Module MC010

Business Ethics


Module author

Roberto Garcia-Castro

IESE Business School
University of Navarra

Learning objectives

After you have studied this module, you will be able to:

  • Understand the main ethical challenges companies face today;
  • Distinguish between the different schools of thought on ethics;
  • Uncover the reasons behind some recent corporate fraud scandals and unprincipled behavior in businesses;
  • Formulate business problems integrating the economic as well as the ethical point of view;
  • Formulate a business strategy consistent with the stakeholder view of the corporation;
  • Address some main cross-cultural ethical challenges appearing in the global economy.

Chapter 1: Ethics Foundations
1.1 The imperative of ethics
1.2 Schools of thought on ethics
1.2.1 Deontology
1.2.2 Consequentialism
1.2.3 Virtue ethics
1.2.4 Evaluation of the three schools
1.3 Case: The trolley problem
1.4 Ehical dilemmas and practical judgment
1.4.1 Standards of conduct
1.4.2 Purposes and goals
1.4.3 Character and relationships
1.5 A triple test

Chapter 2: Frameworks for analyzing ethical behavior in business
2.1 The case for business ethics
2.2 Economic incentives and self-interest
2.3 Stages of moral development
2.4 Organizational constraints shaping decisions in business
2.4.1 Power and hierarchy
2.4.2 Lack of communication
2.4.3 External pressure
2.4.4 Rationalization
2.4.5 Moral distance
2.4.6 Tunnel vision
2.5 Reducing the risk of unethical corporate behavior
2.5.1 The power of negative thinking
2.6 Case: Shell Oil

Chapter 3: Ethics, stakeholders and management
3.1 Shareholders and stakeholders
3.1.1 Shareholder-centric model
3.1.2 Stakeholder-oriented model
3.2 Stakeholder ethical analysis
3.2.1 Value proposition of the company
3.2.2 Principles of stakeholder cooperation
3.2.3 Consideration of societal standards of conduct
3.3 Stakeholder management and value creation
3.4 Case: Walmart

Chapter 4: Globalization and business ethics
4.1 Ethical implications of a global business landscape
4.2 When ethics travel: Moral relativism and universal values
4.2.1 Moral relativism
4.2.2 Universalism
4.3 Two contentious issues: Bribery and labor standards
4.3.1 Bribery
4.3.2 Overseas working conditions
4.4 International ethical guidelines
4.4.1 International benchmarks
4.4.2 Industry standards
4.4.3 Other guidelines for international business
4.5 Case: Nike supply chain

Workload units 2
Read Module Excerpt Business Ethics


Why Open School of Management believes that business ethics is important

A number of recent scandals and business collapses have inspired an exceptionally high level of skepticism concerning the ethical integrity of many businesses. This level of distrust creates a tension that makes it difficult for businesses to effectively engage their target audience and protect their brand. On an individual level, ethics concerns itself with the moral judgment of the individual; however, on a corporate level, ethics are more centered on the culture of the company as a whole. Although individuals or small groups and boards will make the decisions within a company, they will be heavily influenced by the culture of the company itself.

From a technical perspective, business ethics is a distinct form of professional or applied ethics that engages and examines ethical principles within the business structure. Business ethics are applied to every aspect of a business' conduct and can be measured through Individual and corporate action. Business ethics has both, normative and descriptive dimensions. As a career specialization and corporate practice, business ethics is primarily normative; however, academics generally attempt to gain a perspicacity of business ethics through descriptive methods.

Business ethics involves moral turpitude on an individual level, but it is also executed through an established ethical code within the culture of a company. When a business exudes corporate social responsibility and ethical behavior or a corporate scale, it creates the capacity to experience some exceptional benefits, including:

  • The ability to boost profits and sales by attracting customers to the company's products or services;
  • Reduce the turnover rate for employees as well as increase overall productivity;
  • Increase the desire of employees that wish to work for the company or firm, reducing recruitment costs. Additionally, this will increase the level of talent that the company is able to hire;
  • The ability to attract investors, keeping the cost per share higher, which can protect the business from a hostile takeover.

Conversely, unethical behavior, including the lack of corporate social responsibility has the potential to damage the reputation of the company, which will make it less appealing to shareholders and employees.


Why study this Business Ethics?

It is paramount that young managers understand that they set the tone for their company. According to Jim Clifton, chairman and CEO of Gallup, whether it is done consciously or unconsciously, employees measure the ethical capacity of their workplace based on the behavior of their management staff. Clifton goes on to say that whom a company places in a managerial role could possibly be the most impactful force in influencing the company's ethics.

Ethics, much in the manner of politics is local. How an employee views their manager will set their perception of the company as a whole.

Engagement in the workplace is all about the type of managers that a company hires. It all begins with a manager that takes the time to sit down with their employees to determine their strengths in order to ensure that the company is utilizing those strengths. It is also important for the manager to understand the employee's purpose and life mission, so that it can be aligned with the purpose and mission of the company.

It is the manner in which the manager deals with their employees that will set the tone. If the manager carries themselves in an upright manner, proving they can be trusted, it will set the tone and the standard for the employees to follow suit. It is immensely important to understand that this behavior on a local level has far reaching implications. The employee's behavior and commitment to the job will be a direct result of the manner in which they perceive their manager. If the manager lacks the proper ethics it will be reflected in the work of the employee. Even if the employee has exceptional character of their own, their morale will be impacted through poor ethical behavior by their boss. Additionally, this will eventually work its ways through the process cycle to the customer.

