Business ethics BBA Mba Unit 3 business ethics

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1. UNIT-3 BUSINESS ETHICS

2. ETHICS The term “Ethics” refers to value-oriented decisions and behaviour. This word comes from the Greek root ‘Ethos’ meaning character, guiding beliefs, standards, or ideals that pervade a group, community or people. It is that section of information or understanding that deals with a moral code of conduct or principle governing our activities.  

3. BUSINESS ETHICS Ferrel and Hirt have defined business ethics as: “the principles and standards that determine acceptable conduct in business organizations. The acceptability of behaviour in business is determined by customers, competitors, government regulators, interest groups, and the public, as well as each individual’s personal moral principles and values.” The term ‘Business Ethics’ refers to the system of moral principles and rules of the conduct applied to business. Business being a social organ shall not be conducted in a way detrimental to the interests of the society and the business sector itself. Every profession or group frames certain do’s and do not’s for its members. The members are given a standard in which they are supposed to operate.

4. Some other definitions of Business Ethics “Business ethics in short can be defined as the systematic study of ethical matters pertaining to the business, industry or related activities, institutions and beliefs. Business ethics is the systematic handling of values in business and industry.” —John Donaldson “Business Ethics is generally coming to know what is right or wrong in the work place and doing what is right. This is in regard to effects of products/services and in relationship with the stake holders.” —Cater Mcnamara

5. Features of Business Ethics Voluntary Compliance: While laws and regulations establish minimum standards, business ethics go beyond legal requirements. Ethical behavior in business is often voluntary and reflects a commitment to doing what is right rather than simply what is legally mandated. Universal Applicability: Business ethics apply universally across different industries, sectors, and geographical locations. While specific ethical dilemmas may vary, fundamental principles such as honesty, integrity, and fairness remain relevant in all business contexts . Interconnectedness: Ethical decisions in business can have far-reaching consequences, impacting not only the organization itself but also its stakeholders, the environment, and society as a whole. Recognizing these interconnections is essential for making ethical choices that consider the broader implications.

6. Practical Application: Business ethics are not merely theoretical concepts but practical guidelines that inform decision-making and behavior within organizations. They provide frameworks for addressing ethical dilemmas and navigating complex situations in a manner consistent with moral principles . Ethical Leadership: Ethical behavior within an organization starts with ethical leadership. Leaders play a crucial role in setting the tone, establishing ethical standards, and fostering a culture of integrity and accountability among employees . Balance of Interests: Business ethics involve striking a balance between various competing interests, including those of shareholders, employees, customers, suppliers, and the broader community. Ethical decision-making seeks to consider and reconcile these interests while upholding principles of fairness and justice . Accountability and Responsibility: Ethical conduct requires individuals and organizations to take responsibility for their actions and decisions. Accountability mechanisms, such as transparency, oversight, and consequences for unethical behavior, help ensure adherence to ethical standards.

7. Business Ethics Vs. Corporate governance Basis of Difference Business Ethics Corporate Governance Definition Business ethics refers to the principles, values, and standards of conduct that guide behavior within the business environment. It addresses moral principles and ethical dilemmas that arise in business decision-making and interactions with stakeholders. Corporate governance involves the structures, processes, and mechanisms through which a company is directed and controlled. It encompasses the relationships between the board of directors, management, shareholders, and other stakeholders, aiming to ensure accountability, transparency, and fairness in corporate decision-making.

8. Nature Business ethics are inherently normative and deal with questions of right and wrong, good and bad. They provide guidelines for ethical decision-making and behavior in business contexts, emphasizing moral principles and values. Corporate governance is more procedural and regulatory in nature. It involves the establishment of mechanisms and frameworks to ensure accountability, transparency, and effective management of corporate affairs, often guided by legal requirements and best practices. Decision-Making Context Business ethics influence decision-making at all levels of the organization, from individual choices made by employees to strategic decisions made by top management. Ethical considerations are integrated into business processes, policies, and practices. Corporate governance primarily shapes decision-making processes at the highest levels of the organization, such as the board of directors and executive management. It involves establishing frameworks for effective oversight, risk management, and strategic direction.

