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Business Ethics - Study Material

Business Ethics
Faculty: Dr. Shreekumar K. Nair, Professor, NITIE
Kohlberg’s Stages of Moral Development
Level 1 - Pre-conventional morality
◼ At the pre-conventional level, individuals don’t have a personal code of morality.
Instead, the moral code is shaped by the standards of adults and the consequences of
following or breaking their rules.
◼ Authority is outside the individual and reasoning is based on the physical
consequences of actions.
Stage 1. Obedience and Punishment Orientation.
The individual obeys rules in order to avoid punishment.
Stage 2. Individualism and Exchange.
The individual follows the rules only if it is in his or her immediate self-interest to do so.
Level 2 - Conventional morality
◼ At the conventional level, individuals (most adolescents and adults), begin to
internalize the moral standards of valued adult role models.
◼ Authority is internalized but not questioned and reasoning is based on the norms of
the group to which the person belongs.
Stage 3. Good Interpersonal Relationships.
Individual try to live up to the expectations of people close to them.
Stage 4. Maintaining the Social Order.
Individuals broaden their perspective to include the laws of the larger society. They fulfill
duties and obligations and want to contribute to society.
Level 3 - Post-conventional morality
◼ Individual judgment is based on self-chosen principles, and moral reasoning is based
on individual rights and justice.
◼ Stage 5. Social Contract and Individual Rights. The individual becomes aware that
people have diverse value systems. They uphold values of individual rights and
justice. Thus, decisions are based on principles of justice and rights.
◼ Stage 6. Universal Principles. People at this stage develop their own set of moral
guidelines or principles which may or may not fit the law. The person will be prepared
to defend these self-selected ethical principles even if it means going against the rest
of society in the process and having to pay the consequences of disapproval and or
◼ Kohlberg doubted few people reach this stage.
Heinz's Dilemma
A woman was near death from a special kind of cancer. There was one drug that the doctors
thought might save her. It was a form of radium that a druggist in the same town had recently
discovered. The drug was expensive to make, but the druggist was charging ten times what
the drug cost him to produce. He paid $200 for the radium and charged $2,000 for a small
dose of the drug. The sick woman's husband, Heinz, went to everyone he knew to borrow the
money, but he could only get together about $1,000 which is half of what it cost. He told the
druggist that his wife was dying and asked him to sell it cheaper or let him pay later. But the
druggist said: “No, I discovered the drug and I'm going to make money from it.” So Heinz
got desperate and broke into the man's laboratory to steal the drug for his wife. Should Heinz
have broken into the laboratory to steal the drug for his wife? Why or why not?
Ethical Theories
◼ Also called consequentialism.
◼ Credited to philosophers John Bentham and John Stuart Mill.
◼ Principle of “maximum good to maximum number of people”.
◼ One has to predict and judge the consequences to classify the action as ethical or not.
◼ An action is ethical if it results in greater pleasure for larger number of people.
◼ The theory is criticized because it can lead to many unfair practices.
Ethical Egoism
◼ Ethical Egoism is a theory that deals with self-interest.
◼ One’s actions are ethical if they promote the interest of the person who acts.
◼ Each individual is in the best position to judge what will promote his/her self-interest.
◼ Ethical egoism does not respect the rights of others.
◼ The pursuit of self-interest resulting in detrimental effects on others is not generally
◼ This theory goes against some basic ethical principles.
◼ This theory goes against promotion of relationships or comradeship.
◼ Credited to Aristippus, a student of Socrates.
◼ The theory argues that pleasure is the primary or most important intrinsic good.
◼ A hedonist strives to maximize net pleasure (pleasure minus pain).
◼ Ethical hedonism is the idea that all people have the right to do everything in their
power to achieve the greatest amount of pleasure possible to them, assuming that their
actions do not infringe on the equal rights of others.
◼ Hedonists usually define pleasure and pain broadly, such that both physical and
mental phenomena are included.
Virtue Theory
◼ Credited to Aristotle.
◼ Dictated in many traditional religions.
◼ Virtues are acquired habits that help us lead a rational life.
◼ Aristotle considered wisdom as one of the important virtues.
◼ An action is considered ethical if it is what a virtuous agent would have done in a
similar situation.
◼ The theory is criticized for the reason that moral characteristics or virtues of the
person do not remain permanent and can change either way.
