intoduction to business ethics notes for bba bcom

1. Module 1
Introduction to Business Ethics

2. Ethics in Managing
 Ethics is derived from the greek word ethikos meaning custom or character.
 Ethics is defined as the discipline dealing with what is good and
bad and with moral duty and obligation.
 Personal ethics are referred to as the rules by which an individual
lives his or her personal life. E.g. honesty, fairness, preventing
harm to others etc.
 Accounting Ethics pertains to the code that guides the professional
conduct of accountants.
 Business Ethics is concerned with truth and justice and other
aspects like expectations of the society, fair competition,
advertising, Public Relations, social responsibility etc. in a
corporate environment.

3. What is ethics?
 Ethics is the branch of philosophy that focuses on
morality and the way in which moral principles are
applied to everyday life. Ethics has to do with
fundamental questions such as “What is fair?” “What is
just?” “What is the right thing to do in this situation?”
Ethics involves an active process of applying values,
which may range from religious principles to customs
and traditions.

4. What is Ethics?
Ethics:
• is a branch of philosophy.
• is a normative science because it is
concerned with the norms of human
conduct.
• as a science, it must follow the same
rigours of logical reasoning as other
sciences.
• as a science, involves systemizing,
defending and recommending concepts of
right and wrong behaviour.

5. What is business ethics?
 Business ethics focuses on what constitutes right or
wrong behavior in the world of business. Corporate
business executives have a responsibility to their
shareholders and employees to make decisions that will
help their business make a profit. But in doing so,
businesspeople also have a responsibility to the public
and themselves to maintain ethical principles.

6. Business Ethics
 Although ethics provides moral guidelines,
individuals must apply these guidelines in
making decisions. Ethics that applies to
business (business ethics) is not a
separate theory of ethics; rather, it is an
application of ethics to business
situations. Although all people have
ethical responsibilities, higher ethical
standards are imposed upon professionals
who serve as social models, such as
physicians, attorneys, and business
people.

7. What is Business Ethics?
Business ethics is the application of general ethical ideas to
business behaviour.
It is based on the principle of integrity and fairness and
concentrates on the benefits to the stakeholders, both internal and
external. Stakeholder includes those individuals and groups without
which the organization does not have an existence. It includes
shareholders, creditors, employees, customers, dealers, vendors,
government and the society.

8. What is not Business Ethics?
1. Ethics is different from religion.
2. Ethics is not synonymous to law.
3. Ethical standards are different from cultural traits.
4. Ethics is different from feelings.
5. Ethics is not a science in the strictest sense of the term.
6. Ethics is not just a collection of values.

9. The Relationship Between
Law and Ethics
 The law is an expression of the ethical
beliefs of our society.
 Law and ethics are not the same thing.
The question, “Is an act legal?” is
different from the question, “Is an act
ethical?” The law cannot codify all
ethical requirements. Therefore, an
action might be unethical, yet not
necessarily illegal. For example, it
might be unethical to lie to your
family, but it is not necessary illegal.

10. The Relationship Between
Law and Ethics
 Similarly, just because an act is illegal does not necessarily mean it is
immoral. Rosa Parks was acting illegally when she refused to give up
her seat on the bus to a white male, but that does not necessarily
mean she was acting unethically. Should an individual obey the law
even if it would be unethical to do so? Under the theory of civil
disobedience espoused by Martin Luther King, Mahatma Ghandi and
others, an immoral law deserves to be disobeyed. Can you think of
any examples of acts that would be illegal, yet arguably ethical?
Storepicking food for a hungry starving child , Driving faster than the
posted speed limit, Ethical but illegal would be paying ransom to save
a life. We do this because of the big picture, to prevent the future
kidnappings that might happen

11. Ethical Decisions in the
Workplace
 Harassment
 Physical
 Emotional
 Sexual
 Misrepresenting/ Fraud
 Theft
 Customer Relations
 Whistle Blowing

12. Principles of Personal Ethics
 Concern and respect for the autonomy of others;
 Honesty and willingness to comply with the law;
 Fairness and ability not to take undue advantage of
others;
 Benevolence and preventing harm to any creature.