9. Business Ethics Vs. Values Managerial Values : Managerial values focus on the individual beliefs and preferences of managers or leaders and how these values shape their leadership approach, management style, and decision-making processes. Managerial values may vary among individuals and influence organizational culture. Business Ethics : Business ethics focus on the ethical dimensions of decision-making and behavior within the organization as a whole. It addresses questions of right and wrong, moral dilemmas, and the application of ethical principles to business practices, regardless of individual managerial values.

10. Significance of Business Ethics Business ethics will  create a positive image  of the company. If both the employees and an employer follow business ethics with enthusiasm without getting indulged in unscrupulous activities, it will create a positive image in the society of the organization.  If business ethics are strictly followed, it will  safeguard consumer rights   as well. Not only will they get complete information about what they are consuming, but their grievances can be redressed ethically.   Reducing Legal and Financial Risks : Adhering to ethical standards helps mitigate legal and financial risks associated with unethical behavior. Compliance with laws, regulations, and industry standards reduces the likelihood of lawsuits, fines, and reputational damage, safeguarding the organization's assets and resources.

11. Attracting Investors and Partnerships : Investors and partners prefer to collaborate with organizations that demonstrate strong ethical principles and values. Ethical behavior signals stability, reliability, and integrity, making the organization an attractive investment or partnership opportunity . Strengthening Corporate Culture : Business ethics play a vital role in shaping corporate culture by defining shared values, norms, and expectations. A strong ethical culture guides employee behavior, decision-making, and interactions, promoting a sense of belonging, pride, and commitment to the organization's mission and goals . Attracting and Retaining Talent : Employees are attracted to organizations with strong ethical values and a positive corporate culture. Ethical organizations tend to prioritize employee well-being, provide a supportive work environment, and offer opportunities for professional growth. As a result, they can attract and retain top talent, leading to increased productivity and innovation . Improving Decision-Making and Problem-Solving : Business ethics provide a framework for making ethical decisions and resolving ethical dilemmas. Ethical principles guide employees and managers in evaluating the consequences of their actions, considering the interests of stakeholders, and making decisions that align with moral values. Ethical decision-making enhances organizational effectiveness and contributes to positive outcomes.

12. Examples of Business Ethics being followed and violated Starbucks' Ethical Sourcing : Starbucks has prioritized ethical sourcing of coffee beans by implementing programs such as Coffee and Farmer Equity (C.A.F.E.) Practices. These practices ensure that coffee is sourced from farms that meet environmental, social, and economic standards. Starbucks also supports fair trade and pays premium prices to coffee farmers, contributing to the sustainability of coffee-growing communities . Nike and Sweatshop Labor : Nike, a global leader in athletic footwear and apparel, faced intense scrutiny in the 1990s over allegations of sweatshop labor practices in its overseas manufacturing plants. Reports revealed poor working conditions, low wages, and child labor in factories contracted by Nike. This ethical dilemma forced the company to reassess its supply chain practices, implement stricter labor standards, and improve transparency in its manufacturing processes.

13. Theories of Business Ethics There are two types of Ethical Theories:

14. Consequential theory Consequentialist theories assess the morality of an action based on its outcomes or consequences. These theories prioritize achieving the best overall outcome or maximizing utility. Here are two prominent types of this theory: Utilitarianism: Utilitarianism, proposed by philosophers like Jeremy Bentham and John Stuart Mill, asserts that the morality of an action is determined by its ability to produce the greatest amount of happiness or pleasure for the greatest number of people. In a business context, this means that an action is considered ethical if it results in the greatest net benefit for the stakeholders involved. Example: Consider a pharmaceutical company deciding to reduce the price of a life-saving drug, making it more accessible to low-income patients. Despite reducing profits, the action increases overall happiness by improving access to essential healthcare. Utilitarianism would support this decision as it maximizes the overall good for a greater number of people .

15. Utilitarian theory example: Example : A manufacturing company is considering whether to invest in upgrading its production facilities to reduce pollution emissions. While the upgrade would incur significant costs, it would also result in lower environmental impact, improved air quality for nearby residents, and reduced health risks for employees. By applying utilitarian principles, the company decides to proceed with the upgrade because the benefits of reduced pollution outweigh the costs, leading to greater overall happiness and well-being for stakeholders.