Functioning as an ethical business is vital for maintaining a high level of trust with investors, employees and customers. Because of the local impact of ethics, managers remain a central force in the process of cultivating a business culture that is built upon an ethical foundation. Although the board may make the decisions and policies, the managers will be the ones that ensure that these decisions and policies are implemented and carried out in a manner that is reflective of a company with a strong ethical base.

Trust is a huge factor in securing and retaining customers, who want to feel at ease when buying products and services from companies. When a customer can trust that they are purchasing their products and services from a company that is committed to sourcing their labor and materials in a responsible and ethical way, it goes a long way in building the level of trust that leads to customer loyalty.

The wide-spread consequences

When a business does not practice business ethics the consequences and ramifications are widespread. Unethical behavior has the potential to impact more than those directly involved with the company as mentioned to this point. Case in point: A business that does not take the necessary steps to properly dispose of its waste products will cause damage to entire communities and the environment as a whole.

Ethics is a broad subject and it covers the entire sphere of operation as far as a business is concerned; however, at the core it is built on simple moral turpitude that is permeated from the leaders within the company to the labor force. When the managers are working to build an ethical culture, it will be experienced throughout the company.

Top ethical challenges companies face today

According to ASAE Center for Association Leadership, an increasing number of businesses are discovering that ethical training must be an integral part of their business model. Over the last 15 years, the number of companies offering formal ethics training has drastically increased. One of the objectives of this module is to introduce those who enroll to some of the common challenges that business face when it comes to ethics. One of the primary challenges associated with ethics is employee behavior. It is vital to determine what type of employee behavior is considered ethical and what behavior is considered unethical. Something as simple as when an employee will be allowed to check their personal emails has the ability to impact morale and productivity.

Another common issue is the working conditions, which include environmental safety in the workplace and proper remuneration for services performed. The key is to identify these challenges so that they can be addressed.

One area that has become a real sore point in the world of business ethics is poor accounting practices. As businesses fight to provide favorable reports to their investors and shareholders, it has become more enticing to cook the books, so to speak. Everyone remembers what happened with Enron and Tyco. The devastating results of the unethical behavior of those companies were the result of a culture that went completely renegade, creating a house of cards that eventually collapsed.

Social networking creates an entirely new platform on which ethics must be practiced at a very high level. Because of the informal culture associated with social media it can be easy for employees to post things that would be considered inappropriate or even damaging to an individual or the company as a whole. There are companies, such as software developer, Cisco Systems Inc. that develop systems that allow companies to monitor their employees on social media to ensure that there is no unethical or socially irresponsible activity being perpetuated on social media platforms.

Distinguishing between the different schools of thought on ethics

There are three primary schools of thought concerning ethics, and it immensely important to be able to distinguish between the three.

Virtue ethics: Focuses on how to live your life. It requires a person to determine the type of person they wish to be, then determine the virtues that will bring them closer to achieving their personal goals. A person who practices virtue ethics will aspire to a specific set virtues, while avoiding specific vices. Their integrity will be immensely important to them. Additionally, they will place a significant amount of emphasis on balance.

Consequentialist Ethics: Places a great deal of emphasis on how a person's behavior is impacting the world around them. A person who practices consequentialism will entertain the thought of whether they are causing harm or good. The focus is centered on making the world for those in their periphery a better place to live.

Deontological Ethics: Asks whether it is right or not. This school of thought focuses on a set of principles and values that will guide a person's decisions. These principles will serve to guide the person's decisions when they are faced with conflicting duties and more. The function of reason is highly active when using this school of thought.

The cause behind fraud and scandal

Fraud is a deceptive practice that can manifest itself in multitudinous ways; however, it is generally the primary result of placing profit above all else. The truth is that the competitive nature of the business world is a prime breeding ground for unethical behavior. It is where CEOs and vice presidents of companies take the "need to know" approach. This module will take the time to identify the primary reasons for fraud and scandal in business. Additionally, it will also identify methods that will help guard against fraudulent activity.

The formulation of business strategies consistent with shareholder views

What some refer to as "stakeholder management" is the principle of developing business strategies that are in line with the views of the stakeholder. A key interest of any corporation is to ensure that the stakeholders are satisfied. It is important to understand that although stakeholders are concerned about profits, this is not their only concern. Stakeholders also want to know that the company is functioning in line with their values and cultural points of view. This is why it is imperative for the company to develop strategies that are not antithetical to the views of the stakeholders.

There are a number of variables that investors consider when investing in a company — with the most prevalent being profit — however, there are other considerations that are evaluated, such as environmental focus and the commitment to a greener approach to doing business. This must be considered when developing the general business strategy.

Cross-cultural ethical challenges in business

When a company has to conduct business across cultural lines, it must engage some unique challenges that are inherently a part of the merging of two or more cultures. The challenges begin with the differences in governmental laws. What may be legal and acceptable in one country may not be in another. This means that these actions may be viewed as unethical by one of the parties involved.

It is easy to define general unethical behavior such as bribery, illegal campaign contributions, concealing information, selling defective goods and more. However, some of the challenges that are created through a cultural divide may not be as clear cut, but the ramifications may be as devastating as those of a common challenge.

The rule that remains prevalent in dealing with cross cultural challenges is to create a clear understanding of what is expected — discussing any issues that may arise out of the ordinary.

With companies working feverishly to redefine themselves after numerous business scandals and collapses, the information in this module will help equip young managers with the skills and understanding necessary to set the ethical tone and standards in their business environment.


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