13. Motivation for being ethical
 Most people want to maintain a clear conscience and would like to
act ethically under normal circumstances.
 It is natural for people to ensure that their actions do not cause any
injury, whether physical or mental to others.
 People are obliged to obey the laws of land/countries’ constitutional
laws.
 Social and material well-being depends on one’s ethical behaviour in
society.

14. Making an Ethical Decision
How do you deal with them?
Address this issue first
Determine who is effected
What is the ethical concern
of this issue
What do others think?

15. Ethical Decisions
Companies need to be trustworthy and honest
 Effects Stakeholders, customers, employees,
and community
 Ethics and Business go together
Create the environment where people feel
safe enough to speak up
Get Facts
 Which solution will be for the greater good of
the company and create the least harm
 Which solution respects the rights of everyone

16. Ethical Dilemmas
 Conflict of interest
 Situation in which a business decision may be
influenced for personal gain.
 Honesty and integrity
 Telling the truth and adhering to deeply felt
ethical principles in business decisions.
 Whistle blowing
 Employee’s disclosure of illegal, immoral, or
unethical practices in the organization.
 Loyalty Vs truth
 Businesspeople expect employees to be loyal and
truthful, but ethical conflicts may arise.

17. Why should Businesses act Ethically?
The reasons for an organization to be ethical include:
• To protect its own interest,
• To protect the interests of the business community as a whole so
that the public will have trust in it,
• To keep its commitment to society to act ethically, and
• To meet stakeholder expectations.

18. Why should Businesses act Ethically? (contd.)
The reasons for an organization to be ethical include:
• To prevent harm to the general public,
• To build trust with key stakeholder groups,
• To protect themselves from abuse from unethical employees and
competitors,
• To protect their own reputations,
• To protect their own employees, and
• To create an environment in which workers can act in ways
consistent with their values.

19. Ethical Decision-making
Norman Vincent Peale’s and Kenneth Blanchard’s suggestions to
conduct ethical business.
• Is your decision fair?
• Is it a win-win situation for all?
• Is your decision legal? If it is not legal, it is not ethical.

20. Institutionalising Ethics
through MDP
 Business ethics are increasingly addressed in seminars and at
conferences. Managers, especially top managers do have a
responsibility to create an organizational environment that fosters
ethical decision making by institutionalizing ethics. This means
applying and integrating ethical concepts with daily actions. This
can be accomplished in three ways:
 by establishing an appropriate company policy or a code of ethics,
 by using a formally appointed ethics committee, and
 by teaching ethics in management development programmes;

21. Simply stating a code of ethics is not enough, and the appointment of an
ethics committee, consisting of internal and external directors, is
considered essential for institutionalizing ethical behaviour. The functions
of such committees may include:
 holding regular meetings to discuss ethical issues.
 dealing with grey areas.
 communicating the code to all members of the organization
 checking for possible violations of the code
 enforcing the code
 rewarding compliance and punishing violations,
 reviewing and updating the code, and
 reporting activities of the committee to the board of directors.

22. Ethical Programs
 Ethical programs globally are designed keeping four things in mind:
 Considering oneself and the organisation as part of the larger social
framework.
 Considering the development and welfare of others (internal and
external customers) to the extent possible.
 Respecting the traditions / rituals (organisational diversity) of others.
 Evaluating a situation objectively and the consequences thereof.
 The benefits of ethics programs include decreased misconduct and
additional defence to the organisation against complaints from the
employees, when the latter perceives that the organisation is being
unjust to him / her. However in order for the ethics programs to be
successful managerial support and role modelling is very important. In
fact there is a whole body of research that proves that organisations
are increasingly documenting their ethics programs to align
behaviours within the organisation and also going ahead to develop
systems for implementation of the same.

23. How Corporations Observe Ethics in Their
Organizations?
• Publish in-house codes of ethics to be strictly followed by all their
associates.
• Employ people with a reputation for high standards of ethical
behaviour at the top levels.
• Incorporate consideration of ethics into performance reviews.
• Give rewards for ethical behaviour.