16. 2. Egoism : Ethical egoism posits that individuals should act in their own self-interest to maximize personal happiness or well-being. It argues that individuals have a moral obligation to prioritize their own interests, as long as it does not harm others. In a business context, this theory may justify actions that prioritize the interests of the company or its shareholders. Example: An executive at Company Y is faced with a decision to lay off a significant portion of the workforce to cut costs and increase profits, despite knowing that it will negatively impact employees' livelihoods. Choosing an egoistic approach, the executive proceeds with the layoffs, prioritizing the financial interests of the company and its shareholders over the well-being of employees . Example: Consider a CEO of a multinational corporation who faces a decision to outsource production to a foreign country where labor costs are significantly lower. From an egoist perspective, the CEO may justify outsourcing by arguing that it will increase profitability and shareholder value, which ultimately benefits the company's employees, investors, and other stakeholders. While outsourcing may result in job losses in the CEO's home country, the egoist would prioritize the company's interests and the CEO's own financial well-being .

17. While both utilitarianism and egoism focus on the consequences of actions, they differ in their consideration of whose interests should be prioritized. Utilitarianism seeks to maximize overall happiness for the greatest number of people, while egoism prioritizes the self-interest of individuals or entities. In practice, businesses may encounter ethical dilemmas where they must weigh the interests of various stakeholders and determine the most morally justifiable course of action based on these consequentialist theories.

18. Non-Consequentialist Theories Non-Consequentialist Theories: Non-consequentialist theories, also known as deontological theories, emphasize moral principles, duties, or rules irrespective of their outcomes. These theories prioritize moral obligations and principles over consequences. Types are: Kantian Ethics: Kantian ethics, proposed by Immanuel Kant, suggests that the morality of an action is determined by its adherence to universal moral principles, rather than its consequences. It emphasizes rationality and the importance of following moral duties or rules that can be universally applied . Example : A company adopts a policy of honesty and transparency in all its dealings, adhering to the principle that lying or deceiving customers is inherently wrong, regardless of potential benefits or consequences. Kantian ethics would support this decision as it upholds the universal moral principle of honesty.

19. 2. Rights-based Ethics: Rights-based ethics emphasizes the importance of respecting and protecting individual rights and freedoms. It posits that certain rights, such as the right to life, liberty, and property, are inherent and should not be violated, regardless of the consequences . Example: A company upholds employees' rights to fair wages, safe working conditions, and freedom from discrimination, recognizing these as fundamental rights that must be respected and protected. Rights-based ethics would support this decision as it prioritizes the protection of individual rights .

20. 3. Virtue Ethics : Virtue ethics is an ethical theory that emphasizes the development of virtuous character traits as the foundation for ethical behavior. Unlike consequentialist theories that focus on the outcomes of actions or deontological theories that prioritize adherence to moral rules or duties, virtue ethics places central importance on the moral character of the individual and the cultivation of virtues. In virtue ethics, virtuous traits or characteristics are considered intrinsic goods that lead to ethical behavior. These virtues include qualities such as honesty, integrity, compassion, courage, fairness, and empathy. Practicing virtue ethics involves striving to embody and cultivate these virtues in one's actions and decisions. One of the key proponents of virtue ethics was the ancient Greek philosopher Aristotle, who emphasized the importance of developing virtuous character through habituation and moral education. For instance , imagine a sales representative of a company who encounters a situation where a customer mistakenly believes a product feature that would not benefit them as described. In line with virtue ethics, the sales representative decides to be transparent and informs the customer of the misunderstanding, even though it may result in losing the sale. By prioritizing honesty and integrity over immediate financial gain, the sales representative exemplifies virtuous behavior and contributes to fostering trust and credibility in the company's relationships with its customers.

21. C ode of ethics in business A code of ethics is a set of specific statements indicating actions considered ethical as well as unethical. Such statements are developed by realistic application of general ethical standards to business situation. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization's core values, and the standards to which the professional is held . For members of an organization, violating the code of ethics can result in sanctions including termination.