Three Ethical Decision Criteria
An individual manager can use 3 different criteria while making ethical choices in the
◼ (1) Utilitarianism
◼ (2) Rights
◼ (3) Justice
In the utilitarian criterion, decisions are made solely on the basis of their outcomes or
consequences. The goal of utilitarianism is to provide the greatest good for the greatest
number of people. This view is consistent with goals like efficiency, productivity, and high
Example: A business executive can argue that he is maximizing profits (greatest good for the
greatest number) while handing out dismissal notices to surplus employees
(2) Rights
This criterion calls on individuals to make decisions consistent with the fundamental rights,
liberties and privileges. The focus here is on respecting and protecting the basic rights of
individuals, such as the right to privacy, to free speech and to due process.
Example: Executives have to ensure that they protect whistleblowers when they report
unethical or illegal practices by their organization to the press or government agencies on
the grounds of their right to speech.
(3) Justice
This criterion requires individuals to impose and enforce rules fairly and impartially so that
there is an equitable distribution of benefits and costs.
Union members typically favour this view.
It justifies paying people the same wage for a given job, regardless of differences in
Example: Executives have ensure that rules are enforced without discriminating the
Ethical/Moral Dilemmas
◼ Ethical Issues are Seldom Black & White
◼ Conflicting Demands on the Professional
◼ Concern for Public Welfare
◼ Loyalty to Company & Colleagues
◼ Personal Ambition or Family Gain
◼ Personal Integrity
◼ Ethical standards are usually relative and personal, there is seldom an absolutely
correct application of the standards.
Ethical Dilemma: Example
◼ Kickbacks
A County Engineer in Vermont demanded a 25% kickback in secret payments for highway
work contracts he issued. In 1973 he made such an offer to Kevin, a 32 year old civil engineer
who was vice president of a young and struggling consulting firm greatly in need of the work.
Kevin discussed the offer with others in the firm, who told him it was his decision to make.
Finally Kevin agreed to the deal, citing as a main reason his concern for getting sufficient
work to retain his current employees.
Was he Right or Wrong?
Corporate Governance
Issues concerned with good corporate governance are:
◼ All business practices must be based on corporate social responsibility. Businesses must
respond to the basic concerns of society such as hunger, health, human rights, and the
◼ Every corporate entity should formulate an ethical policy for its own functions and those
of its employees. This must be known to all the stakeholders.
◼ Corporate governance must stand scrutiny in terms of transparency in its dealings, business
policies, plans, and actions.
◼ Communication mechanisms must be present for lateral, top-down, and bottom-up
communication to ensure transparent functioning.
◼ The business must ensure equity and justice to all stakeholders.
◼ Corporate governance should look for excellence in performance by ethical means.
◼ The business must respect all governing rules and regulations put forth by the government.
Finance and Accounting
◼ Ethics in accounting practices is synonymous with good corporate governance.
◼ The following can be considered as some canons in this regard:
◼ Businesses must follow the well laid-out norms for accounting practices.
◼ No attempt must be made to manipulate accounts to hide the financial health of the
Accounting Practices
◼ Businesses must scrupulously follow the well laid-out norms for reporting financial aspects
of a company to stakeholders during the annual general meeting (AGM).
◼ There should be no dealings that cannot be reported in the accounts or reported in a
different way in the accounts. All expenses must be legitimate.
◼ Businesses conduct a financial audit, which is like a watchdog for the financial practices
of a company. It informs the stakeholders the true financial health of a company. The audit
team should not connive with or turn a blind eye to financial malpractices.
The Satyam Scandal
◼ The scandal relating to the IT and ITES company, Satyam Computer Services, brought out
many key issues on business ethics including accounting fraud.
◼ It was revealed by Ramalinga Raju that the accounts of the company was being fudged for
nearly seven years to show profits.
◼ The auditing firm which certified their accounts for all those years was
PriceWaterhouseCoopers, an internationally renowned firm of auditors.
Toshiba CEO Quits Over Accounting Scandal
Managers were “Systematically” Inflating Profits
The president of Toshiba, Hisao Tanaka and seven other executives resigned on July 21, 2015 over
a 1.2 billion accounting scandal blamed on their pursuit of profit that has battered one of Japan’s
best-known firms.
The report by a company-hired panel said managers were involved in “systematically” inflating
profits over several years, in one of the most damaging accounting scandals to hit Japan in recent
A company statement admitted that there has been inappropriate accounting going on for a long
time and deeply apologized for causing serious trouble for shareholders and other stakeholders.