24. How Corporations Observe Ethics in Their
Organizations? (contd.)
• SEBI, CII and such other organizations representing corporations
issue codes of best practices and enjoin their members to
observe them.
• IIMs and highly rated B-schools give extensive and intensive
instruction in business ethics, corporate social responsibility
and corporate governance as part of their curriculum.
• Conduct an Ethics Audit.

25. Ethical Theories in Business
Ethics is a normative study, i.e., an investigation that attempts to
reach normative conclusions.
It aims to arrive at conclusions about what things are good or bad, or
what actions are right or wrong. E.g ‘companies should follow
corporate governance standards’ or ‘managers ought to act in a
manner to avoid conflict of interest.’
Ethical Normative theories include in business include:
• Consequentialist normative theory: Normative themes—egoism,
utilitarianism, Kantian ethics.
• Non-consequentialist normative theory: Non-consequentialist
normative themes—duties, moral rights, and prima facie principles

26. Examples of Indian companies
incorporating Business Ethics
 Wipro and Tata Steel have been recognised by the
Ethisphere Institute, a global leader in defining and
advancing the standards of ethical business practices, as
one of the world’s most ethical companies.
 Wipro chairman Rishad Premji said, “At Wipro, ethical
and responsible conduct has been an integral part of the
way we think and act, since inception. In the world we
live in today, a corporation that does not commit itself
in letter and spirit to a more sustainable, just and
equitable world, will be failing in its primary duty. At
Wipro, our attempt has always been to go beyond what
is required by compliance and to do the right things
both at our workplace and in our communities outside.”

27. Classification of Normative Themes in Ethics
(Deontological – Duty-based)
Consequentialist
Kantian ethics
Non-consequentialist
Normative Themes
Egoism Utilitarianism

28. Consequentialist
 In ethics, normative theories propose some principle or
principles for distinguishing right actions from wrong
actions. These theories can, for convenience, be
divided into two kinds: consequentialist and
nonconsequentialist.
 According to consequentialist theories, the moral
rightness of an action is determined solely by its results.
If its consequences are good, then the act is right; if
they are bad, the act is wrong. Consequentialists (moral
theorists who adopt this approach) determine what is
right by weighing the ratio of good to bad that an action
will produce. The right act is the one that produces (or
will probably produce) at least as great a ratio of good
to evil as any other course of action open to the agent.
 Two Types

29. Nonconsequentialist
 By contrast, nonconsequentialist (or deontological)
theories contend that right and wrong are determined
by more than the likely consequences of an action.
Nonconsequentialists do not necessarily deny that
consequences are morally significant, but they believe
that other factors are also relevant to the moral
assessment of an action. For example, a
nonconsequentialist would hold that for Kevin to break
his promise to Cindy is wrong not simply because it has
bad results (Cindy’s hurt feelings, Kevin’s damaged
reputation, and so on) but because of the inherent
character of the act itself. Even if more good than bad
were to come from Kevin’s breaking the promise, a
nonconsequentialist might still view it as wrong.
 KANtian theory

30. Normative Themes
Egoism
• It asserts that the only moral obligation we have is to ourselves, though it does
not openly suggest that we should not render any help to others.
• contends that an act is morally right if and only if it best promotes an agent’s
long-term interests
• makes use of self-interest as the measuring rod for actions performed
• is equated with an individual’s personal interest but it is equally identified with
the interest of an organization or society
• intends to provide positive consequences to the party’s interest without
considering the consequence to the other parties
• It does not mean that an egoist may work against the interest of society. They
may be able to safeguard their interest without hurting the interest of others.
• They assert that all actions of men are self motivated by self interest. Even the
act of whistle-blowing is an attempt to take revenge or to become a celebrity.
• SPAIN HOLIDAY------ versus a teacher (Not selfish train set /car set)

31. Normative Themes: Egoism (Contd.)
Philosophers distinguish between two kinds of egoism: personal
and impersonal.
• Personal egoism: One should pursue his/her long-term interest
and not dictate what others should do.
• Impersonal egoism: Everyone should follow their best long-
term interest.
Criticism:
• It is not a moral theory at all.
• It assumes that all actions of men are self motivated and It
undermines the human tendency to rise above self interest in
the times of calamities like flood, earthquake etc.
• It ignores blatant wrongdoings like bribery, pollution, gender
discrimination etc.

