BECG Business Ethics Chapter 1

What is business?
Business an activity performed with profit motive People find fault with profit motive is it ethical

What is the contribution of business to the society?

Employment Provide products and services to society with efficiency Wealth creation Innovation

Can society manage without business entities?

Communism Utopian environment They failed sustain themselves Capitalism proved to be successful

Business and Society

Business is a necessary But we need to ensure that it fulfills its responsibilities for which it is functioning

Stakeholders
Stake interest, claim, share Stakeholder- individual or group that has one or more of the various kinds of stakes in the business Who are the stakeholders of Business ?

Stakeholders
Shareholders and investors Employees and Managers Customers Suppliers and other business partners Local community Government Social Pressure groups Media Trade bodies Competitors

Morality
What is Morality? Morality standards that an individual or a group has about what is right and wrong, or good and evil

Moral Standard
When will you call a standard as moral standard ? Deals with matters which has serious implications for the human beings Cannot be established or changed by any authoritative bodies Preferred over other values including selfinterest Based on impartial considerations Associated with emotions

Ethics
Then, what is ethics? Morality is a field Moral standards may give conflicting options Ethics a discipline that examines how moral standards apply to our lives It answers the question of whether the moral standards are reasonable and supported by good reasons right or wrong

Ethics
Ethics Ethikos (Greek word) Character or Custom Other topics also deal with Morality Social Science, Psychology

Where did these ethical standards come from?

Religion All religions talk more or less in similar tone about ethical standards

Golden Rule of Ethics

"Treat others only as you consent to being treated in the same situation." GR forbids this combination: I do something to another person. I'm unwilling that this be done to me in the same situation.

Golden Rule in Religions

Hinduism This is the sum of duty; do naught onto others what you would not have them do unto you (Mahabharata, 5: 1517)) Judaism What is hateful to you, do not do to your neighbor. (Talmud, Shabbat 31a; Tobit 4:15) Christianity Therefore all things whatsoever ye would that men should do to you do ye even so to them (Matthew 7:12) Buddhism-Hurt not others with that which pains yourself (Udanavarga 5:18) Islam - "None of you is a believer until he wishes for his brother what he wishes for himself." (40 Hadith of AnNawawi 13 )

Religion does not clarify everything about ethical rules.

Ethical relativism
Societal requirements also determine (Ethical relativism) Sacking employees in US and India Abortion Japan and Europe Birth control measures among the Muslims in Turkey and Iran

Why ethics in Business

Why study ethics in business ? Individuals need to follow ethical standards but what about corporations? Two views about business and ethics

Business and Ethics

Unitarian View Business activities are part of the ethical system Separatist view Adam Smith Business need not worry about ethics- The invisible hand will ensure that Milton Friedman Business should concentrate on production and distribution of goods. Its the duty of the government to focus on social problems

Business and Ethics

Global business Frauds Barings, Enron, WorldCom, Global Crossing, Arthur Andersen, Parmalet, Refco, Indian Business Frauds Cooperative Banks, DSQ Software, GTB, CRB Scam, Satyam

Modern theories of ethics

I - Teleological Theories 1. Egoism 2. Utilitarianism II - Deontological Theories 1. Universalism 2. Principle of Rights Principle of Justice

III - Virtue ethics

Principle of Care

Teleological Theories
Moral Worth of Actions determined by its Consequences Egoism - Jeremy Bentham (1748-1832), Utilitarianism - John Stuart Mill (1806-1873)

Utilitarianism
Greatest happiness for greatest number of people Maximization of good and minimization of evil Only the ends are important and not the means An action is morally right if the net benefits (utility) over costs are greatest compared with the net benefits of all other possible choices Cost- Benefit Analysis

Issues with Utilitarianism

Problem of measurement Problem with rights and justice The case of Ford Pinto Ford Pinto- Small car introduced in 1971Involved in fatal accidents 1978 case Ford has located the fuel tank behind the rear axle instead of above it Any hit from the rear side would cause a damage to fuel tank resulting fire accident

 Ford officials came to know about it in 1972 itself. They found design change solution also which implemented would have resulted in changes in the production system. The estimated cost for the production change was $11 per vehicle. This $11 per unit cost applied to 12 million cars results in an overall cost of $137 million.

