1

BUSINESS MANAGEMENT 061

TOPIC 2: BUSINESS ETHICS
AND BUSINESS OWNERSHIP

Part 1: Business Ethics and Social

Responsibility

LL EE AA RR NN II NN G
G O
O BB JJ EE CC TT II VV EE SS
After reading this chapter, you should be able to:
1. Explain how individuals develop their personal codes of
ethics and why ethics are important in the workplace.
2. Distinguish social responsibility from ethics, identify
organizational stakeholders, and characterize social
consciousness today.
3. Show how the concept of social responsibility applies
both to environmental issues and to a firms
relationships with customers, employees, and
investors.

LL EE AARR NN II NN GG OO BB JJ EE CC TT II VV EE SS (contd)
(contd)
After reading this chapter, you should be able to:
4. Identify four general approaches to social
responsibility and describe the four steps that a
firm must take to implement a social
responsibility program.
5. Explain how issues of social responsibility and
ethics affect small business.

Whats in It for Me?

By understanding the material in this
chapter, youll be better able to:
Assess ethical and socially responsible issues
facing you as an employee and as a boss or
business owner.
Understand the ethical and socially
responsible actions of businesses you deal
with as a consumer and as an investor.

Ethics in the Workplace

Ethics
Beliefs about whats right and wrong or good and bad

Ethical Behavior
Behavior conforming to individual beliefs and social norms
about whats right and good

Unethical Behavior
Behavior conforming to individual beliefs and social norms
about what is defined as wrong and bad

Business Ethics
The ethical or unethical behaviors by employees in the context of
their jobs

Individual Values and Codes

Sources of Personal Codes of Ethics

Childhood responses to adult behavior

Influence of peers
Experiences in adulthood
Developed morals and values

Business and Managerial Ethics

Managerial Ethics
The standards of behavior that guide individual
managers in their work
Ethics affect a managers behavior toward:
Employees
The organistion
Other economic agentscustomers, competitors,
stockholders, suppliers, dealers, and unions

Ethical Concerns
Ambiguity (e.g., financial disclosure)
Global variation in business practices (e.g.,
bribes)

Assessing Ethical Behavior

Simple Steps in Applying Ethical
Judgments
Gather the relevant factual information
Analyse the facts to determine the most
appropriate moral values
Make an ethical judgment based on the
rightness or wrongness of the proposed activity
or policy

Assessing Ethical Behavior

Ethical Norms and the Issues They Entail
Utility: Does a particular act optimize the benefits
to those who are affected by it? Do all relevant
parties receive fair benefits?
Rights: Does the act respect the rights of all
individuals involved?
Justice: Is the act consistent with whats fair?
Caring: Is the act consistent with peoples
responsibilities to each other?

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Company Practices and Business Ethics

Encouraging Ethical Behavior Involves:
Adopting written codes of conduct and establishing
clear ethical positions for the conduct of business
Having top management demonstrate its support
of ethical standards
Instituting programs to provide periodic ethics
training
Establishing ethical hotlines for reporting and
discussing unethical behavior and activities

11

Social Responsibility
Social Responsibility
The overall way in which a business attempts to
balance its commitments to relevant groups and
individuals (stakeholders) in its social environment

Organisational Stakeholders
Groups, individuals, and organizations that are
directly affected by the practices of an organization
and, therefore, have a stake in its performance

12

The Stakeholder Model of Responsibility

Customers

Businesses strive to treat customers fairly and honestly

Employees

Businesses treat employees fairly, make them a part of the team,

and respect their dignity and basic human needs

Investors

Businesses follow proper accounting procedures, provide

information to shareholders about financial performance, and
protect shareholder rights and investments

Suppliers

Businesses emphasize mutually beneficial partnership

arrangements with suppliers

Local and International Communities

Businesses try to be socially responsible

13

Contemporary Social Consciousness

The Concept of Accountability
The expectation of an expanded role for
business in protecting and enhancing the
general welfare of society

14

Areas of Social Responsibility

Responsibility Toward the Environment

Properly disposing of toxic waste

Engaging in recycling
Controlling air, water, and land pollution
Green Marketing
The marketing of environmentally friendly goods
Includes a number of strategies and practices:

Production processes
Product modifications
Carbon offsets
Packaging reduction
Sustainability

Greenwashing: Using advertising to project a green image without substantially

altering processes or products
Federal Trade Commission (FTC) started hearings in January 2008 regarding
green marketing claims

15

Areas of Social Responsibility (contd)

Responsibility Toward Customers
Involves providing quality products and pricing products fairly

Consumerism
Social activism dedicated to protecting the rights of consumers in
their dealings with businesses

Basic Consumer Bill of Rights

To possess safe products

To be informed about all relevant aspects of a product
To be heard
To choose what to buy
To be educated about purchases
To receive courteous service

16

Areas of Social Responsibility (contd)

