Chapter

Ethical Issues in Business

The Meaning of Ethics
Business Ethics across Organizational Functions
Why Ethical Problems Occur in Business
Ethics in a Global Economy
Ethics, Law, and Illegal Corporate Behavior

The meaning of ethics

Ethics
A conception of right and wrong conduct. It tells us whether our
behavior is moral or immoral with fundamental human
relationships.
Ethical Principles
Guides to moral behavior.
Business Ethics
The application of general ethical ideas to business behavior.

Figure 5.1

Observations of unethical behavior at work

Percentage of type of observed misconduct:
Unsafe working conditions
Deceptive sales practices
Mishandling proprietary or confidential information
Violations of privacy rights
38%
Shipping low-quality or unsafe products
Employment discrimination
Sexual harassment
Altering product quality or safety test results
Antitrust violations or unfair competitive practices
Environmental breaches

56%
56%
50%
37%
36%
34%
32%
32%
31%

Source: 2000 Organizational Integrity Survey: A Summary, Integrity Management Services, KPMG LLP

Figure 5.2

Why should business be ethical?

To meet demands of business stakeholders.

To enhance business performance.
To comply with legal requirements.
To prevent or minimize harm.
To promote personal morality.

U.S. Corporate Sentencing Guidelines:

Directives
1.
2.
3.
4.
5.
6.
7.

Establish standards and procedures to reduce criminal conduct.

Assign high-level officer(s) responsibility for compliance.
Not assign discretionary authority to risky individuals.
Effectively communicate standards and procedures through
training.
Take reasonable steps to ensure compliancemonitor and audit
systems, maintain and publicize reporting systems.
Enforce standards and procedures through disciplinary
mechanisms.
Following detection of offense, respond appropriately and
prevent reoccurrence.

Sarbanes-Oxley Act of 2002

The firms audit committee is entrusted with auditor oversight

with all independent directors on the committee.
Certain nonaudit services by auditors to clients are banned,
nonaudit services must be preapproved by the audit committee,
the lead auditor must be rotated every five years, and auditors
report to the audit committee.
The CEO and CFO must sign off on financial statements as
accurate and fair and must repay bonuses if a restatement of
financials is undertaken.

Sarbanes-Oxley Act of 2002

A Public Company Accounting Oversight Board is established.

The firms are not permitted to offer loans to its executive officers
or board of directors.
SEC rules will create guidelines for internal controls and financial
reporting procedures, require the adoption of or waiver for a code
of ethics for the board, mandate a financial expert must serve on
the board, and compel the firm to state its financial condition in
plain English on a rapid or current basis.
ERISA penalties are increased from $5,000 to $100,000 and one
year in prison to $100,000 to $500,000 and up to 10 years in
prison.

Exhibit 5.Aa

Professional codes of conduct

in accounting
American Institute of Certified Public Accountants (AICPA)
Responsibilities: In carrying out their responsibilities as professionals,
members should exercise sensitive professional and moral judgments
in all their activities..
The Public Interest: members should act in a way that will honor the
public interest.
Integrity: members should perform all professional responsibilities with
the highest sense of integrity.
Objectivity and Independence: a member should maintain objectivity
and be free of conflicts of interest in discharging services.
Due care: a member should discharge professional responsibility to the
best of the members ability.
Scope and nature of services: members should observe the Principles
of the Code of Professional Conduct in determining the scope and nature
of services to be provided.
Source: www.aicpa.org.

Exhibit 5.Ab

Professional codes of conduct in finance

Association for Investment Management and Research (AIMR)
Members of the Association shall:
1) Act with integrity, competence, dignity, and in an ethical manner when
dealing with the public, clients, prospects, employers, employees, and
fellow members.
2) Practice and encourage others to practice in a professional and ethical
manner that will reflect credit on members and their profession.
3) Strive to maintain and improve their competence and the competence of
others in the profession.
4) Use reasonable care and exercise independent professional judgment.

Source: www.aimr.org/ethics

Exhibit 5.Ba

Professional codes of conduct in marketing

American Marketing Association (AMA)

Members of the AMA have embraced the following topics:

Marketers must accept responsibility for the consequences of their activities

and make every effort to ensure that their decisions, recommendations, and
actions function to identify, serve, and satisfy all relevant publics.
Marketers shall uphold and advance the integrity, honor, and dignity of the
marketing profession.
Participants in a marketing exchange should be able to expect that products
services offered are safe, communications about offered products and
services are not deceptive, all obligations in an exchange are discharged in
good faith, and appropriate internal methods exist for equitable redress of
grievances concerning purchases.
www.awma.org
Marketers should not demand, encourage or apply coercion to Source:
obtain

Exhibit 5.Bb

Professional codes of conduct

in information technology
Association for Computing Machinery (ACM)
General imperatives for ACM members include:

contributing to society and human well-being,

avoid harm to others,
be honest and trustworthy,
be fair and take action not to discriminate,
honor property rights,
honor copyrights and patents,
give proper credit for intellectual property,
respect privacy of others, and
honor confidentiality.
Source: www.acm.org/constitution/code

Figure 5.3

Why ethical problems occur in business

Reason

Nature of Ethical
Problem

Typical Approach Attitude

Personal gain and

selfish interest

Selfish interest
versus others
interests

Egotistical mentality

I want it!

Competitive
pressures on profits

Firms interest
versus others
interests

Bottom-line
mentality

We have to beat the

others at all costs!

Business goals
versus personal
values

Bosss interests
versus subordinates
values

Authoritarian
mentality

Do as I say, or
else!

Cross-cultural
contradictions

Companys interests
versus diverse
cultural traditions
and values

Ethnocentric
mentality

Foreigners have a
funny notion of
whats right and
wrong.

Exhibit 5.C

Anticorruption and bribery efforts in Russia

President Putins commitment to end bribery and corruption is
demonstrated by the following actions:

A probe of high-level bureaucrats led to charges against many officials

including Railways Minister Nikolai Aksyonenko for illegally spending
ministry funds.
Judges salaries were increased fivefold in an effort to cut down on courtroom
bribery.
A new law banned the intervention of state prosecutors in private litigation
between contending business parties, eliminating another potential bribery
situation.
Other regulations sharply restricted discounts that railroad regulators could
give to shippers.
The number of business activities that required a license was drastically
reduced from 2,000 to 100fewer licenses meant fewer chances for a
bureaucrat to be in line for a bribe. Source: Cleanup Time: The Kremlin is Launching a Major Attack
on Corruption, Business Week, January 14, 2002, pp.46-47

Figure 5.4

International codes of conduct and their focus

Ethical Focus

ICC

OECD

ILO

UN/CTC

Economic
development

Technology
transfer

Regulatory action

Employment

Human rights
Environmental
protection

X
X

Consumer
protection

Political action

EU

UN/GC
X

Source: William C. Frederick, The Moral Authority of Transnational Corporate Codes, Journal of Business Ethics 10 (1991), pp. 165177; and Kathleen A. Getz, International Codes of Conduct: An Analysis of Ethical Reasoning, Journal of Business Ethics 9(1990), pp.
567-577.