CEO Tanaka offered a heartfelt apology saying, “This is the worst damage for our brand in its 140year history.” (Mumbai Mirror, 22.7.2015)
The Sahara Case
In August 2012, the SC had directed two group companies – Sahara Real Estate and Sahara
Housing – to return around Rs. 24,000 crore with interest to nearly three crore investors through
The group deposited Rs. 5120 crore claiming it had returned money to most investors and had a
liability of little over Rs. 2000 crore. The SC did not believe the story and sent Roy to jail with
two directors on March 4, 2014. It said they would walk out on bail when the group deposited Rs.
5000 crore in cash with SEBI and furnished a bank guarantee for another Rs. 5000 crore. Sahara
has so far deposited nearly Rs. 4000 crore and its chief Subrata Roy has completed a year in jail.
The total dues have now gone up to Rs. 40,000 crore.
The SC on 13-3-2015 issued an ultimatum to the Sahara group and its jailed chief Subrata Roy to
pay up the court-directed dues of Rs. 40,000 crore to investors or face auction of group assets.
The court’s ultimatum came after it had repeatedly expressed its annoyance over Sahara failing to
arrange the money to secure Roy’s bail and pay back investors.
(Source: The Times of India: March 14, 2015).
Corporate Social Responsibility
Views About CSR
✓ CSR is an inherent responsibility of business and in fact makes good business sense.
Businesses take from the society and create wealth, jobs, and prosperity, and so they have
an equal responsibility to see that the society as a whole prospers.
✓ Doing good and ethical business itself is CSR. Business results in wealth creation, it
provides jobs, caters to the needs of people in the society, and makes their life easier. If
these are done in an ethical way following the rules and regulations stipulated by the society
or the government, this in itself is the shouldering of social responsibility by business.
✓ Focusing on CSR distracts businesses from the main economic goals of business.
✓ ‘It refers to the obligations of businessmen to pursue those policies, to make those
decisions, or to follow those lines of action which are desirable in terms of the objectives
and values of our society.’ (H.R. Bowen 1953)
✓ ‘The idea of social responsibilities supposes that the corporation has not only economic
and legal obligations but also certain responsibilities to society which extend beyond these
obligations.’ (McGuire 1963)
✓ ‘Social responsibility, therefore, refers to a person’s obligation to consider the effects of
his decisions and actions on the whole social system. Businessmen apply social
responsibility when they consider the needs and interest of others who may be affected by
business actions. In so doing, they look beyond their firm’s narrow economic and technical
interests.’ (Davis and Blomstrom 1966).
✓ CSR is the moral obligation of the corporate entity, while doing ethical business with
excellent business acumen to achieve the goals of business in terms of economic gains,
technical excellence, and strategies, to look beyond the bottom line and share its prosperity
with the society at large for its own good.
Concept of CSR
✓ Earlier, CSR was considered philanthropy
✓ Later as broader commitment to all stake holders including community.
✓ CSR reports now cover a variety of issues such as governance, ethics, worker welfare,
purchase and supply chain management, energy audit and environmental impact.
✓ CSR is no longer a ‘may do’ option.
✓ Sustainability has been defined as “‘meeting the needs of the present generation without
compromising the ability of the future generation to meet their needs.’
✓ CSR is one strategy for sustainability of business.
In the first phase charity and philanthropy were the main drivers of CSR. Culture, religion, family
values and tradition and industrialization had an influential effect on CSR. In the preindustrialization period, which lasted till 1850, wealthy merchants shared a part of their wealth
with the wider society by way of setting up temples for a religious cause.
Moreover, these merchants helped the society in getting over phases of famine and epidemics by
providing food from their godowns and money and thus securing an integral position in the society.
With the arrival of colonial rule in India from the 1850s onwards, the approach towards CSR
changed. The industrial families of the 19th century such as Tata, Birla, Bajaj, Godrej, Modi, etc.
were strongly inclined towards economic as well as social considerations.
The Law on CSR
Under the Companies Act, 2013, any company having a net worth of rupees 500 crore or more or
a turnover of rupees 1,000 crore or more or a net profit of rupees 5 crore or more should
mandatorily spend at least 2% of last 3 years’ average net profits on CSR activities as specified in
Schedule VII of the Companies Act, 2013 and as amended from time to time.
Environmental Ethics
Environmental ethics is the discipline that studies the moral relationships of human beings to, and
also the values and moral status of, the environment and its non-human contents.
Major issues that concern environmental ethics today:
✓ Anthropocentrism or human-centredness in development.
