BUSINESS ETHICS AND ETHICAL DECISION-MAKING

CHAPTER V

Business Ethics and Ethical Decision-Making

OVERVIEW OF CLASS MODULE

In this module, business ethics, examine its importance from an organizational perspective, and review
its foundations, ethical issues in business to help understand areas of risk will be defined. We then look
at the individual, organizational, and opportunity factors that influence ethical decision-making in the
workplace. And the requirements for developing an ethical organizational culture will be examined.

Key business ethics concerns relate to questions about whether various stakeholders consider specific
business practices acceptable. A reputation as an ethical firm takes a long time to earn but just
minutes to lose. Once lost, it can take considerable time to restore goodwill with stakeholders.
Business ethics is important to build trust and create an organizational culture that establishes a good
reputation.

LEARNING OBJECTIVES

By the end of this module, the students should be able to:

1. Define and describe the importance of business ethics;
2. Understand the diverse and complex nature of existing and emerging ethical issues;
3. Discuss the individual factors that influence ethical or unethical decisions;
4. Explore the effects of organizational relationships on ethical decision-making;
5. Evaluate the role of opportunity in ethical or unethical decisions; and
6. Understand how to implement an ethical culture.

LEARNING CONTEXT

THE NATURE OF BUSINESS ETHICS

Business decisions can be both acceptable and beneficial to society. It is necessary to examine
business ethics to understand decisions made in the context of an organizational culture. The term
ethics relates to choices and judgments about acceptable standards of conduct that guide the
behavior of individuals and groups.

These standards require both organizations and individuals to accept responsibility for their
actions and to comply with established principles, values, and norms. Without a shared view of which
values and norms are appropriate and acceptable, companies will not have consistency in decisions,
with individuals differing in how they resolve issues.

Business ethics comprises the principles and standards that guide the behavior of individuals
and groups in the world of business. Most definitions of business ethics relate to rules, standards, and
principles regarding what is right or wrong in specific situations.

Principles are specific and pervasive boundaries for behavior that are universal and absolute.
Principles often become the basis for rules. Some examples of principles include freedom of speech,
principles of justice, and equal rights to civil liberties.

Values are used to develop norms that are socially enforced. Integrity, accountability, and trust
are examples of values. Investors, employees, customers, interest groups, the legal system, and the
community often determine whether a specific action is right or wrong, ethical or unethical. Although
these groups are not necessarily “right,” their judgments influence society’s acceptance or rejection of
a business and its activities.

Some businesspeople choose to behave ethically because of enlightened self-interest, or

the expectation that “ethics pays.” They want to act responsibly and assume that the
public and customers will reward the company for its ethical actions.

FOUNDATIONS OF BUSINESS ETHICS

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Because all individuals and groups within a company may not have embraced the same set of
values, there is always the possibility of ethical conflict. Most ethical issues in an organizational context
are addressed openly whenever a policy, code, or rule is questioned. Even then, it may be hard to
distinguish between the ethical issue and the legal means used to resolve it. Because it is difficult to
draw a boundary between legal and ethical issues, all questionable issues need an organizational
mechanism for resolution.

The legal ramifications of some issues and situations may be obvious, but questionable decisions
and actions more often result in disputes that must be resolved through some type of negotiation or
even litigation. Companies that sell e-cigarettes, for instance, may be subject to such risks similar to
traditional tobacco firms.

When ethical disputes wind up in court, the costs and distractions associated with litigation can
be devastating to a business. In addition to the compensatory or nominal damages actually incurred,
punitive damages may be imposed on a company that is judged to have acted improperly to punish
the firm and to send an intimidating message to others.

To avoid the costs of litigation, companies should develop systems to monitor complaints,
suggestions, and other feedback from stakeholders. In many cases, issues can be negotiated or
resolved without legal intervention. Strategic responsibility entails systems for listening to,
understanding, and effectively managing stakeholder concerns.

A high level of personal morality may not be sufficient to prevent an individual from violating the
law in an organizational context in which even experienced attorneys debate the exact meaning of the
law. Because it is impossible to train all the members of an organization as lawyers, the identification
of ethical issues and the implementation of standards of conduct that incorporate both legal and
ethical concerns are the best approaches to preventing crime and avoiding civil litigation.

Codifying ethical standards into meaningful policies that spell out what is and is not acceptable
gives businesspeople an opportunity to reduce the probability of behavior that could create legal
problems. Without proper ethical training and guidance, it is impossible for the average business
manager to understand the exact boundaries for illegal behavior in the areas of product safety, price
fixing, fraud, collusion, copyright violations, and so on.

Although the values of honesty, respect, and trust are often assumed to be self-evident and
universally accepted, business decisions involve complex and detailed discussions in which correctness
may not be so clear-cut. Both employees and managers need experience within their specific industry
to understand how to operate in gray areas or to handle close calls in evolving areas.