32. Psychological Egoism
 Psychological egoism, people are, as a matter of fact,
so constructed that they must behave selfishly.
 Psychological egoism asserts that all actions are
selfishly motivated and that truly unselfish actions are
therefore impossible. Even such apparently self
sacrificial acts as giving up one’s own life to save the
lives of one’s children or blowing the whistle on one’s
organization’s misdeeds at great personal expense are,
according to psychological egoism, done to satisfy the
person’s own self interested desires.

33. Utilitarianism
The proponents were:
Jeremy Benthan (1748–1832)
John Stuart Mill (1806–1873)
•Utilitarian principle: An action is ethically right only if the sum
total of utilities produced by that act is greater than the sum total
of utilities produced by any other act that could have been
performed in its place.
•Ethics is the art of directing the actions of men so as to bring
about the greatest possible happiness to all those who are
concerned with these actions.
•It provides an objective means of resolving conflicts of self-interest
with the action for common good.
•The theory provides a flexible, result oriented approach to ethical
or moral decision making.
•JIO/LSD

34. Utilitarianism Criticism
 The major problem is the measurement of utility. Since utility
differs from person to person, place to place, and time to time.
 The second problem concerns the intractability to measurement
that arise while dealing with certain benefits and costs. E.g. how
can one measure the value of life or health?
 Lack of predictability of benefits and costs.
 Lack of clarity in defining what constitutes benefits and what
constitutes cost.

35. Kantian Ethics
Proponent: Immanuel Kant (1724–1804)
• This theory introduces an important humanistic dimension to business
decisions, which is to behave in the same way that one would wish to be
treated under the same circumstances and to always treat other people
with dignity and respect.
• Stressed that action must be undertaken for duty's sake and not for
some other reason. Ethics is based on reason alone and not on human
nature. Only when we act from duty does our action have moral worth.
• Opined that the imperatives of morality are not hypothetical but
categorical. The core idea of this categorical imperative is that an
action is right if and only if it will become a universal law of conduct. It
means we must never perform an action unless we can consistently will
that it can be followed by everyone.
• Lying is an example, no matter how much good it may result from the
act, lying is always wrong.
• The theory proposes to act only in ways that one would wish others to
act when faced with the same circumstances.
• It also proposes that always treat other people with dignity and respect.

37. Normative Theories of Business Ethics: Classification
Normative Theories
Stockholder Theory Stakeholder Theory Social Contract Theory

38. Stockholder Theory
• It expresses business relationship between stock owners and their
managers running the day-to-day business of the company. As per the theory,
managers should pursue profit only by all legal, non-deceptive means.
• Also known as shareholder theory, according to which businesses are
merely arrangements in which one group of people i.e. the shareholders
advance capital to another group i.e. the managers to realize certain ends
which are beneficial to them.
• The managers are empowered to manage the capital advanced by the
shareholders and are duty bound by their agency relationship to carry on the
business exclusively for the purpose outlined by their principals.
• The theory has been summarized by Milton Friedman who asserted that
there is one and only one social responsibility of business- to use its
resources and engage in the activities designed to increase its profit so long
it stays within the rules of the rules of the game, i.e. to stay engaged in
open and free competition without deception or fraud.
• imagine an automobile company that has recently gone
public. Naturally, the shareholders want to see their stock values rise, and
the company is eager to please those shareholders because they have
invested money into the firm

39. Criticism of Stockholder theory
 It has been described as part of corporate law which has lost
its importance in modern times. It is regarded as impractical
and foolish by many ethicists which cannot be relied upon to
secure the common good.
 In today’s world government plays an important role in
collecting taxes from the corporates which is used
henceforth for the public good. Therefore there is no true
free market in the economy prevailing these days.
 It is based on false analogy. If government of democratic
societies have a moral justification to spend the taxpayers
money for promoting the common welfare of people without
taking their consent, it might mean, that businesses are also
justified in carrying out social welfare activities without the
consent of the shareholders. This is based on a wrong and
far-fetched assumption.

