A Definition for Business Ethics

Paul Merchant
Workplace Behavior Ethics

Business ethics is the accepted set of moral values and corporate standards of conduct in a business organization. The specifics of what this actually means can vary from one organization to another.

The Meaning of Business Ethics

According to Kirk O. Hanson, a renowned ethics expert who also doubles as the Executive Director of the Markkula Center for Applied Ethics, "business ethics is the study of the standards of business behavior which promote human welfare and the good."

Business ethics manifests both as written and unwritten codes of moral standards that are critical to the current activities and future aspirations of a business organization. They can differ from one company to another because of differences in cultural perspectives, operational structures and strategic orientations. The guiding framework of business ethics permeates all levels of the organization. It is about having the wisdom to determine the difference between right actions and wrong decisions.

In simpler terms, business ethics fundamentally epitomizes the organization's codes of corporate governance. It stipulates the morality standards and behavioral patterns expected of individuals and the business as a whole. These moral benchmarks can be perceived in terms of the microenvironment and macro environment of the business.

Stakeholder Versus Shareholder

There are two schools of thought regarding how companies should approach a definition for business ethics: the shareholder perspective and the stakeholder perspective. The underlying frameworks of the shareholder and the stakeholder perspectives are primarily enshrined in the principal objectives and activities of the business.

Shareholder Perspective

Those who approach ethical decision making from a shareholder perspective focus on making decisions that are in the owners' best interest. Decisions are guided by a need to maximize return on investment for the organization's shareholders. Individuals who approach ethics from this perspective feel that ethical business practices are ones that make the most money.

The prioritization of the shareholder perspective, however, may sometimes compromise business ethics. The perspective, indeed, is influenced by the profit-driven motives that are biased toward the optimization of the interests of shareholders. Such biases can prompt corporate managers to commit or omit extremely consequential actions.

In 2002, for example, Enron Corporation collapsed following the revelation of a mega scandal that involved authoring financial reports to hide the company's losses from shareholders. In a bid to please shareholders, the management of the giant energy conglomerate at the time published false financial information that reported profitability when the company was actually incurring huge losses. Enron finally collapsed in 2002 when a whistleblower voluntarily revealed the unethical business practices.

Stakeholder Perspective

The phrase corporate social responsibility is often used in discussions of business ethics. The idea behind this concept is the belief that companies should consider the needs and interests of multiple stakeholder groups, not just those with a direct financial stake in the organization's profits and losses.

Organizations that approach business ethics from a stakeholder perspective consider how decisions impact those inside and outside the organization. Stakeholders are individuals and groups who affect or who are affected by a company's actions and decisions. Shareholders are definitely stakeholders, but they are not the only ones who fall under the definition of stakeholder.

Stakeholders may include: employees, suppliers, customers, competitors, government agencies, the news media, community residents and others. The idea behind stakeholder based ethical decision making is to make sound business decisions that work for the good of all affected parties.

What Is Ethical Behavior?

Different people have different beliefs about what constitutes ethical behavior. The law defines what is and is not legal, but the distinctions between moral right and wrong are not always so clear. In many situations lines between right and wrong are blurred. Such situations can lead to ethical dilemmas.

When faced with ethical dilemmas, it's important to consider outcomes of the decision-making process. One way of dealing with ethical dilemmas is to use the four way test to evaluate decisions. This test involves asking four questions:

  1. Is my decision a truthful one?
  2. Is my decision fair to everyone affected?
  3. Will it build goodwill for the organization?
  4. Is the decision beneficial to all parties who have a vested interest in the outcome?

When these four questions can truthfully be answered with a "yes," it is likely that the decision is an ethical one.

Another way of making sure decisions are truly ethical is by using the publicity test. Ask yourself how you would feel if your actions were published in your hometown newspaper. If you would be comfortable having your parents, grade school teachers, and other people find out what you did, chances are that your decision is an ethical one. However, if you would not want these individuals to learn about your actions, you probably need to rethink your decision.

Management and Business Ethics

A company's managers play an important role in establishing its ethical tone. If managers behave as if the only thing that matters is profit, employees are likely to act in the same manner. A company's leaders are responsible for setting standards for what is and is not acceptable employee behavior. It's vital for managers to play an active role in creating a working environment where employees are encouraged and rewarded for acting in an ethical manner.

Managers who want employees to behave ethically must exhibit ethical decision making practices themselves. They have to remember that leading by example is the first step in fostering a culture of ethical behavior in their companies. No matter what the formal policies say or what they are told to do, if employees see managers behaving unethically, they will believe that the company wants them to act in a like manner.

Importance of Ethical Business Decisions

Companies and business people who wish to thrive long-term must adopt sound ethical decision-making practices. Companies and people who behave in a socially responsible manner are much more likely to enjoy ultimate success than those whose actions are motivated solely by profits. Knowing the difference between right and wrong and choosing what is right is the foundation for ethical decision making. In many cases, doing the right thing often leads to the greatest financial, social, and personal rewards in the long run.

There have been many instances in the past when businesses experienced catastrophic consequences for failure to adhere to ethical business practices. News Corp, a New York-based international media company owned by Rupert Murdoch, provides a vivid example of the disastrous consequences of unethical business behaviors. In June 2011, the world was treated to a shock when accusations that the company's team of journalists collected news stories through illegal hacking into telephone communications of unsuspecting victims. The phone hacking conspiracy affected Britain's general population as well as the royal family and prominent celebrities. This scandal was allegedly committed by employees of News International, a subsidiary of News Corp in Britain.

The Costly Consequences

The public anger and hostility that soared in Britain within days of the revelations was too unbearable for Murdoch that he ordered the closure of News of the World newspapers. News of the World, a leading print media that had been in existence for 168 years, was News International's flagship brand. News International even abandoned its pursuit of a $12 billion takeover bid for the British Sky Broadcasting.

The scandal led to the arrest of some of News International's top executives while a number of high-ranking personalities in Britain's security enforcement agencies were sent packing. Murdoch and his son, James, experienced more embarrassments when they were summoned for questioning before a committee of the British Parliament. These unfortunate experiences that came out of the phone hacking scandal demonstrate the significance of ethics in business.

A Definition for Business Ethics