The interests and values of individual employees may differ from those of the company in
which they work, from industry standards, and from the society in general. When personal
values are inconsistent with the configuration of values held by the work group, ethical
conflict may ensue. It is important that a shared vision of acceptable behavior develop from
an organizational perspective to cultivate consistent and reliable relationships with all
concerned stakeholders. A shared vision of ethics that is part of an organization’s culture can
be questioned, analyzed, and modified as new issues develop. However, business ethics
should relate to work environment decisions and should not control or influence personal
ethical issues.

Recognizing an Ethical Issue

Although we have described a number of relationships and situations that may generate ethical
issues, it can be difficult to recognize specific ethical issues in practice. Failure to acknowledge ethical
issues is a great danger in any organization, particularly if business is treated as a game in which
ordinary rules of fairness do not apply. Sometimes, people who take this view do things that are not
only unethical but also illegal to maximize their own position or boost the profits or goals of the
organization.

One way to determine whether a specific behavior or situation has an ethical component is to ask
other individuals in the business for feedback and guidance, or approval/disapproval of your decision.
Another way is to determine whether the organization has adopted specific policies or whether there
are legal ramifications. An activity approved of by most members of an organization, if it is also
customary in the industry, is probably ethical.

An issue, activity, or situation that can withstand open discussion between many stakeholders,
both inside and outside the organization, and survive untarnished probably does not pose a threat. For

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instance, it is a common legal practice for medical device manufacturers to have close relationships
with medical practitioners, which often include monetary transactions. However, the nature of these
relationships may concern outside stakeholders, especially when devices are found to malfunction and
cause patients harm.

ETHICAL ISSUES IN BUSINESS

An ethical issue is a problem, situation, or opportunity requiring an individual, group, or

organization to choose among several actions that must be evaluated as right or wrong, ethical or
unethical. Surveys can render a useful overview of the many unsettled ethical issues in business.

A constructive step toward identifying and resolving ethical issues is to classify the issues
relevant to most business organizations. In this section, we examine ethical issues related to abusive
behavior, misuse of company resources, conflict of interest, bribery, discrimination and sexual
harassment, fraud, and privacy issues.

1. Abusive or Intimidating Behavior

Abusive or intimidating behavior is the most common ethical problem for employees, but
what does it mean to be abusive or intimidating? The concepts can mean anything from physical
threats, false accusations, annoying a coworker, profanity, insults, yelling, harshness, and ignoring
someone to the point of being unreasonable, and the meaning of these words are subjective and
can vary from person to person. It is important to understand that each term falls along a
continuum.

Within the concept of abusive behavior, intent should be a consideration. If the employee was
trying to convey a compliment when the comment was considered abusive, then it was probably a
mistake. The way a word is spoken (voice inflection) can be important. Add to this the fact that we
now live in a multicultural environment doing business and working with many different cultural
groups and the businessperson soon realizes the depth of the ethical and legal issues that may
arise.

2. Misuse of Company Time and Resources

Theft of time is estimated to cost companies hundreds of billions of pesos annually. It is

estimated that the average employee “steals” more than ten hours per week with late arrivals, long
lunch breaks, leaving early, daydreaming, excessive socializing, engaging in personal activities, and
using social networking sites such as Facebook.

Using company computer equipment for personal business is a common way employees
engage in time theft. While employees might recognize that spending the workday talking with
friends and relatives is unacceptable, they might not hesitate to go online and do the same thing.
Typical examples of misusing company computers include sending personal emails, socializing on
Facebook, shopping on Amazon or eBay, downloading music, doing personal banking, or watching
sporting events online.

3. Conflict of Interest

A conflict of interest exists when an individual must choose whether to advance his or her
own interests, those of his or her organization, or those of some other group. To avoid conflicts of
interest, employees must be able to separate their private interests from their work roles.
Organizations, too, must avoid potential conflicts of interest in providing goods or services.

4. Bribery

Bribery is the practice of offering something, such as money, gifts, entertainment, and travel,
in order to gain an illicit advantage from someone in authority. The definition of bribery depends
upon whether the illicit payment or favor is used to gain an advantage in a relationship. In many
developed countries, society generally recognizes that employees should not accept bribes or
special favors from people who could influence the outcome of a decision.

5. Discrimination and Sexual Harassment

Discrimination remains a significant ethical issue in business despite nearly 50 years of

legislation to outlaw it. In America, once dominated by white men, today’s U.S. workforce includes
significantly more women, African Americans, Hispanics, and other minorities, as well as workers
with disabilities and older workers. Experts project that within the next 30 years, Hispanics will

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represent 30 percent of the population, while African Americans and Asians/Pacific Islanders will
make up 15 and 9.2 percent, respectively.19 These groups have traditionally faced discrimination
and higher unemployment rates and have been denied opportunities to assume leadership roles in
corporate America.