22. Components of a Code of Ethics : 1. Ethical Standards : A code of ethics establishes ethical standards that individuals and organizations are expected to adhere to. These standards reflect fundamental principles of integrity, honesty, fairness, respect, responsibility, and accountability . EXAMPLE Scenario : A marketing executive is asked to promote a product using misleading claims to increase sales. Application of Code of Ethics : The code would emphasize honesty and integrity in all marketing communications. It would prohibit the use of deceptive practices and require marketing materials to accurately represent the product's features and benefits . 2. Guidance for Conduct : It provides guidance on acceptable and unacceptable behavior in different business situations. This may include guidelines for interactions with customers, employees, suppliers, competitors, and other stakeholders .

23. 3. Confidentiality and Privacy : A code of ethics typically includes provisions regarding the protection of confidential information and the privacy rights of individuals. It outlines protocols for handling sensitive data and respecting privacy boundaries . 4. Continuous Improvement : A code of ethics may also include provisions for ongoing review, evaluation, and improvement of ethical practices within the organization. It acknowledges that ethical challenges may evolve over time and emphasizes the importance of adapting ethical standards accordingly . EXAMPLE Scenario : A company realizes that its environmental impact is higher than desired due to excessive waste generation. Application of Code of Ethics : The code promotes continuous improvement in environmental practices. In response to the issue, the company implements measures to reduce waste generation, such as implementing recycling programs, optimizing production processes to minimize waste, and investing in sustainable practices to mitigate environmental impact.

24. 5. Conflicts of Interest : It addresses conflicts of interest that may arise in business relationships and provides protocols for managing such conflicts in an ethical manner. This ensures that business decisions are not unduly influenced by personal interests or biases . EXAMPLE Scenario : A purchasing manager receives gifts from a supplier in exchange for favoring their company's products in procurement decisions . Application of Code of Ethics: The code of ethics would prohibit employees from accepting gifts or favors that could compromise their objectivity or loyalty to the organization. It would require disclosure of any potential conflicts of interest and abstention from decisions where personal interests conflict with organizational interests.

25. 6. Compliance and Legal Requirements : A code of ethics often includes provisions to ensure compliance with legal requirements and regulations governing business activities. It helps businesses navigate complex legal landscapes while also upholding ethical standards beyond mere legal compliance. EXAMPLE Scenario : A financial analyst is asked to manipulate financial data to meet quarterly targets, which may violate accounting regulations. Application of Code of Ethics : The code would mandate compliance with all applicable laws and regulations, including accounting standards. It would prohibit the manipulation of financial data and emphasize the importance of accurate reporting and transparency.

26. 7. Reporting Mechanisms : Many codes of ethics incorporate mechanisms for reporting ethical violations or concerns. This encourages employees and stakeholders to raise ethical issues without fear of retaliation and promotes a culture of accountability and transparency . EXAMPLE Scenario : An employee witnesses unethical behavior by a senior executive but fears retaliation for reporting it. Application of Code of Ethics : The code would establish a confidential reporting mechanism, such as an anonymous hotline or whistleblower policy. It would assure employees that reports of ethical violations will be investigated impartially, and measures will be taken to protect whistleblowers from retaliation.

27. ETHOS OF VEDANTA IN MANAGEMENT Ethos refers to the characteristic spirit, beliefs, and values of a community, culture, or group. It encompasses the guiding principles, moral code, and overall culture that shape behavior and decision-making within that context. In the context of management, ethos refers to the fundamental values, principles, and beliefs that guide the actions, decisions, and culture within an organization. It encompasses the organization's mission, vision, and core values, as well as the norms and behaviors expected of its members.

28. CONT. The term Vedanta is a Sanskrit compound word that is formed with a combination of two basic words: Veda and anta. The Sanskrit term ‘Veda’ is derived from ‘vid’ which means - to know or to see directly or to have the knowledge and ‘anta’ means ‘the end of’ or ‘the goal of’ or ‘culmination ’. So, the compound term Vedanta means ‘the quest for Self-knowledge’ or ‘the knowledge of Truth’ or ‘the knowledge of our divine nature . Vedanta primarily focuses on understanding the nature of reality, the self, and the ultimate truth. It explores concepts such as the existence of Brahman (the ultimate reality), the nature of Atman (the individual self), and the relationship between the two. In the context of management, Vedanta principles can be applied to cultivate a deeper understanding of leadership, organizational dynamics, and human behavior.

