What Is Business Ethics?
Business ethics is the study and formulation of business policies based on a framework of values. This framework defines employee behavior in their interactions with each other and outsiders. It also defines the values and role of the business within a society. For example, a company may discourage direct reports from having romantic relationships with each other to prevent favoritism during quarterly reviews. It may also choose to pay a high minimum wage to its workers or institute environment-friendly practices at its facilities to minimize damage to its surroundings due to production processes.
The application of ethics to business situations has been around since ancient times. But it became an important field of study only in the 1970s. Modern corporations design their business ethics policies to achieve two ends: reconcile their role as public citizens and fulfill their business requirement of producing goods and profits. As such, business ethics are meant to ensure an orderly and fair workplace that is also productive and efficient.
Understanding Business Ethics
Previous discussions about the importance of ethics in business was situated in the context of philosophy. For example, Aristotle emphasized the importance of individual virtue – intellectual and moral – in business dealings in ancient Greece.
As a term used to describe corporate responsibilities, business ethics gained currency during the 1970s. The publication of Harvard economist John Kenneth Galbraith’s “An Affluent Society” in 1958 paved the way for a discussion about income inequality and wealth redistribution in postwar America. The upheavals of the 1960s, when the counterculture movements that brought awareness about social and environmental causes took place, further added to the urgency of rethinking the existing business order.
The first conference on business ethics took place in 1974 and papers relating to the topic from the conference were published under the title of Ethics, Free Enterprise, and Public Policy. Around the same time, management guru Peter Drucker came out with his famous publications defining management as a discipline. In his writings, he held that “profit and profit alone can supply the capital . . . both for more jobs and for better jobs.”
Subsequently, three anthologies relating to business ethics were published in 1979. More publications and conferences in the years that followed set the stage for redefining business ethics within the context of corporate America.
The case for business ethics has become stronger in recent times with the intertwining of profits and business reputations. Research has proved that employee turnover is lowest for workplaces where workers feel that they are doing meaningful work and contributing to a larger good, as opposed to simply earning money to satisfy their desires. Business ethics have also become important contributors to the financial bottom line of corporations. A 2020 study by consumer research firm Nielsen found that a majority of customers were more inclined to buy goods from companies that made a positive impact on the world. Business ethics increase consumer trust and lead to more profits for such companies.
As a result, organizations are increasingly playing up their role as stewards of society by incorporating an approach to business that emphasizes human values and places the well-being of the environment and workers at the center of their strategy.
Corporations and Business Ethics
Business ethics encompass multiple aspects of a firm’s business operations. It attempts to answer important questions relating to the firm.
Can firms sell taboo products, such as sex or body parts, to customers? Is offensive or false advertising that attracts attention and generates publicity justified in pursuit of profits? Should product safety and liability be incorporated into production processes? What are the environmental and social costs associated with a certain business strategy?
One of the central questions that business ethics attempts to answer is whether corporate firms are moral agents. Individuals are considered moral agents because their actions affect people and events around them. On the other hand, corporate firms are tasked with maximizing value for stakeholders i.e., their job is to make sure that the outfit generates profits to pay dividends.
Social scientists have argued that corporations also have moral agency and cause events to occur in their immediate surroundings and society. For example, they can influence the economic well-being of their workers through wages. They can also affect their immediate physical surroundings. A firm that disposes chemical waste into its immediate surroundings harms living conditions in its neighborhood.
In their effort to become responsible citizens, corporations are often guided by governments and laws. For example, federal and state minimum wage laws establish minimum salaries for workers based on the economic conditions. Advisories and mandates for environmental measures, such as zero waste and recycling, also function as guideposts for ethics policies. When these rules are not binding, businesses use them as a framework to craft their own policies to influence organizational behavior at the individual and corporate level.
Implementing Business Ethics
Business ethics policies in organizations often take two forms. The first one defines an internal code of ethics for the organization’s employees in their business dealings with each other and with vendors and stakeholders. For example, the code of ethics for India’s Tata Group explicitly forbids employees from giving or receiving bribes. Employees are required to pass training related to ethics to ensure ethics compliance.
The second type generally takes the form of a public-facing corporate social responsibility statement that defines the organization’s conduct with respect to the larger society. The advent of multinational corporations with operations that span multiple countries has meant that corporate social responsibility has implications across borders. An example is the case of pharmaceutical giant Merck.
In the 1970s, research scientists at Merck developed a drug to cure river blindness, a debilitating disease that blinded thousands of people in West Africa. But the entire process of drug research, testing, and clinical trials was too expensive for justify spending on it because the drug’s target customers – people who lived in West Africa – were too poor to afford it. Merck went ahead with the development anyway and made the drug available for free to countries that requested it.
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About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.