✓ Conservation of biodiversity in the biosphere
✓ Energy conservation including nuclear energy
✓ Global climate changes
✓ Overpopulation and destruction of forests or animal habitats
✓ Exponentially increasing depletion of natural resources
✓ Genetic engineering, cloning, genetically modified foods
✓ Waste disposal and e-waste
✓ Intensive farming and overuse of pesticides
✓ Ozone depletion
CASE: Bhopal Gas Tragedy
What happened in the Union Carbide plant in Bhopal on December 23, 1984, was what had to be
the world's worst industrial disaster. A result of technological, industrial, legal and human error,
the incident took the lives of 2,500 people, and injured about 400,000, with the toll still rising to
this day.
A leak of the toxic methyl isocyanate (MIC) gas occurred that night when it reacted with a sizable
volume of water that had made its way into the MIC storage tanks. Action by the staff and
supervisors was too late to contain the leak, and forty tons of MIC flowed out of the tanks over
two hours. And even if they had reacted immediately, the safety standards accepted at the plant
would not have allowed them to do anything about it. Thus the methyl isocyanate gas escaped into
the air and drifted eight kilometers downwind over the city of Bhopal, population 900,000,
poisoning all in its path. The most seriously affected areas were those nearest the plant, the
absolutely poorest sector of the population.
Professional Ethics
◼ Loyalty to public good: Showing loyalty to a cause.
◼ Loyalty to the profession: Sense of dedication and perseverance to uphold the
professional skills and competencies.
◼ Loyalty to the employer/organization: Dedication to the organization to which the
professional belongs.
Misplaced Loyalty
Loyalty is a double-edged sword.
While organizational loyalty is a contractual obligation, it should not supersede or override the
professional’s commitment to public safety and concern. Thus, loyalty to a group or employer
should be considered in the context of the overall loyalty to the public.
An employee working in an organization is privy to a lot of information that may be treated
confidential for various reasons.
Both by contractual obligations and moral considerations, the employee has to keep such
information confidential.
However, confidentiality is not absolute and employees have the right to divulge information that
is detrimental to public safety and welfare. This comes from the whistleblowing rights one gets as
a professional.
Official Secrets Act 1923
Any disclosure of information that is likely to jeopardize the sovereignty and integrity of the
country, security of the state, or friendly relations with other countries is punishable under the
Official Secrets Act.
Conflict of Interest
Professionals must steer clear of situations that create a conflict of interest.
A conflict of interest is a situation where –
✓ Your good professional judgement may be affected because you have a personal interest
in the issue.
✓ Your sound and unbiased professional judgement is important for the company you are
working for.
The Institute of Electrical and Electronics Engineers (IEEE) code of ethics has a provision that
“to avoid real or perceived conflict of interest wherever possible and to disclose them to affected
parties when they do exist.”
Tender Manipulation Through Cartel
Contractors/Suppliers form a cartel and quote rates so that they are able to get better prices for the
goods/services and make enormous profits.
In price-fixing, contractors –
➢ Form a cartel to discuss and decide the bid process;
➢ Allocate bids to each one as per some criteria;
➢ Manipulate bids so that prices are quoted above the present market level to make higher
profits; and
➢ Form an agreement on the price to be quoted by each vendor for each of the works/items.
In the US, price-fixing is punishable under the Antitrust Act.
Insider Trading
Legal & Illegal Insider Trading
Legal insider trading refers to trading in shares of their own company by employees of a company
when it is reported to the exchange commission by the person dealing in such shares.
Illegal insider trading refers to buying and selling shares when in possession of information that is
not public or is obtained by fraudulent means.
Insider trading became illegal in India after SEBI enacted the Prohibition of Insider Trading
Regulations in 1992.
The Rajat Gupta Case
Rajat Gupta served as Goldman Sachs director and head of McKinsey & Company.
He was educated at IIT and Harvard.
He received personal benefit in exchange for passing confidential Goldman Sachs information to
hedge fund founder and the owner of Galleon Group, Raj Rajaratnam. Both were charged with
serious violations by the US stock regulator.
Gupta began serving a two-year prison term on insider trading charges in June 2014.
◼ Individuals have a right not to be discriminated against on the basis of religion, caste, creed,
colour, and other extraneous factors.
◼ Discrimination can be direct or very subtle and indirect.
◼ Discrimination is more commonly felt in recruitment for jobs.
◼ Family-owned companies are found to practice nepotism.
◼ Gender discrimination is rampant in India with women not getting equal pay for equal
The Glass Ceiling Effect: the invisible barrier that keeps women from rising to the upper
rungs of the corporate ladder.