40. Stakeholder Theory
• This theory argues that a corporate’s success in the marketplace
can best be assured by catering to the interests of all its
stakeholders (shareholders, customers, employees, suppliers,
management and the local community). This objective is achieved
when corporations adopt policies that ensure an optimal balance
among all stakeholders.
• It stresses that regardless of the fact whether the management
achieves improved financial performance or not, managers should
promote the interests of all stakeholders.
• It considers a firm to be an instrument for coordinating
stakeholders interests and considers managers as having a fiduciary
responsibility not only to the shareholders but all of them.

41. Stakeholder Theory
• Principles that guide corporations are:
• First principle is Principle of corporate legacy-
according to this the corporation should be
managed for the benefit of its stakeholders: its
customers, suppliers, owners, employees and the
local community. The rights of these groups must
be ensured and further the groups must
participate in decisions that substantially affect
their welfare.
• Second Principle is the stakeholder fiduciary
principle that asserts that management bears a
fiduciary relationship to the stockholders and to
the corporation as an abstract entity. It must act
in the interests of the corporation to ensure the
survival of the firm, safeguarding the long-term
stakes of each group.

42. Stakeholder Theory - Criticisms
 It is not applicable in practice by corporations.
 There is comparatively less empirical evidence to suggest a
linkage between stakeholders concept and corporate
performance.
 The major problem with this theory stems from the
difficulty of defining the concept, like who really
constitutes the genuine stakeholders. There is an expansive
list of stakeholders.
 It is also argued further that intent of the theory is better
achieved by relying on the hand of management to deliver
social benefit where it is required rather than suggesting a
wide range of stakeholders.
 Stakeholder model also stands accused of opening up a path
to corruption and chaos; since it offers opportunity to divert
wealth away from shareholders.
 It can also be criticized on the ground that it extends the
rights of the stakeholders far too much.

43. Social Contract Theory
• This is based on the principles of “social contract”, wherein it is assumed
that there is an implicit agreement between the society and any created entity
such as a business unit, in which the business recognizes the existence of a
condition that it will serve the interest of the society in certain specified ways.
• This theory is drawn from the model of political-social theories
propounded by Thomas Hobbes, John Locke, and Jean Jacques Rousseau.
• The theory is based on an assumed contract between businesses and
members of the society who grant them the right to exist in return for certain
specified benefits that would accrue to them. These benefits are a result of
the functioning of these businesses, both for their own sake and for that of the
larger society.
• When members of the society give the firms legal recognition, the right to
exist, engage them in any economic activity and earn profit by using the
society’s resources such as land, raw materials, and skilled labour, it
obviously implies that the firms owe an obligation to the society. This would
imply that business organizations are expected to create wealth by producing
goods and services, generate incomes by providing employment
opportunities, and enhance social welfare.

44. Social Contract Theory
 As consumers members of the society benefit from the
establishment of the business firms in three ways:
 Business firms provide increased economic
efficiency, by enhancing the advantages of
specialization, improving decision making
resources and increasing the capacity to acquire
and utilize expensive technology and resources;
 They offer stable levels of production and channels
of distribution;
 They provide increased liability resources, which
could be used to compensate consumers adversely
affected by their products and services.

45. Social Contract Theory
 Business Firms are likely to produce the social
welfare element of social contract and enjoin the
business firm should act in such a manner so as to
 Benefit consumers to enable them reach
maximisation of their wants;
 Benefit employees to enable them secure high
incomes and other benefits that accrue by
means of employment;
 Ensure that pollution is avoided, natural
resources are not fast depleted and workers’
interest are protected.

46. Social Contract Theory –
Criticisms
 Critics argue that social contract is no contract at all.
Legally speaking a contract is an agreement between
two or more persons which is legally enforceable
provided certain conditions are observed.
 A contract implied meeting of minds, which does not
exist in so called social contract. It is neither an explicit
nor an implicit contract.