 It was estimated that making the change would result in a total of 180 less burn deaths, 180 less serious burn injuries, and 2,100 less burned vehicles. These estimates were multiplied by the insurance cost figured by the National Highway Traffic Safety Administration. These figures were $200,000 per death, $67,000 per injury, and $700 per vehicle equating to the total "societal benefit" is $49.5 million. Since the benefit of $49.5 million was much less than the cost of $137 million, Ford felt justified in its decision not to alter the product design. The risk,/benefit results indicate that it is acceptable for 180 people to die and 180 people to burn if it costs $11 per vehicle to prevent such casualty rates. On a case by case basis, the argument seems unjustifiable, but looking at the bigger picture complicates the issue and strengthens the risk/benefit analysis logic.

Teleological theories In Business

Egoism a corporation ought to do whatever is in the corporations best interest (which is also the best interest of its shareholders) Utilitarianism one ought to seek to produce the greatest possible balance of good over evil, or the least possible balance of evil over good, for all who will be affected by ones actions the stakeholder versus stockholder approach to management decision-making

Deontological Theories
Moral Worth of an action determined by right duties, not consequences

Universalism
Immanuel Kant (1724-1804) A person should choose to act if and only if he/she would be willing to have every person on earth in that same situation exactly that same way Means are also equally important along with ends

Issues with Universalism

Not clear in certain situations

Principle of Rights
Everybody have certain rights Actions should respect the rights Means are important than ends Rights cannot be overridden by Utility

Problems with rights theory

Conflict among rights Positive and Negative rights Who or what defines the Positive Rights

Principle of Justice
Fair treatment to each person Distributive Justice Retributive Justice Compensatory Justice

Distributive Justice
Different people put forth claims on societys benefits and burdens and all claims cannot be satisfied

Egalitarianism Justice as Equality Every person should be given exactly equal shares of societys or a groups benefits and burdens But human beings are not equal in their ability, talent and requirements Political equality and economic equality

Capitalism Justice based on Contribution Benefits should be distributed according to the contribution the individual makes to a society, a task, a group or an exchange How do you measure contribution?

 Whether it is based on Effort or Productivity or Value in the market

Socialism Justice based on needs and abilities Work burdens should be distributed according to peoples abilities, and benefits should be distributed according to peoples needs Louis Blanc (1811-1882) and then Karl Marx (1818-1883) , Lenin (1870-1924)

Is it possible? Will people accept it?

Family Structure Communists attempted to build family culture at the societal level

Issues
Without any connection between level of work and the compensation who will work? Violates the individual rights

Justice as fairness : John Rawls (1921-2002) Each person has an equal right to the most extensive basic liberties compatible with similar liberties for all Social and economic inequalities are arranged so that they are both To the greatest benefit of the least advantaged persons and Attached to offices and positions open to all under conditions of fair equality of opportunity

Retributive Justice
Justice of punishing persons for wrong doing 1. Person being punished actually did wrong 2. The wrong doing must have been committed knowingly 3. Punishment should be proportional to the wrong

Compensatory Justice
Justice of restoring to a person what the person lost when he or she was wronged by someone else

Ethics of Care
Obligation to exercise special care toward those particular persons with whom we have valuable close relationships

Virtue Ethics
Ethical behavior is not enough It is an alternative to theories of Ethics Aristotle Both Kantian and utilitarian systems try to provide guiding principles for actions that allow a person to decide how to behave in any given situation. Virtue ethics, by contrast, focuses on what makes a good person, rather than what makes a good action

Ethics and Law

Statues laws created by the legislative bodies IPC, Company law, Factories Act Regulations Enacted by boards and agencies subjected to the statutory power always subordinate to the law Constitutional Law- Foundation of the legal system

Law
Law- Consistent set of universal rules that are widely published, accepted and enforced. It also defines the requirement that one must act or must not act in a given situation

Law
Consistent Degree of firmness Universal applicable to all Published Available in written form Accepted Everybody should accept it Enforced mechanism to enforce