◼ Cultural discrimination includes discrimination based on language, religion, caste, etc.
SEBI Norms on Women Directors
As per the new directives of the Securities and Exchange Board of India (SEBI), all listed
companies must have at least one woman on their board of directors.
Currently, 1,469 companies are listed on NSE. According to one source, 51 per cent of the
companies didn’t have a woman director as of August 31, 2014.
To ease process of implementing stronger corporate governance norms by listed firms, regulator
SEBI relaxed various provisions of the new law, especially for smaller companies, and extended
the deadline for appointing at least one woman director to April 1, 2015.
Gender Pay Gap in India
The gender pay gap in India stands at 27% according to the latest Monster’s Salary Index (MSI).
According to the report, women earned a median gross hourly salary of Rs. 207.9 against Rs. 288.7
for men.
The highest gender pay gap was recorded in the manufacturing sector at 34.9%, where there are
strict regulations with respect to women working in factories.
The lowest gender pay gap was recorded in the BFSI (Banking, Financial Services & Insurance),
transport, logistics and communication sectors at 17.7%.
Double Standards
A double standard is the application of different sets of principles for similar situations. A double
standard may take the form of an instance in which a social norm, or rule is perceived as acceptable
to be applied by one group of people, but are considered unacceptable when applied by another
There are double standards in society because different moral structures are often applied to men
and women in society.
Whistleblowing refers to the attempt by an employee of an organization to disclose wrongdoings
within the organization to authorities with an intention to put an end to them.
It is similar to the instance of a football referee blowing a whistle after noticing the foul committed
by a player.
Near & Miceli (1985) has defined it as “the disclosure by organization members (former or current)
of illegal, immoral, or illegitimate practices under the control of their employers, to persons or
organizations that may be able to effect action.”
External Whistleblowing:
Giving out information about unethical acts to agencies outside the organization he/she works for.
Internal Whistleblowing:
Disclosing information within the organization to a superior entity bypassing the normal channels
of communication.
Internal whistleblowing is usually justified as it is done in the best interests of the employer and
thereby implies loyalty to the organisation.
However, in view of the serious harm external whistleblowing can cause to the organisation, it is
seldom justified or at best justified only if internal whistleblowing has been tried but has failed,
and if the consequences of the wrongdoing are perceived to be disastrous to society.
The Satyendra Dubey Case
Whistleblowing came into focus in India after the case of Satyendra Dubey, an engineer working
with the golden quadrilateral corridor project. He blew the whistle on the corruption and the poor
quality of work in the project by writing to the Prime Minister of India. The fact that he paid for it
with his life outraged the public across the country and it finally led to a bill for the protection of
Manjunath Case
Shanmugam Manjunath was a manager for the the Indian Oil Corporation (IOC) who was
murdered for sealing a corrupt petrol station in UP.
While working for (IOC) in Lucknow, he had ordered two petrol pumps at Lakhimpur Kheri sealed
for selling adulterated fuel. When the pump started operating again a month later, Manjunath
decided to conduct a surprise raid on 19 November 2005.
That very night, during his inspection, Manjunath was shot dead near the town of Lakhimpur
Kheri. His body, riddled with bullets, was found in the backseat of his own car, which was being
driven by two employees of the petrol pump.
Whistleblowing: An Act of Conscience
◼ The attempts by the whistleblower to “keep the stables clean” were prompted by a sense
of fair-play and justice to prevail in the organization rather than by feelings of desperation
and retaliation.
◼ There were concerted attempts by the whistleblower to correct the wrongdoing through
available channels of communication before finally making the whole affair public.
◼ In their attempts to expose the malaise within the organization, whistleblowers had to pay
a heavy price, just as they anticipated, in terms of lost jobs, ruined careers, continuous
emotional stress, etc.
◼ There was a sense of fulfillment and satisfaction for the whistleblowers in spite of the
terrifying experience they had to undergo after their revelations.
◼ There were hardly any feelings of regrets for the whistleblowers during and after the whole
ordeal were over. In fact, many vowed that, if faced with a similar situation in future, they
would do the same.
The following approaches can provide channels and procedures for facilitating internal
◼ “Open door” policies
◼ Management By Walking Around (MBWA)
◼ Regular “open house” sessions
◼ Having “Ethics Officer” or “Ombudsperson”
◼ Setting up an “Ethics Committee”
◼ Clear-cut policies and guidelines
◼ Action against vindictive superiors