47. Ethics and Religion
The world’s great religions—Christianity, Hinduism and Islam—have
all left their indelible marks on morality and the conduct of people
in every aspect of human endeavor, including business. Every
religion has provided its followers its own set of catechisms, moral
instructions, beliefs, values and virtues, traditions and
commitments.

48. Teachings of the Church
The Church always supports and promotes the welfare of the poor. People often think
how we can relate business and ethical teachings of the Church. But now the trend
has changed and organizations and institutions relate business to religion and ethics.
This transition is due to the increased importance of ethics in business. The Church’s
concerns and ethical teachings are found in several papal encyclicals, i.e., letters
the pope writes to his followers.
Rerum Novarum
Since the late 19th century, there has developed a strong tradition of reflective
thought on economic issues within the Catholic Church. This concern on economic
issues effectively started in May 1891, with the publication of Rerum Novarum, an
encyclical by Pope Leo XIII. The central theme of the letter was the relationship
among the State, employers and workers.
Features of encyclical
• Directs the State and organizations to perform their duties to the working class
to avoid corruption or unethical behaviour in the society.
• When man is deprived of dignity and equality they will indulge in unethical
practices. Mutual support in the society and organization will help individuals to
perform their best for productivity and profit

49. Indian Ethical Traditions
• The Hindu scriptures such as the Gita and the Upanishads speak of the
performance of right duty, at the right time in the right manner. The rich Indian
tradition has always emphasized the dignity of human life and the right to live in a
respectful manner.
• The Bhagawad Gita cites numerous instances of how moral values and ethics can
be incorporated into one's work life. Many of its verses are directly significant for the
modern manager who may be confused about his direction and struggling to find an
answer to ethical dilemmas. The Lord reiterates that work or karma is the driving
force of life, and that this work has to be ethical.
• Chapter II, Verse 47“You have a right to perform your prescribed duty, but you
are not entitled to the fruits of action. Never consider yourself the cause of the
results of your activities and never be attached to not doing your duty.”
This stanza implies that the performer of an action has only to perform the
prescribed duty and not think about the result of the action, because the result is
beyond his control. This teaching of Gita draws one's attention to Nishkama Karma.

50. Message of the Gita: Chapter II, Verse 56
“One who is not disturbed in mind amidst the three-fold misery or
elated when there is happiness and who is free from attachment,
fears and anger, is called a sage of steady mind.”
A steady mind gives the right attitude and right direction.
Detachment is that quality which enables the individual not to
accept anything for his personal gratification. Personal desires and
conflicting interests end up in unethical practices.
Gita’s Message in an Organization
When applied to an organization where one is only worried of the
result, he is likely to fall into improper activities. On the other hand,
if he is ready to do his duty to the utmost of his ability and set aside
the result, he will be an ethical person in the organization.

51. Business and Islam
All principles covering business emanate from the Holy Quran, as they are
explained and amplified in the Hadith (collection of the Prophet’s sayings).
The Prophet Mohammed ordained that businesses should promote ethical
and moral behaviour and should follow honesty, truthfulness and fulfilment
of trusts and commitments, while eliminating fraud, cheating, cut-throat
competition, lending money at interest to people in need and false
advertising.
Shariah and Interest on Capital
Shariah, the canonical law of the followers of Islam, forbids payment and
receipt of interest on capital and money lent and condemns usurious
practices.
Shariah requires that investors profit only from transactions based on the
exchange of assets, not money alone, and therefore, interest is banned.

52. Major principles of Islam and
Ethics
 No fraud and deceit
 No excessive oaths in sale
 Need for mutual consent
 Be strict in regard to weights and measures
 Monopoly is a sin
 Free enterprise- price should not be fixed unless there is a crisis
 Hoarding is forbidden
 Forbidden transactions like intoxicants
 Islamic Bonds or Sukuk
Bankers sell Islamic bonds or sukuk, by using property and other
assets to generate income equivalent to interest they would pay
on conventional debt. The money cannot be invested on stocks
of companies dealing in alcohol, conventional financial services
(banking and insurance), entertainment (cinemas and hotels),
tobacco, pork meat, defence and weapons while computer
software, drugs and pharmaceuticals, and automobile ancillaries
are all Shariah-compliant.