29. Now, when we talk about "Vedanta in management," we're referring to the application of the principles and insights derived from Vedanta philosophy in the context of organizational management. This involves integrating the ethos of Vedanta, which includes values such as self-awareness, interconnectedness, ethical conduct, and holistic perspective, into management practices to foster a culture of integrity, purpose, and well-being within the organization.

30. Features of Indian Ethos Each Soul is Potentially Divine : Indian ethos recognizes the inherent divinity within each individual. This belief underscores the idea that every person possesses the potential for spiritual growth and enlightenment . Emphasis on Values and Ethics : Indian culture places a strong emphasis on moral values and ethical conduct. Virtues such as honesty, compassion, humility, and integrity are highly valued and considered essential for leading a righteous life . Emphasis on Duties and Responsibilities : Indian ethos emphasizes fulfilling one's duties and responsibilities (dharma) in various roles and relationships, whether as a member of the family, community, or society. This focus on duty encourages individuals to prioritize their obligations over personal desires . Rarely Speaks of Rights and Privileges : Unlike Western philosophies that often emphasize individual rights and freedoms, Indian ethos tends to focus more on fulfilling one's duties and responsibilities rather than asserting one's rights and privileges.

31. Balance and Equilibrium : The Indian ethos emphasizes the importance of balance and equilibrium in all aspects of life. This concept includes the idea of maintaining balance between worldly responsibilities and spiritual pursuits, balancing material desires with spiritual aspirations, and seeking harmony between opposing forces (such as light and dark, good and evil ). Respect for Elders and Teachers : Indian culture places a high value on respect for elders and teachers. The guru- shishya tradition, where knowledge is imparted from teacher to student, reflects the reverence for wisdom and learning . Hospitality and Generosity : Indian culture places a high value on hospitality and generosity towards guests and those in need. Offering food, shelter, and assistance to others is considered virtuous and is deeply ingrained in social customs.

32. Respect for Nature: Indian ethos reveres nature and the environment, viewing it as sacred and worthy of preservation. Traditional practices such as worshipping rivers, trees, and animals reflect the reverence and respect for the natural world. Seva (Selfless Service) : Service to others, known as seva , is considered a noble act in Indian ethos. Whether through charitable activities, volunteering, or acts of kindness, seva is seen as a way to express compassion, humility, and selflessness.

33. ETHOS OF VEDANTA IN MANAGEMENT Dharma (Duty/Righteousness) : Dharma is the moral and ethical duty one must fulfill in their role or position. In management, it means acting in accordance with the greater good of the organization, stakeholders, and society as a whole. For example, a CEO making decisions that prioritize long-term sustainability over short-term profits is following the principle of Dharma . Ahimsa (Non-violence) : Ahimsa refers to non-violence, not just physical but also in speech and thought. In management, it means resolving conflicts and issues without resorting to aggression or harm. This can involve fostering a workplace culture of respect and empathy where constructive criticism is encouraged rather than hostility . Satya (Truth) : Satya emphasizes truthfulness and honesty. In management, it means being transparent in communication, whether it's with employees, stakeholders, or customers. For instance, communicating accurate information about company’s financial health to stakeholders.

34. Aparigraha (Non-possessiveness) : Aparigraha encourages non-attachment to material possessions and desires. In management, it involves avoiding greed and excessive accumulation of wealth or resources. Leaders practicing Aparigraha may focus on using resources efficiently and sharing success with employees and communities rather than hoarding wealth for personal gain . Atman(Inner-self) : Atman refers to the inner self or soul. In management, it emphasizes self-awareness, self-development, and understanding the needs and aspirations of oneself and others. Managers who recognize the atman within themselves and their employees foster a supportive work culture that promotes personal and professional growth . Sattva (Purity) : Sattva signifies purity, harmony, and balance. In management, it involves cultivating a work environment characterized by clarity, positivity, and equanimity. Managers promoting sattva inspire creativity and foster collaboration.

35. Santosh : Santosh means contentment or satisfaction. In management, it involves recognizing and appreciating the accomplishments and contributions of employees, fostering a culture of gratitude and fulfillment . Managers promoting santosh inspire loyalty, motivation, and long-term commitment among their team members . Samaveshita (Inclusivity) : Samaveshita refers to inclusiveness and integration. In management, it emphasizes respecting diversity, embracing different perspectives, and fostering a sense of belonging among employees. Managers promoting samaveshita create an inclusive work environment where everyone feels valued and empowered to contribute their unique talents and ideas.

