driving force of life, and that this work has to be ethical. • Chapter II, Verse 47“You have a right to perform your prescribed duty, but you are not entitled to the fruits of action. Never consider yourself the cause of the results of your activities and never be attached to not doing your duty.” This stanza implies that the performer of an action has only to perform the prescribed duty and not think about the result of the action, because the result is beyond his control. This teaching of Gita draws one's attention to Nishkama Karma.
  49. 49. Message of the Gita: Chapter II, Verse 56 “One who is not disturbed in mind amidst the three-fold misery or elated when there is happiness and who is free from attachment, fears and anger, is called a sage of steady mind.” A steady mind gives the right attitude and right direction. Detachment is that quality which enables the individual not to accept anything for his personal gratification. Personal desires and conflicting interests end up in unethical practices. Gita’s Message in an Organization When applied to an organization where one is only worried of the result, he is likely to fall into improper activities. On the other hand, if he is ready to do his duty to the utmost of his ability and set aside the result, he will be an ethical person in the organization.
  50. 50. Business and Islam All principles covering business emanate from the Holy Quran, as they are explained and amplified in the Hadith (collection of the Prophet’s sayings). The Prophet Mohammed ordained that businesses should promote ethical and moral behaviour and should follow honesty, truthfulness and fulfilment of trusts and commitments, while eliminating fraud, cheating, cut-throat competition, lending money at interest to people in need and false advertising. Shariah and Interest on Capital Shariah, the canonical law of the followers of Islam, forbids payment and receipt of interest on capital and money lent and condemns usurious practices. Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, and therefore, interest is banned.
  51. 51. Major principles of Islam and Ethics  No fraud and deceit  No excessive oaths in sale  Need for mutual consent  Be strict in regard to weights and measures  Monopoly is a sin  Free enterprise- price should not be fixed unless there is a crisis  Hoarding is forbidden  Forbidden transactions like intoxicants  Islamic Bonds or Sukuk Bankers sell Islamic bonds or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money cannot be invested on stocks of companies dealing in alcohol, conventional financial services (banking and insurance), entertainment (cinemas and hotels), tobacco, pork meat, defence and weapons while computer software, drugs and pharmaceuticals, and automobile ancillaries are all Shariah-compliant.