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Importance of Business Ethics

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					The Importance of Business Ethics

Outline
• What is ethical behavior and why is it
important to business? • The ethical value proposition • Laws, policies and ethics • Evidence that good ethics means good business • Is ethical behavior improving? • Teaching ethics—the Ethics Maturity Model

Ethical Behavior
• Conducting one’s life in complete
• These principles may be derived from •
•
accord with a firmly held set of values and principles

religious beliefs, philosophical understanding, etc. Application should be in all areas of one’s life: personal, family, business, social, etc. ―Integrity‖ is the consistent application of ethical behavior.

Foundations of Ethical Behavior
• Treat others as you would be treated
– Respect – Honesty – Trust

Is There a Universal Ethical Standard?
Yes—In Principle
Are you comfortable with a world with your standards?

Christian principle: The Golden

Rule

―Do unto others as you would have them do unto you.‖ Luke 6:29-38 ―Thou shalt love thy neighbor as thyself.‖
Luke 10:27

Taught in All Cultures
Judaism: What you hate, do not do to anyone. Islam: No one of you is a believer until he loves for his brother what

he loves for himself.

Hinduism: Do nothing to thy neighbor which thou wouldst not have

him do to thee.

Sikhism: Treat others as you would be treated yourself. Buddhism: Hurt not others with that which pains thyself. Confucius: What you do not want done to yourself, do not do to

others.

Aristotle: We should behave to our friends as we wish our friends to

behave to us.

Plato: May I do to others as I would that they should do unto me.

TREAT PEOPLE THE WAY YOU WANT THEM TO TREAT YOU

Bad Ethics Increases Transaction Costs
Security Regulators Lawyers Delays Trade Party B

Party A

Testing
Interest Etc, etc! Duplication

Societal Costs of Unethical Behavior
1. Law enforcement and other security personnel 2. Physical protection (locks, electronic security, fences, vaults,
etc.) 3. A substantial portion of attorney and court system costs 4. Some welfare costs 5. Costs of collecting taxes 6. Wasted/misused investment funds 7. A substantial portion of accounting/auditing costs 8. A large fraction of costs for regulators and examiners 9. Some marketing/advertising costs 10.Costs for institutions like better business bureaus, consumer protection agencies 11.Some costs of bankruptcy 12.Lack of investment from outside investors, tourists

Business Costs of Unethical Behavior
1. Loss of physical assets 2. Increased costs of security 3. Loss of customers—especially those who value ethics 4. Loss of employees—especially the more ethical 5. Loss of reputation 6. Increased legal costs 7. Higher costs of debt 8. Loss of investor confidence (lower stock price,
difficulty in raising funds, problems with lenders) 9. Regulatory intrusion 10.Costs of bankruptcy

What is the Cost of Lack of Integrity in the US?
• Employee fraud • Time theft • Industrial espionage
$400 B $230 B

$200 B • Counterfeiting $200 B • Employee dishonesty • Identity theft

$120 B $ 50 B

(Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)

Levels of Constraints on Behavior
Ethical Behavior Tied to Set of Values

Professional Standards

Legal Requirements

Ethical Issues Relating to Business • Honesty—communication and behavior consistent
•
– – – – – – – – –

with facts

Unfair competition

Disclosure of information Promises/commitments Laws and professional standards Representation of others like shareholders (applies to board members) Refrain from bribes and excessive gifts (that sway judgment) Avoid quid pro quo transaction Comply with ―anti-trust‖ laws (these relate to pricing, monopolistic practices) Respect intellectual property (product piracy) Treat employees fairly

• •

Just compensation

Respecting rights of others

–
–

Treat others with fairness and respect regardless of age, religion, ethnic group, sex, economic status, etc., especially children, women, and subordinates Respect the community you operate in by paying fair share of economic costs you create

Why Ethical Behavior Adds Value
• Better information
– – – – – Trust from investors Lower costs for audits, controls, investigations Better allocation of resources Customers will be more loyal (RC Willey example) Lower costs from suppliers (automotive company example) – Attracting and retaining better employees – Lowers cost of business in economy – Leads to better decision-making (do what’s best for firm, not one individual) – Improves competitive nature of a country’s economy

• Fair competition

Why Ethical Behavior Adds Value
• Just compensation
– Creates a more vibrant, entrepreneurial economy – Attracts and retains better employees

• Rights of others
– Draws upon talents of wider set of individuals – Develops long-term respect from the community (Godfrey study) – Maintains the environment for long-term value to all (Costa Rica)

• It’s the right thing to do!

Is There Evidence that Ethical Behavior Yields Increased Value?
1.Study of 2,100 firms with very strong, wellgoverned boards of directors outperformed overall market 15% vs. 12.5% in 2005 2.Firms with high level of “democracy” outperformed ―dictatorial‖ firms by 8% per year in the decade of the 1990’s. 3.Philanthropy: Firms that contribute a higher portion
of their assets to the communities in which they reside fare better in an economic downturn.

How Important is Integrity in a Leader?
• In a survey of 54,000 people Integrity was
by far the number one attribute desired in a leader

(Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)

Short-Term vs. Long-Term
• One party may gain temporary advantage
by unethical behavior
– Enron – Livedoor – Ghana Airways

• But in the long-term, individuals,
companies and society are hurt

Questionable State of Our Integrity
Did You Cheat to Get Into Graduate School?