36. Role of various agencies in ensuring Ethics in Corporations

37. Public Opinion and Media: Public opinion and media act as watchdogs, highlighting unethical practices in corporations through investigative journalism, exposing corruption, fraud, or lapses in corporate governance. The right to freedom of speech and expression, guaranteed by Article 19(1)(a) of the Indian Constitution, empowers the media and public to critique corporate behavior. Additionally, the Right to Information Act, 2005, facilitates access to information, enabling public scrutiny of corporate activities . For example, in 2016, Nestle India faced a massive backlash and a significant drop in sales following allegations of lead contamination in its popular noodle brand, Maggi. Subsequently, Nestle undertook extensive corrective measures to restore public trust.

38. Auditors: An auditor, as per Indian law, refers to a chartered accountant or a firm of chartered accountants appointed by a company to conduct an independent examination of its financial statements, books of accounts, and other relevant records. The auditor's objective is to express an opinion on whether the financial statements present a true and fair view of the company's financial position and performance in accordance with applicable accounting standards and statutory requirements. Auditors are required to adhere to auditing standards, ethical guidelines, and reporting requirements prescribed by the Institute of Chartered Accountants of India (ICAI) and regulatory authorities such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). They play a crucial role in enhancing transparency, reliability, and credibility in financial reporting, thereby facilitating informed decision-making by stakeholders and ensuring compliance with corporate governance norms and regulatory frameworks. Example: The Satyam scandal exposed lapses in auditing practices when the company's auditor, Price Waterhouse, failed to detect fraudulent activities despite conducting audits. Subsequently, Price Waterhouse faced regulatory action, and the case prompted reforms in auditing standards and oversight mechanisms.

39. Director: directors are responsible for overseeing the management of a company and ensuring that it operates ethically and in best interest of stakeholders. Role of independent directors is crucial in bringing transparency in operations. Section 149(10) mandates that at least one-third of the total number of directors (excluding nominee directors and alternate directors) of listed companies should be independent directors. This provision also applies to certain prescribed classes of public companies . Institutional Investors: Institutional investors, such as mutual funds, pension funds, and insurance companies, play a crucial role in promoting ethical behavior in corporations. Institutional investors have significant financial stakes in companies, giving them the leverage to demand transparency, accountability, and responsible corporate behavior. They often advocate for improved governance practices, environmental sustainability, social responsibility, and ethical conduct. Through voting rights, shareholder resolutions, and dialogue with company management, institutional investors exert pressure on corporations to align their practices with ethical standards to protect long-term shareholder value.

40. SEBI (Securities and Exchange Board of India ) : SEBI, formulated on 12 th April 1988, regulates the securities market in India and plays a vital role in ensuring ethics in corporations, particularly those listed on stock exchanges. It formulates policies, regulations, and codes of conduct for listed companies to promote transparency, fairness, and investor protection. SEBI mandates disclosure requirements, corporate governance norms, and codes of conduct for listed companies to prevent market abuse, insider trading, and fraudulent practices. SEBI has power to inspect books of accounts and documents of companies as required . Judiciary : The judiciary interprets laws, resolves disputes, and delivers judgments to uphold ethical standards, enforce legal accountability, and provide remedies for aggrieved parties. Courts adjudicate cases of corporate misconduct, shareholder disputes, and breaches of fiduciary duties. For instance, courts may order compensation for victims of corporate fraud.

41. Government agencies: In India, we have : Ministry of Corporate affairs(MCA) which is responsible for administering the Companies Act, which governs the formation, functioning, and dissolution of companies in India . Central Bureau of Investigation ( CBI) investigates economic offenses, including corporate fraud and corruption, and takes legal action against offenders . Institute of Chartered Accountants of India (ICAI ) : ICAI is the regulatory body for chartered accountants in India . Reserve Bank of India (RBI ) : RBI oversees banks and financial institutions to ensure compliance with regulations and ethical standards. Telecom Regulatory Authority of India (TRAI ) : TRAI also ensures ethical practices among telecom companies. Insurance Regulatory and Development Authority (IRDA ) : IRDA regulates the insurance industry in India, overseeing insurance companies and intermediaries.