Sexual harassment can be defined as any repeated, unwanted behavior of a sexual nature
perpetrated upon one individual by another. It may be verbal, visual, written, or physical and can
occur between people of different genders or those of the same gender. Displaying sexually explicit
materials “may create a hostile work environment or constitute harassment, even though the
private possession, reading, and consensual sharing of such materials is protected under the
Constitution.

To establish sexual harassment, an employee must understand the definition of a hostile work
environment, for which three criteria must be met:

- the conduct was unwelcome

- the conduct was severe, pervasive, and regarded by the claimant as so hostile or offensive
as to alter his or her conditions of employment
- the conduct was such that a reasonable person would find it hostile or offensive.

6. Fraud

When an individual engages in deceptive practices to advance his or her own interests over
those of the organization or some other group, charges of illegal fraud may result. In general,
fraud is any false communication that deceives, manipulates, or conceals facts to create a false
impression when others are damaged or denied a benefit. It is considered a crime, and convictions
may result in fines, imprisonment, or both.

7. Privacy

Some privacy issues that businesses must address include the monitoring of employees’ use
of available technology, consumer privacy, and online marketing. Companies often use cookies or
other devices to engage in online tracking, and many websites use consumer information to
improve services. Although this can benefit consumers in the form of better marketing and tailored
searches, it is also controversial because many consumers do not want their information being
tracked. Others are still willing to provide personal information despite the potential risks.

There are two issues involving consumer privacy: consumer awareness of information
collection and a growing lack of consumer control with respect to how organizations use
their personal information.

UNDERSTANDING THE ETHICAL DECISION-MAKING PROCESS

Understanding the ethical decision-making process can help individuals and businesses design
strategies to deter misconduct. The descriptive approach to understanding ethical decision-making
does not prescribe what to do but, rather, provides a framework for managing ethical behavior in the
workplace. Figure 5.1 depicts this framework, which shows how individual factors, organizational
relationships, and opportunities interact to determine ethical decisions in business.

Table 5.1 Factors that Influence the Ethical Decision-

Making Process
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Individual Factors

Individuals make ethical choices on the basis of their own concepts of right or wrong, and they act
accordingly in their daily lives. Studies suggest that individual ethics are reaching a new low.

1. Moral Philosophies

Principles, or rules, which individuals apply in deciding what is right or wrong; morals refers to
the individuals’ philosophies about what is right or wrong.

2. Social Exchange Theory

This concept is particularly important to the concept of social exchange theory, which states
that social behavior is determined by social exchanges between different parties.

3. Consequentialism

A class of moral philosophy that considers a decision right or acceptable if it accomplishes a

desired result, such as career growth, the realization of self-interest, or utility in a decision.

4. Egoism

A philosophy that defines right or acceptable conduct in terms of the consequences for the
individual.

5. Utilitarianism

A consequentialist philosophy that is concerned with seeking the greatest good for the
greatest number of people.

6. Ethical Formalism

A class of moral philosophy that focuses on the rights of individuals and on the intentions
associated with a particular behavior rather than on its consequences.

7. Justice Theory

A class of moral philosophy that relates to evaluations of fairness, or the disposition to deal
with perceived injustices of others.

8. Principle of Equal Freedom

A similar concept is the Principle of Equal Freedom, which asserts that all persons must have
equality under the law.

9. Machiavellianism

In extreme cases, this mentality could become Machiavellian in nature. Machiavellianism in

business is the use of duplicity or cunning to achieve business goals.

10.Ethical Diversity

Refers to the fact that employee values often differ from person to person.

Organizational Relationships

Ethical choices in business are most often made jointly in committees and work groups or in
conversations with coworkers. Moreover, people learn to settle ethical issues not only from their
individual backgrounds but also from others with whom they associate in the business environment.

The outcome of this learning process depends on the strength of each individual’s personal
values, opportunity for unethical behavior, and exposure to others who behave ethically or unethically.
Consequently, the culture of the organization, as well as superiors, peers, and subordinates, can have a
significant impact on the ethical decision-making process.

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1. Organizational, or Corporate, Culture

A set of values, beliefs, and artifacts shared by members or employees of an organization. It

answers questions such as “What is important?” “How do we treat each other?” and “How do we do
things around here?” Culture may be conveyed formally in employee handbooks, codes of conduct,
memos, and ceremonies, but it is also expressed informally through dress codes, extracurricular
activities, and anecdotes. A firm’s culture gives its members meaning and offers direction as to how
to behave and deal with problems within the organization.