―Yes‖
– 43% – 52% – 63% – 75% Liberal Arts Education Law and Medicine Business
Source: Rutgers University survey of students

Questionable State of Our Integrity
• 76% were willing to understate expenses that •
cut into their companies’ profits Nearly all believe shareholder value is more important than customer service Convicts in 11 minimum security prisons had higher scores on an ethical dilemma exam than MBAs

MBAs

•

Questionable Integrity at Work
• 76% of employees observed a high level
of illegal or unethical conduct at work in the past 12 months • 49% of employees observed misconduct that, if revealed, would cause their firms to ―significantly lose public trust‖
KPMG 2000 Organizational Integrity Survey

Survey of Employees
• Most (65%) don’t report ethical
problems they observe • 96% feared being accused of not being a team player • 81% feared corrective action would not be taken anyway • 68% feared retribution from their supervisors
Source: Society of Human Resource Management

Deterioration in Honesty over Time
Year College students who cheated in H.S. Self-reported cheating Believe cheating is common Year

1940 (20%) 1983 (11%) 1940 (20%)

2002 (75-98%) 1993 (49%) 1997 (88%)

Used cheat sheets
Let others copy work Willing to lie to get job Students who had stolen

1969 (34%) 1969 (58%) 2000 (28%) 2000 (35%)

1989 (68%) 1989 (98%) 2002 (39%) 2002 (38%)

(Based on several different ethics studies)

Another Study of Student Honesty
• Responses 50,000 college students at 69 schools • 26% of business majors admitted to serious cheating on

• •
•

•
•

exams 54% admitted to cheating on written assignments Journalism majors were worse with 27% admitting to cheating on exams. The most honest—students in the sciences (19% reported cheating on tests) Author observes ―cheating has increased since he began doing surveys 15 years ago‖ He partly blames technology—makes it easier to cheat

“Biz Majors Get an F for Honesty” by Donald McCabe published on February 6, 2006, by the Center for Academic Integrity

Will Our Ethics Improve?
2002 2001

Survey of High School Students
• 74% (71%) cheated on an exam in the last year; 45% •
(45%) said they did it at least twice in the last year 93% (92%) lied to their parents in the past year; 79% (79%) say they lied twice 78% (78%) have lied to their teachers 37% (27%) said they would lie to get a job 38% (35%) took something from a store in the last year Josephson (2002)(2001)

• • •

Why is Dishonesty Increasing?
Modeling Labeling

Honesty

Why Is Dishonesty Increasing?
• Bad Modeling/Lack • Lack of Positive
of Good Modeling
Labeling
– Makes up our news— more explicit than ever – Focus of TV/movies – Dishonest ―leaders‖ – Sports, business, entertainment ―heroes‖ – Good models are rare

– Home….average family spends 10 hours less time together a week than 20 years ago – Vocabulary of kindergarten children – Schools – Churches

Confession of Fraudulent Executive
• Even when put in jail, I didn’t feel like a ―criminal.‖ I
somehow felt we were different and I started noticing every white collar guy I did talk to began every sentence with: ―all I did was.‖ Once you’re in jail and you start feeling the animosity the other prisoners have toward white-collar guys, where they say to you, ―you’re no different than us,‖ ―you’re just a thief,‖ ―you use other words.‖ Even the word ―embezzlement‖ is a nice word…they said ―you’re a thief, you lie to people and take their money, that’s what I do to‖ and that hit me like a ton of bricks.
Mike Morze, ZZZZ Best

Can Ethical Values be Taught? Level 1: The Foundation

Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

Personal Ethical Understanding
• Concepts of right and wrong, fair play,
respect for rights of others, honesty, personal integrity • Best learned in the home at an early age— and follow-up is needed throughout life • Institutions (churches, schools, etc.) can help • Difficult to ―back fill‖ in adulthood

Level 2: Application to Business

Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness

Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

Application of Ethics to Business Situations
• Fraudulent practices, misleading advertising,

•
• •

unfairness Can be taught in management education and organizations—provided students have a personal understanding of ethics Taught by modeling (cases and personal example are helpful) Can be reinforced by policies, codes of ethics, training

Application of Ethics to Business Situations
• Businesses can teach through proper modeling:
―Companies also have to further strengthen ethics management and social responsibility activities to improve their public image’’
Korean Commerce-Industry-Energy Minister Lee Hee-beom

Level 3: Ethical Courage

Ethical Courage
Willingness to Pay the Price for Ethics

Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness

Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

Ethical Courage
• It is not sufficient to simply understand ethical
• • •
principles One must have the courage to pay a price for being ethical Examples can be helpful—case studies showing people willing to stand up for ethical principles Again, it helps to have ―practiced‖ ethical behavior over many years—especially in small things

Level 4: Ethical Leadership
Ethical Leadership
Helping Others to be Ethical

Ethical Courage
Willingness to Pay the Price for Ethics

Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness

Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

Ethical Leadership
• The ability and willingness to encourage
•
others to behave ethically Can be taught through cases, problem solving, study of successful organizations Includes
– Developing an organizational climate that fosters ethical behavior – Structuring policies that encourages ethics – Behaving ethically while facing the pressures of leadership

•

The Importance of Ethical Leadership
Honest Employees
Will be Honest Always

Swing Group
Could Go Either Way

Dishonest Employees
Policies Won’t Help Much

Ethical Leadership will significantly impact an organization since the vast majority, in this view, can be influenced to behave ethically.

Importance of Ethical Leadership
Honest Employees Dishonest Employees
Policies Won’t Help Much

Swing Group Will be Honest Always Could Go Either Way

Strong Ethical Leadership—induces the middle group to behave as if they were the honest employees.

Importance of Ethical Leadership
Honest Employees
Will be Honest Always

Swing Group Won’t Help Much Policies
Could Go Either Way

Dishonest Employees

Weak Ethical Leadership—permits the middle group to behave as if they were the dishonest employees.

Which Way Will Your Organization Swing?

“Good Ethics Means Good Business”


				
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