Law and Moral Standards

Law is based on moral code to a greater extent An action can be legal but morally wrong An action can be moral but illegal Law has other considerations Sovereignty, Bringing order in the society etc

Formulation of Law
Individual Process Group Process Society Process Political Process

Individual Process
Individual have norms, beliefs and Values Norms Expected behavior Belief about the ethical standards to be followed Values- priorities that person establishes for his/her norms

Morality, Law and Economic considerations

On many issues Moral, legal and economic consideration suggest different paths resulting in conflicts in decision making. The case of Tiruppur

Pollution Problems in Tiruppur

Legally Close down the dying and bleaching units Economically Dont close down as Triuppur can grow in postquota regime. Develop some other center parallelly to ensure a long term replacement Morally Dilemma Closing down will lead to job lose continuing will spoil agricultural activities

Applying Ethical theories to Business

Unitarian View Business entities are part of the society hence they need to adopt ethical practices But how to apply ethical standards to Business entities? To apply to the organization as a whole Citi bank in 1992 Scam- Ford Pinto - who is responsible Or to the individuals who are responsible for it Enron

Application of Ethical theories in Business

Theory of Corporate Moral Excellence Ethics and Stakeholders theory Ethics and Corporate Governance

Theory of Corporate Moral Excellence

Corporations have two sets of values Espoused Values Values in Practice Differences between the above two will result in violation of ethical norms

Theory of Corporate Moral Excellence

How to overcome the problems? 1. Values, attitudes and beliefs 2. Shape mission, policies, structure and strategies based on values (Culture should reflect the values) 3. Organizational procedures and process should facilitate the values

Ethics and Stakeholders theory

Act in a responsible manner by paying attention to the needs and rights of the primary stakeholders

Ethics and Corporate Governance

Code of Conduct Managers are working for Stakeholders not for personal gains (except the salary)

Value System of a Company

Value systems of Corporate

The value system of the firms guide the practices, if the promoters are serious about it

Murugappa Group
Profile : 29 companies Agri, Finance, Ceramics, Finished Steel Products Commercial

Murugappa Group
The fundamental principle of economic activity is that no man you transact with will lose; then you shall not. - Arthashastra

Values and beliefs of Murugappa group

Adhere to ethical norms in all dealings with shareholders, employees, customers, suppliers, financial institutions and the government. Provide value for money to customers through quality products and services. Treat people with respect and concern; provide opportunities to learn, contribute and advance; recognize and reward initiative, innovativeness and creativity.

Maintain: An organizational climate conducive to trust, open communication and team spirit and a style of operation befitting our size but reflecting moderation and humility.
Manage the environment effectively for harnessing opportunities.

Discharge responsibilities to various sections of society and preserve the environment.

Grow in an accelerated manner, consistent with values and beliefs, by continuous organizational renewal.

Ethical norms- with shareholders

In early nineties Murugappa family realized that there are many opportunities available in the liberalized market Professionals can do a better job in wealth creation- 1993- MCB was established N.S.Ragavan appointed as non-executive Chairman of Murugappa Corporate Board2001

 2002- P.S.Pai Executive Chairman for a three year term which got extended for the fourth year- Till October 2006 2006 A family member become Chairman To ensure better control over professional managers Murugappa Corporate Board

Ethical norms- with Employees

Encourage employees to be entrepreneurs (suppliers) Young engineers-Encourage them to pursue further studies No strike in the last 30 years 30,000 employees Empowered employees

Ethical norms- with Customers

Tata Group- JJ.Irani- Comments about Murugappa Group in CUMI function "the Tatas of South India- in terms of integrity and ethics,

With Suppliers
Scope Information solutions Quote the correct price in project proposals Mutual trust

With Government & Society

License raj- Never bribed officials applied for around 20 licenses got only 3 Got out of IMFL business in 1989

IMD DISTINGUISHED FAMILY BUSINESS AWARD 2001

Earlier given to only European Business Criteria The company should be under family ownership and Management for at least three generations. It should be a market leader and respected in the Industry. It should have international business activities Should have effectively linked tradition and innovation. The company Should be a good corporate citizen. Should practice effective Corporate Governance system.