2. Ethical climate

That part of the firm’s culture that focuses specifically on issues of right and wrong.

3. Significant Others

Include superiors, peers, and subordinates in the organization who influence the ethical
decision-making process. Although people outside the firm, such as family members and friends,
also influence decision-makers, organizational structure and culture operate through significant
others to influence ethical decisions.

Superiors and coworkers can create organizational pressure, which plays a key role in
creating ethical issues. Although power differences will exist between supervisors and their
employees, ethical leaders attempt to reduce these differences when communicating with
employees. It is not uncommon for leaders within the organization to adopt the habit of
viewing employee information as unimportant. However, employees who feel that they are
not being heard are less likely to report concerns and more likely to ignore questionable
conduct in the workplace. Ethical leaders can help to reduce these perceived power
differences through frequent employee communication. T

Opportunity

A set of conditions that limits barriers or provides rewards. When these conditions provide
rewards—be it financial gain, recognition, promotion, or simply the good feeling from a job well done—
the opportunity for unethical conduct may be encouraged or discouraged.

DEVELOPING AN ETHICAL CULTURE

Organizational ethics and compliance initiatives are developed to establish appropriate conduct
and core values. The term ethical culture refers to the character of the decision-making process
employees use to determine if their responses to ethical issues are right or wrong.

Ethical culture is that part of corporate culture that encompasses the values and norms an
organization defines as appropriate conduct. The goal of an ethical culture is to curtail the need for
enforced compliance of rules and amplify the use of principles that contribute to ethical reasoning in
complex or new situations.

Organizational Values

Organizational values are abstract ideals distinct from individual values. Values can evolve
over time. They are more subjective and are viewed by societal members as ethical or unethical.
Values-based practices become the end results and are separate from organizational practices based
on technical or efficiency considerations.
Normative Considerations of Ethical Decision-Making

Understanding what impacts the ethical decision-making process is necessary for developing and
managing an ethical culture within an organization. However, understanding how ethical decisions are
made is different from determining what ought to guide ethical decisions. Normative approaches are
concerned with how organizational decision-makers should approach an ethical issue. It is concerned
with providing a vision and recommendations for improving ethical decision-making.

Concepts like fairness, justice, and moral philosophies such as deontology and utilitarianism are
important to a normative approach. Strong normative approaches in organizations have a positive
relationship to ethical decision-making. Besides values, norms provide more specific beliefs about
expected behaviors in a specific context. Norms may exist about expected behavior in work groups and

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teams throughout the organization.

Managing the Ethical Culture: Variations of Employee Conduct

Despite the creation and implementation of shared organizational values, organizations must
recognize that employee behavior will still vary. Overall, it is up to the organization to take
responsibility for an ethical culture and implementation. However, research indicates that there are
major differences in the values and philosophies influencing how individuals that comprise
organizations make ethical decisions. Due to ethical diversity, employees will often interpret situations
differently and will vary in their responses to an ethical issue.

KEY TAKEAWAYS

In this module, you learned:

 Business ethics comprises principles and standards that guide individual and work group
behavior in the world of business.
 Principles are specific and pervasive boundaries that are absolute, while values are used
to develop norms that are socially enforced.
 Stakeholders determine these conventions, and they may change over time. The most
basic of these standards have been codified as laws and regulations. Business ethics goes
beyond legal issues.
 Because individuals and groups within a company may not have embraced the same set of
values, ethical conflict may occur.
 An ethical issue is a problem, situation, or opportunity requiring an individual, group, or
organization to choose among several actions that must be evaluated as right or wrong,
ethical or unethical. Questionable decisions and actions may result in disputes that must
be resolved through some type of negotiation or even litigation.
 Codifying ethical standards into meaningful policies that spell out what is and is not
acceptable gives businesspeople an opportunity to reduce the possibility of behavior that
could create legal problems.
 Business decisions involve complex and detailed discussions in which correctness may not
be clear-cut. It is important that a shared vision of acceptable behavior develops from an
organizational perspective to create consistent and reliable relationships with all
concerned stakeholders.
 Common ethical issues faced by businesses include abusive or intimidating behavior,
misuse of company time and resources, conflicts of interest, bribery, discrimination and
sexual harassment, fraud, and privacy issues. Understanding the ethical decision-making
process can help individuals and businesses design strategies to prevent misconduct.
Three of the important components of ethical decision-making are individual factors,
organizational relationships, and opportunity.

CLASSROOM DELIGHTS

Classroom Delight #5.

Let’s dig deeper!

Why is business ethics a strategic consideration in organizational decisions?

SOURCE:

 Ferell, O. et al (2018). “Business and Society: A Strategic Approach to Social Responsibility

and Ethics.” Chicago Business Press.
 The World Wide Web

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