Unfair Pricing
Collusion: When two or more firms agree to
collaborate on such wrongful acts as price fixing
Price gouging: Responding to increased
demand with overly steep (and often
unwarranted) price increases

Ethics in Advertising

Truth in advertising
Morally objectionable advertising

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Areas of Social Responsibility (contd)

Responsibility Toward Employees
Legal and social commitments to:

Not practice illegal discrimination

Provide a physically and socially safe workplace
Provide opportunities to balance work and life
Provide protection for whistleblowers (an employee who
discovers and tries to put an end to a companys unethical,
illegal, or socially irresponsible actions by publicizing them)

Responsibility Toward Investors

Proper financial management (no insider trading)
Proper representation of finances

18

Implementing Social Responsibility (SR)

Programs
Arguments Against SR
The cost of SR threatens profits.
Business has too much control over which SR issues
would be addressed and how SR issues would be
addressed.
Business lacks expertise in SR matters.

Arguments for SR

SR should take precedence over profits.

Corporations as citizens should help others.
Corporations have the resources to help.
Corporations should solve problems they create.

19

Approaches to Social Responsibility

Obstructionist Stance

A company does as little as possible and may attempt

to deny or cover up violations

Defensive Stance

A company does everything required of it legally but

no more

Accommodative Stance

A company meets its legal and ethical requirements

and also goes further in certain cases

Proactive Stance

A company actively seeks to contribute to the wellbeing of groups and individuals in its social
environment

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Managing Social Responsibility Programs

1.

Social responsibility must start at the top and be

considered as a factor in strategic planning.

2.

A committee of top managers must develop a plan

detailing the level of management support.

3.

One executive must be put in charge of the firms agenda.

4.

The organization must conduct occasional social audits

systematic analyses of its success in using funds
earmarked for its social responsibility goals.

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Social Responsibility and the Small

Business
Large Business versus Small Business
Responses to Ethical Issues
Differences are primarily differences of scale
More issues are questions of individual ethics

Ethics and social responsibility are decisions

faced by all managers in all organisations,
regardless of rank or size

22

BUSINESS MANAGEMENT 061

TOPIC 2: BUSINESS ETHICS
AND BUSINESS OWNERSHIP

Part 2: Entrepreneurship, New Ventures

and Business Ownership

23

LL EE AA RR NN II NN G
G O
O BB JJ EE CC TT II VV EE SS
After reading this chapter, you should be able to:
1.
2.
3.

4.

Define small business, discuss its importance to the economy

and explain popular areas of small business.
Explain entrepreneurship and describe some key characteristics
of entrepreneurial personalities and activities.
Describe the business plan and the start-up decisions made by
small businesses and identify sources of financial aid available to
such enterprises.
Discuss the trends in small business start-ups and identify the
main reasons for success and failure among small businesses.

24

LL EE AARR NN II NN GG OO BB JJ EE CC TT II VV EE SS (contd)
(contd)
After reading this chapter, you should be able to:
5. Explain sole proprietorships, partnerships, and
cooperatives and discuss the advantages and
disadvantages of each.
6. Describe corporations, discuss their advantages
and disadvantages, and identify different kinds
of corporations.
7. Explain the basic issues involved in managing a
corporation and discuss special issues related to
corporate ownership.

25

Whats in It for Me?

By understanding the material discussed

in this chapter, youll be better prepared
to:
1. Understand the keys to entrepreneurial
success, including business planning
2. Discuss the reasons for success or failure
3. Evaluate the advantages and disadvantages
of different kinds of ownership

26

What Is a Small Business?

Small Business Defined
A business that is independent (not part of a
larger business) and that has relatively little
influence in its market.

The Importance of Small Business in the

Economy
Job creation
Innovation
Contributions to big business
Suppliers of specialized services and raw materials
Sellers of larger firms products

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FIGURE 3.2: Small Business by Industry

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Entrepreneurship
Entrepreneurship
The process of seeking business opportunities under
conditions of risk

Entrepreneur
One who accepts the risks and opportunities of
creating, operating and growing a new business

Small Business Owner

A person who independently owns a business
that has relatively little impact in its market

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Entrepreneurial Characteristics
Successful Entrepreneurs:

Are resourceful.
Are concerned about good customer relations.
Desire to be their own boss.
Can deal with uncertainty and risk.
Are open-minded.
Rely on networks, business plans, and consensus.
Have different views on how to succeed, to
automate a business, and when to rely on
experience or business acumen.

