lOMoARcPSD|17400748
COMMON UNETHICAL PRACTICES OF BUSINESS
ESTABLISHMENTS
lOMoARcPSD|17400748
Module 7: COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS
Learning Objectives:
After studying the chapter, the students should be able to...
1.
2.
3.
To familiarize yourself of the common unethical practices of business establishments such as
•
Misrepresentation and
•
Over-Persuasion
Describe how direct misrepresentation is committed by business firms such as
a)
deceptive packaging
b)
misbranding or mislabeling
c)
false and misleading advertising
d)
adulteration
e)
weight understatement
f)
measurement understatement
g)
quantity understatement
Describe how indirect misrepresentation is done by business firms such as
a)
caveat emptor
b)
deliberate withholding of information
c)
passive deception
4.
Describe how over-persuasion becomes unethical.
5.
Describe some unethical corporate practices of the
a)
board of directors
b)
executive officers and lower level manager
c)
employees
COMMON UNETHICAL PRACTICES OF BUSINESS ESTABLISHMENTS
Unethical problems in business ethics occur in many forms and types. The most common of these unethical practices of
business establishments are misrepresentation and over-persuasion.
Misrepresentation may be classified into two types: direct misrepresentation and indirect misrepresentation.
Direct Misrepresentation is characterized by actively misrepresenting about the product or customers. This includes:
Deceptive Packaging. Deceptive packaging takes many forms and is of many types. One type is the practice of placing
the product in containers of exaggerated sizes and misleading shapes to give a false impression of its actual contents.
An example of this type of deceptive packaging is slack-fill packaging where containers like cartons, tin cans and
certain plastics are filled only up to eighty-five to ninety-five percent of their capacity.
1
lOMoARcPSD|17400748
Misbranding or Mislabeling. Misbranding is the practice of making false statements on the label of a product or making
its container similar to a well-known product for the purpose of deceiving the customer as to the quality and/or quantity
of a product being sold.
False or Misleading Advertising. Advertising serves a useful purpose if it conveys the right information. It is the principal
means by which people are informed about the availability, nature and uses of old and new products. However,
advertising does not always tell the "whole truth and nothing but the truth" if it greatly exaggerates the virtues of a
product and tells only half of the truth or else sings praises to its non-existent virtues. If advertising does not provide a
useful service anymore to the customers, it can become the agent of misrepresentation.
Examples are:
a. Advertisements with pictures or statements that convey exaggerated impression of the product’s reliability or quality.
b. Advertisement that claims that the product is the "fastest selling brand" or the "product of the year".
c. Advertisements using fictitious or obsolete testimonials.
Adulteration. Adulteration is the unethical practice of debasing a pure or genuine commodity by imitating or
counterfeiting it, by adding something to increase its bulk or volume, or by substituting an inferior product for a superior
one for the purpose of profit or gain, it is unethical because an inferior product is passed off as a superior one. This
does not meet the standard for fair service, that is achieving success by offering better service (in the form of a superior
product and terms of payment) than the competitor.
Weight understatement or Short weighing. In short weighing, the mechanism of the weighing scale is tampered with or
something is unobtrusively attached to it so that the scale registers more than the actual weight. An example is a foot
pedal with a concealed string tied to the weighing scale. The modus operandi of sellers is to use two sets of scales one
which gives the correct weight and has been sealed by the authorities and another which looks identical but registers
more weight than the product. Short weighing is practiced in selling products where prices depend on the weight such
as sugar, meat, fish, vegetables, fruits, nails, etc.
Measurement understatement or Short measurement. In short measurement, the measuring stick or standard is shorter
than the real length or smaller in volume than the standard. This unethical practice is found in selling situations
where the price of the product depends on its length such as selling cloth or textiles, electric cords or wires or on its
volume such as selling rice by the sack.
Quantity understatement or Short numbering. In this unethical practice, the seller gives the customer less than the
number asked for or paid for. Short numbering is often practiced in selling situations where the product being sold is in
such a shape or is packed in a manner that would make counting the product difficult or inconvenient. For example, a
customer who is not vigilant may receive less quantity than what he is entitled to when buying toilet paper, bond paper,
carbon paper, paper clips, thumb tacks, matches and toothpicks which are sold by the box or package.
Indirect Misrepresentation is characterized by omitting adverse or unfavorable information about the product or service.
Among the most common practices involving indirect misrepresentations are caveat emptor, deliberate withholding of
information and business ignorance.
Caveat emptor is a practice very common among salesmen. Translated, caveat emptor means "let the buyer beware".
Under this concept, the seller is not obligated to reveal any defect in the product or service he is selling. It is
responsibility of the customer to determine for himself the defects of the product.
Caveat emptor is indirect misrepresentation and unethical because a seller is a witness for the goods he is selling. He
testifies to its nature, features, uses and qualities. As a witness, it is his obligation to "tell the truth and nothing
but the truth" about his product. What makes caveat emptor unethical is the willingness of the seller to generate profit
by taking advantage of the buyer's lack of information. This is passive deception which is also lying.
2
lOMoARcPSD|17400748
Deliberate Withholding of Information. Following the argument that caveat emptor is unethical, the deliberate
withholding of significant information in a business transaction, is also unethical. No business transaction is fair where
one of the parties does not exactly know what he is giving away or receiving in return.
Passive deception. Direct misrepresentation gives business a bad name while indirect misrepresentation or passive
deception is not as obvious, it nonetheless contributes to the impression that businessmen are liars and are out to
make a fast buck. Business ignorance is passive deception because the businessman is unable to provide the customer
with the complete information that the latter needs to make a fair decision.
