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Chapter 4

Ethics and
Ethical Reasoning

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Ch. 4: Key Learning Objectives

Defining ethics and business ethics
Evaluating why businesses should be ethical
Knowing why ethical problems occur in business
Identifying managerial values as influencing ethical
decision making
Recognizing how peoples spirituality influences their
ethical behavior
Understanding stages of moral reasoning
Analyzing ethical problems using generally accepted
ethics theories


The Meaning of Ethics

A conception of right and wrong conduct
Tells us whether our behavior is moral or immoral
Deals with fundamental human relationshipshow we think
and behave toward others and want them to think and
behave toward us

Ethical Principles
Guides to moral behavior

Business Ethics
Application of general ethical ideas to business behavior

Sources of Ethics
Notions of right and wrong come from many sources
Religious beliefs
Eg. -"Tidak sempurna iman seseorang itu selagi dia tidak
mengasihi saudaranya sebagaimana ia mengasihi dirinya
sendiri" (Riwayat Bukhari dan Muslim)
Family background
Media influences

These experiences create a concept of ethics, morality, and

socially acceptable behavior in each person
Acts as a moral compass to guide an individual when ethical
dilemmas arise
We should all work for the betterment of all.

Ethical Relativism
Concept which holds that ethical behavior should be
defined by various periods in time in history, a societys
traditions, the special circumstances of the moment, or
personal opinion.
The meaning given to ethics would be relative to time, place,
circumstance, and the person/s involved.
Therefore, there would be no universal ethical standards or
permanent criteria on which people around the globe could
It teach that a societys ethic evolve over time and change to fit


Figure 4.1 Observations of Unethical

Behavior at Work


Five Key Reasons Business

Should Be Ethical
To meet demands of business stakeholders

About three-fourths of employees surveyed in 2007 believe their

firms are considering the environment, employee well-being,
and the interests of society and the community.
Meeting demands of stakeholders is good business

To enhance business performance

Research shows linkage between ethically responsible behavior

and favorable corporate financial performance
Imparts trust, promoting positive alliances among business


Five Key Reasons Business

Should Be Ethical
To comply with legal requirements

Two legal requirements provide direction for companies interested

in being more ethical in their business operations

U.S. Corporate Sentencing Guidelines (Hofman-LaRoche a

multinational pharmaceutical company guilty of price fixing
conspirancy in vitamins market.)
Sarbanes-Oxley Act of 2002-(eg. increased penalties for
destroying, altering, or fabricating records in federal
investigations or for attempting to defraud shareholders. The
act also increased the accountability of auditing firms to
remain unbiased and independent of their clients (in the case
of Enron an energy company based in Houston Texas and
Auditor Arthur and Anderson in 2001)

Although they apply only to U.S.-based firms, these legal

requirements also provide a model for firms that operate outside4-8

U.S. Corporate Sentencing Guidelines

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
Take reasonable steps to ensure compliancemonitor and audit
systems, maintain and publicize reporting systems
Enforce standards and procedures through disciplinary
Following detection of offense, respond appropriately and prevent
(Hoffman-LaRoche pleaded guilty to price fixing conspiracy in
vitamins market-the sentence was reduced because HoffmanLaRoche had met many of the sentencing guidelines)


Sarbanes-Oxley Act of 2002

Born from the ethics scandals at Enron, WorldCom, Tyco.
Seeks to ensure that firms maintain high ethical standards in
how they conduct and monitor business operations.
Requires executives to vouch for the accuracy of a firms
financial reports.
Requires executives to pay back bonuses based on earnings
that are later proved fraudulent.
Established strict rules for auditing firms.
In 2006 and 2007 regulation loosening occurred when the SEC
provided more relaxed guidelines to parts of the Sarbanes-Oxley

Five Key Reasons Business

Should Be Ethical
To prevent or minimize harm

Overriding principle that business should do no harm

Examples include not harming society with toxic waste, protecting
business from unethical employees and unethical competitors

To promote personal morality

Knowing one works in a supportive ethical climate contributes to

sense of psychological security
People want to work for companies that do the right thing


Why Ethical Problems Occur in Business

Four Primary Reasons

Personal gain and selfish interest-people whose personal values

are less then desirable, who will put their own welfare ahead of
others (eg., Stealing companys money for personal interest)
Competitive pressure on profits-managers of poor financial
performers and companies with financial uncertainties are proned to
commit illegal acts (eg., Royal Bank of Scotland collude with
Barclay PLC on loan pricing)
Conflicts of interest (Accounting firms are restricted from providing
both auditing and consulting services to the same client because of
the tendency to overlook irregularities to increase the chances to
get lucrative consulting work from the company).
Cross-cultural contradictions-What is considered unethical may be
legal in certain countries because of ethical relativism).

Figure 4.3 Why Ethical Problems

Occur in Business


Core Elements of Ethical Character:

Managers are
key to whether a company and


employees will act ethically or unethically.

The values held my managers will serve as models for
others who work at the company.
Differences in ethical stances of U.S. versus European
managers and employees.
Younger generation of managers more concerned about
ethics/social responsibility.

A companys CSR performance is a major factor when selecting a

new employer for todays graduating MBAs


Spirituality in the Workplace

Personal belief in a supreme being, religious
organization, power of nature or some other life-guiding
Organizations have responded to the increased attention
to spirituality and religion at work by attempting to
accommodate their employees (eg. Pricewaterhouse
provide prayer room and special sink for
ablution for Muslims).
Opponents of spirituality at work point to the myriad of
implementation issues as grounds for keeping spirituality
out of the workplace.

Issues include which religion should be promoted, and need for

recognizing diversity of religious beliefs.

Figure 4.4 Stages of Moral Development

and Ethical Reasoning


Stages of Moral Development

From childhood to mature adulthood people move up
in their moral reasoning.
Earliest stages of reasoning are ego-centered.
Most developed stages are principle-centered.
Most managers make decisions based on criteria in
levels 3 and 4.
Company executives reasoning has wide implications
both inside and outside the organization.


Analyzing Ethical Dilemmas in Business

Business managers and employees need a set of
decision guidelines that will shape their thinking when
on-the-job ethics issues occur.
These guidelines should help them:

Identify and analyze the nature of an ethical problem, and

Decide which course of action is likely to produce an ethical



Four Methods of Ethical Reasoning


Values and character are critical determining factors.


Compares benefits and costs of a decision, policy or action.

Costs and benefits can be economic, social or human.


Person or group is entitled to something or to be treated in a

certain way.
Examples of basic human rights are right to life, safety, and due


Means benefits and burdens are distributed equally, according to

some accepted rule.


Figure 4.5 Four Methods of

Ethical Reasoning


Applying Ethical Reasoning to Business Activities

Can use the virtues, utility, rights, and justice
framework as a tool to analyze real business ethics
Once the ethical analysis is complete, the decision
maker should ask the question: Do all of the above
ethics approaches lead to the same decision?

If all the answers are Yes, the proposed action is ethical.

If all the answers are No, the action is not ethical and needs
to be reconsidered.
If Yes and No answers are mixed, you must decide which
takes priority.