30

Starting and Operating a New Business

Crafting a Business Plan
Conveys a description of the business strategy for the
new venture and how it will be implemented
A business plan should address:
The entrepreneurs goals and objectives
The strategies that will be used to obtain them
The implementation of the chosen strategies

Preparing a Business Plan

Setting goals and objectives
Sales forecasting
Financial planning

31

Starting the Small Business

Buying an Existing Business
Less risk in purchasing ongoing, viable business

Franchising
Advantages
Proven business opportunity for franchisee
Access to management expertise of franchisor

Disadvantages
Start-up costs for franchise purchase
Ongoing payments to the franchisor
Management rules and restrictions on the franchisee

32

Starting the Small Business (contd)

Starting from Scratch
Disadvantage: Higher risk of business failure
Advantage: Avoids problems of an existing business

Questions to Be Answered:

Who and where are my customers?

How much will those customers pay for my product?
How much of my product can I expect to sell?
Who are my competitors?
Why will customers buy my product rather than the
product of my competitors?

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Financing the Small Business

Personal Resources
Loans from Family and Friends
Bank Loans
Venture Capital Companies
Small-Business Investment Companies (SBICs)
Minority Enterprise Small-Business Investment
Companies (MESBICs)
SBA Financial Programs
Guaranteed loans and immediate loan programs
Management advice (SCORE and SBDCs)

34

Trends in Small-Business Startups

Emergence of
E-commerce
Crossovers from
Big Business
Opportunities for
Minorities & Women
Global
Opportunities
Better
Survival Rates

35

Reasons for Failure and Success

Failure

Poor management
Neglect
Weak control systems
Insufficient capital

Success

Hard work, drive and dedication

Proven concept
Market demand
Managerial competence
Luck

36

Business Ownership
Forms of Legal Ownership
Sole proprietorship: Owned and operated by one
person
Partnership: Sole proprietorship multiplied by the
number of partner-owners
Corporation

Choice of Ownership Form

Based on the entrepreneurs needs/desires for
control, ownership participation, financing sources,
and appropriateness of the chosen form for the
industry in which the firm will compete

37

Sole Proprietorships
Advantages:

Freedom
Simple to form
Low start-up costs
Tax benefits
Formation of
cooperatives

Disadvantages:
Unlimited liability:
Owners are responsible for all
debts of a business

Limited resources
Limited fundraising
capability
Lack of continuity

38

Partnerships
Advantages:

More talent and

money
More fundraising
capability
Relatively easy to form
Limited liability for
limited partners
Tax benefits

Disadvantages:

Unlimited liability
for general partner
Disagreements
among partners
Lack of continuity

39

Alternatives to General Partnerships

Limited Partnership

Allows for limited partners who invest money but are

liable for debts only to the extent of their investments
Must have at least one general (or active) partner,
who is usually the person who runs the business and is
responsible for its survival and growth

Master Limited Partnership

Organisation sells shares (partnership interests) to

investors on public exchange. Investors are paid back
from profits
The master partner retains at least 50 percent
ownership and runs the business, while minority
partners have no management voice

40

Cooperatives
Combine the freedom of sole
proprietorships with the financial
power of corporations
Groups of sole proprietorships or
partnerships agree to work together for
their common benefit

41

Corporations
Corporation
Firms that have filed papers of incorporation

Corporations may:

Be small or large
Sue and be sued
Buy, hold, and sell property
Make and sell products
Commit crimes and be tried and punished for them
Have limited liability for individuals who form
them

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Corporations
Advantages:
Limited liability: The
owners responsibility for the
debts of a business is limited to
their investment in a business

Continuity
Stronger fundraising
capability

Disadvantages:
Double taxation of
dividends
Fluid control
Complicated and
expensive to form

43

Types of Corporations
Closely Held (Private) Corporation
Publicly Held (Public) Corporation
Subchapter S Corporation
Limited Liability Corporation (LLC)
Professional Corporation
Multinational (Transnational) Corporation

44

Managing a Corporation
Corporate Governance
The roles of shareholders, directors, and other
managers in corporate decision making and
accountability
Corporate governance is established by the firms
bylaws and involves three bodies:
Stockholders (shareholders): Investors who buy ownership
shares in the form of stock
The board of directors: Group elected by stockholders to
oversee corporate management
Corporate officers: Top managers hired by the board to run
the corporation

45

Stockholders: Owners of Corporations

Stock: A share of ownership in a corporation
Dividends: Profits distributed among
stockholders

46

Special Issues in Corporate Ownership

Joint Ventures and Strategic Alliances:
Strategic alliance: Two or more organizations
collaborate on a project for mutual gain
Joint venture: Partners share ownership of a new
enterprise

Employee Stock Ownership Plans

Allows employees to own a share of the corporation
through trusts established on their behalf

Institutional Investors
Control enormous resources and can buy huge
blocks of stock

47

Special Issues in Corporate Ownership (contd)

Mergers, Acquisitions, Divestitures and

Spin-Offs:
Merger: Two firms combine to create a new
company
Acquisition: One firm buys another outright
Divestiture: Strategy whereby a firm sells one
or more of its business units
Spin-off: A firm sells part of itself to raise
capital