The Importance of Business Ethics

Business Ethics means conducting all aspects of business and dealing with all stakeholders in an ethical manner

Aim of Business Ethics

It is neither defense of the status quo nor its radical change. Rather, it should serve to remedy those aspects or structures that need to change, and it should protect those that are moral.

CASE
THE COLLAPSED MINE

Ethical Behavior
Conducting ones life in complete accord with a firmly held set of values and principles
These principles may be derived from religious beliefs, philosophical understanding, etc. Application should be in all areas of ones life: personal, family, business, social, etc. .

Foundations of Ethical Behavior

Treat others as you would be treated
Respect Honesty Trust

Taught in All Cultures

Judaism: What you hate, do not do to anyone. Islam: No one of you is a believer until he loves for his brother what he loves for himself. Hinduism: Do nothing to thy neighbor which thou wouldst not have him do to thee. Sikhism: Treat others as you would be treated yourself. Buddhism: Hurt not others with that which pains thyself.

TREAT PEOPLE THE WAY YOU WANT THEM TO TREAT YOU

Bad Ethics Increases Transaction Costs

Security

Regulators Lawyers Delays Trade

Testing Party B

Party A

Interest Etc, etc! Duplication

Societal Costs of Unethical Behavior

1. Law enforcement and other security personnel 2. Physical protection (locks, electronic security, fences, vaults, etc.) 3. A substantial portion of attorney and court system costs 4. 5. 6. 7. Costs of collecting taxes Wasted/misused investment funds A substantial portion of accounting/auditing costs A large fraction of costs for regulators and examine

Business Costs of Unethical Behavior

1. 2. 3. 4. 5. 6. 7. 8. Loss of physical assets Increased costs of security Loss of customersespecially those who value ethics Loss of employeesespecially the more ethical Loss of reputation Increased legal costs Higher costs of debt Loss of investor confidence (lower stock price, difficulty in raising funds, problems with lenders) 9. Costs of bankruptcy

Ethical Issues Relating to Business

Honestycommunication and behavior consistent with facts

Disclosure of information Promises/commitments Laws and professional standards Representation of others like shareholders (applies to board members)

Unfair competition
Refrain from bribes and excessive gifts (that sway judgment)

Just compensation
Respect intellectual property (product piracy) Treat employees fairly

Respecting rights of others

Treat others with fairness and respect regardless of age, religion, ethnic group, sex, economic status, etc Respect others and future generations by treating the environment well

Why Ethical Behavior Adds Value Better information

Trust from investors Lower costs for audits, controls, investigations Better allocation of resources Customers will be more loyal Lower costs from suppliers Attracting and retaining better employees

Fair competition
Lowers cost of business in economy Leads to better decision-making (do whats best for firm, not one individual)

Short-Term vs. Long-Term

One party may gain temporary advantage by unethical behavior But in the long-term, individuals, companies are hurt

Deterioration in Honesty over Time

Year Year

College students who cheated in H.S. Self-reported cheating Believe cheating is common Used cheat sheets Let others copy work Willing to lie to get job Students who had stolen

1940 (20%) 1983 (11%) 1940 (20%) 1969 (34%) 1969 (58%) 2000 (28%) 2000 (35%)

2002 (75-98%) 1993 (49%) 1997 (88%) 1989 (68%) 1989 (98%) 2002 (39%) 2002 (38%)

(Based on several different ethics studies)

Another Study of Student Honesty

Responses 50,000 college students at 69 schools 26% of business majors admitted to serious cheating on exams 54% admitted to cheating on written assignments Journalism majors were worse with 27% admitting to cheating on exams. The most honeststudents in the sciences (19% reported cheating on tests) Author observes cheating has increased since he began doing surveys 15 years ago He partly blames technologymakes it easier to cheat
Biz Majors Get an F for Honesty by Donald McCabe published on February 6, 2006, by the Center for Academic Integrity

Will Our Ethics Improve?

74% (71%) cheated on an exam in the last year; 45% (45%) said they did it at least twice in the last year 93% (92%) lied to their parents in the past year; 79% (79%) say they lied twice 78% (78%) have lied to their teachers 37% (27%) said they would lie to get a job 38% (35%) took something from a store in the last year Josephson (2002)(2001)
Survey of High School Students 2002 2001

Why is Dishonesty Increasing?

Modeling

Labeling

Honesty

Why Is Dishonesty Increasing?

Bad Modeling/Lack of Good Modeling
Focus of TV/movies Dishonest leaders Sports, business, entertainment heroes Good models are rare

Lack of Positive Labeling

Home.average family spends 10 hours less time together a week than 20 years ago Schools

Confession of Fraudulent Executive

Even when put in jail, I didnt feel like a criminal. I somehow felt we were different and I started noticing every white collar guy I did talk to began every sentence with: all I did was. Once youre in jail and you start feeling the animosity the other prisoners have toward white-collar guys, where they say to you, youre no different than us, youre just a thief, you use other words. Even the word embezzlement is a nice wordthey said youre a thief, you lie to people and take their money, thats what I do to and that hit me like a ton of bricks. Mike Morze, ZZZZ Best

Can Ethical Values be Taught? Level 1: The Foundation

Personal Ethical Understanding

Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

Personal Ethical Understanding

Concepts of right and wrong, fair play, respect for rights of others, honesty, personal integrity Best learned in the home at an early ageand follow-up is needed throughout life Institutions (churches, schools, etc.) can help Difficult to back fill in adulthood

Level 2: Application to Business

Application of Ethics to Business Situations

Fraudulent Practices, Misleading Advertising, Unfairness

Personal Ethical Understanding

Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

Application of Ethics to Business Situations

Fraudulent practices, misleading advertising, unfairness Can be taught in management education and organizationsprovided students have a personal understanding of ethics Taught by modeling (cases and personal example are helpful) Can be reinforced by policies, codes of ethics, training

Application of Ethics to Business Situations

Businesses can teach through proper modeling:

Companies also have to further strengthen ethics management and social responsibility activities to improve their public image
Korean Commerce-Industry-Energy Minister Lee Hee-beom

Good Ethics Means Good Business

Questions?