Need and Importance of Business Ethics

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Business ethics seek to proscribe behavior that businesses, firm managers, and workers should not engage in. Ethics is a source of guidance beyond enforceable law. It is clear and uncontroversial that firms and their workers should not engage in unlawful acts, such as selling harmful or defective products, and ignorance of the law cannot be used as a justification for unlawful actions. Business and management ethics goes beyond the law lo provide guidelines as to what is acceptable behavior in business transactions. Being based on values, however, it is often not clear what ethical behavior is and what it is not, since different people may have different values.

For example, should you report to your supervisor an affair between two of your co-workers? Some people would say yes, but others would think that it is none of their business. What about selling a product abroad that has been found to be harmful to health and is not allowed lo be sold in the United States? Or buying foreign products made with child labor? Or polluting abroad in a way that is not allowed at home? These issues are important to the firm because, independent of its ethical stand, they could seriously affect its bottom line if, for example, they lead angry consumers to boycott the firm.

Today, most large companies have established codes of ethical behavior for the firm’s personnel and have created “ethics officers” or guardians of corporate rectitude with the mission of keeping employees conduct more upright than the law requires. A company with such a code of behavior and an ethics officer is more likely to hear of unethical behavior in the firm before it becomes a legal problem or before it leads to consumer reaction, both of which can harm the image and profitability of the firm. There have been many such cases, such as when it became known that Nestle (the Swiss multinational and largest food company in the world) pushed infant formula in many poor countries when the mother’s milk would have been healthier for the infant, or when Nike was exposed for paying poverty wages in many developing countries to workers making its high-priced sneakers.

An important additional incentive for many firms establishing codes of conduct for their employees and creating ethics officers was the establishment of sentencing guidelines by the courts in 1991 that reduced fines for white-collar crimes committed by employees of companies that had established comprehensive ethics programs. Such ethics programs attempt to indicate as clearly as possible behavior that the firm regards as unethical and that employees are asked to avoid. These include using the company’s telephone for personal use, taking office supplies home, lying about being sick for missing work, reporting illegal behavior by other employees, giving or accepting gifts, and many others.

Since it is practically impossible to list all types of hypothetical behavior that a company would regard as unethical and come up with a universally accepted code of conduct, after listing many such examples, some companies provide the broad guideline of “don’t do it if it doesn’t feel right or if you would be embarrassed reading about it in the local newspaper or hearing about it on the local evening news.” Today, professions such as medicine, law, and accounting have professional codes of ethics. Despite this, a number of spectacular financial frauds were exposed.

Better would be to change the structure or architecture of the corporation so as to foster ethical behavior. This might include rewarding the company’s CEO more with stock options that tie rewards to the company’s long-run profitability than with salary ties to current profits; requiring founders of the company to retain a large position in the stock of the company to ensure that their interests are consistent with those of new investors; rewarding production workers for both quality and quantity and not just for quantity; providing bonuses for the sales force for having satisfied customers and not just for maximizing-sales; and rewarding rather than punishing employees exposing illegal behavior at the firm.

Many consumer groups would like corporations to go further and have a social conscience and use some of their resources to redress social ills, for example, by aiding the poor, promoting education, funding crime-prevention programs, reducing general environmental pollution, financing public projects, and so on. Some of these actions can directly benefit the bottom line of the firm; by helping local schools, for example, the firm gets better trained worker than otherwise (thus saving on its training expenses), or it can benefit the firm indirectly by establishing a reputation for the firm as a “good citizen” (thus attracting more customers and leading to more sales).

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