Over-Persuasion
Persuasion is the process of appealing to the emotions of a prospective customer and urging him to buy an item of merchandise
he needs. Persuasion is legitimate and necessary in the selling of goods if it is done in the interest of a buyer such as persuading
him to get a hospitalization insurance policy. However, persuasion used for the sole benefit of selling a product without
considering the interest of the buyer is not ethical. The common instances of over-persuasion include the following examples:
1. Urging a customer to satisfy a low priority need for merchandise.
2. Playing upon intense emotional agitation to convince a person to buy.
3. Convincing a person to buy what he does not need just because he has the capacity or money to do so.
CORPORATE ETHICS
Unethical Practices of Corporate Management
Practices of corporate management that involve ethical considerations may be classified into two: practices of the Board of
Directors and practices of executive officers. In many cases, the practices may apply to both categories of corporate
management and the only dividing line is in the financial magnitude and implications of a particular corporate management
practice.
Some Unethical Practices of the Board of Directors
1. Plain Graft
Some of the Board of Directors help themselves to the earnings that otherwise would go other stockholders. This is done by
voting for themselves and the executive officers huge per diems, large salaries, big bonuses that do not commensurate to the
value of their services. They can also reduce the earnings going to the other shareholders by authorizing purchases of goods
and services for the company’s use at a price higher than normal, in consideration of a certain percentage of the purchase value
or commission accruing to them.
2. Interlocking Directorship
Interlocking directorship is often practiced by a person who holds directorial positions in two or more corporation that do business
with each other. This practice may involve conflict of interest and can result to disloyal selling. Disloyal selling happens when
this person is compelled to decide which of the two corporation’s interest should be protected or upheld. Thus, whatever
decisions the person makes, he betrays the trust reposed on him by the shareholders of either of the two companies.
3. Insider Trading
Insider trading involves trading in a public company's stgock by someone who has non-public material information about that
stock for any reason. Insider trading can be either illegal or legal depending on when the insider makes the trade. It is illegal
when the material information is still non-public, and this sort of insider trading comes with harsh consequences. Insider
trading occurs when a broker or another person with access to confidential information uses that information to trade in shares
and securities of a corporation, thus giving him an unfair advantage over the other purchasers of these securities.
Material non-public information is any information that could substantially impact on investor's decision to buy or sell the
security that has not been made available to the public.
lOMoARcPSD|17400748
4. Negligence of Duty
A more common failure of the members of the Board of Directors than breach of trust is neglect of duties when they fail to attend
board meetings regularly. It is only in regular attendance that they can protect the rights and interests of the shareholders and
their non-attendance of board meetings could result to betrayal of trust of the parties who elected them to their positions.
Some Unethical Practices of Executive Officers and Lower Level Managers
To a lesser extent, executive officers may also guilty of unethical practices. All the unethical practices of the members of the
Board of Directors discussed are activities they are also capable of engaging in though perhaps to a lesser degree because of
certain limits to their authority. Unethical practices that are more common to executive officers and lower level managers are:
1. Claiming a vacation trip to be a business trip. The President or a Vice President reports his personal vacation in
Europe or in the United States as a business trip so he can get reimbursement for his expenses including those of his
family’s.
2. Having employees do work unrelated to the business. Executive officers and lower managers ask company
employees to do personal things for them on company time such as having the company janitors water and mow their
lawns, having the maintenance men do house or appliance repairs for them, and having subordinate employees secure
a license or type letters pertaining to their other businesses.
3. Loose or ineffective controls. Managers do not provide adequate controls to remove temptation and to prevent or
discourage employees from engaging in unethical practices. A manager has the moral obligation to provide the proper
control atmosphere so that his subordinates will not be tempted to commit dishonest acts. A manager indirectly betrays
the trust placed on him by higher executive officers if the administrative and accounting controls in his office are so
weak or effective that employees are given the opportunity to misappropriate funds or engage in petty thievery.
4. Unfair labor practices. The labor code lists the following as unfair labor practices committed by an employer on
employees or a group of employees who have organized themselves into a union.
a. To interfere with, restrain or coerce employees in the exercise of their right to self-organization;
b. To require as a condition of employment that a person or an employee shall not join a labor organization or shall
withdraw from one to Which he belongs;
c. To contract out services or functions being performed by union members when such will interfere with, restrain or
coerce employees in the exercise of their rights to self-organization;
d. To initiate, dominate, assist or otherwise in with the formation or administration of any labor organization, including
the giving of financial or other support to it;
e. To discriminate with regard to wages, hours of work, and other terms or conditions of employment in order to
encourage or discourage membership in any labor organization.
f. To dismiss, discharge, or otherwise prejudice or discriminate, against an employee for having given or being about
to give testimony under the Labor Code.
g. To violate the duty to bargain collectively a prescribed by the Labor Code;
h. To pay negotiation or attorney’s fees to the union or its officers or agents as part of the settlement of any issue in
collective bargaining or any other dispute;
i. To violate or refuse to comply with voluntary arbitration awards or decisions relating to the implementation or
interpretation of a collective bar gaining agreement;
j. To violate a collective bargaining agreement.
4
lOMoARcPSD|17400748
5. Making false claims about losses to free themselves from paying the compensation and benefits provided by law. There are
employers who claim non-existent losses so they can be exempted from paying the minimum wage and emergency-cost-ofliving allowances required by law.
6. Making employees sign documents showing that they are receiving fully what they are entitled to under the law when in fact
they are only receiving a fraction of what they are supposed to get.
7. Sexual Harassment. Work, education or training-related sexual harassment is committed by an employer, employee,
manager, supervisor, agent of the employer, teacher, instructor, professor, coach, trainer or any other person who, having
authority, influence or moral ascendency over another in a work or training or education environment, demands, requests or
otherwise requires sexual favor from the other, regardless of whether the demand, request or requirement for submission is
accepted or not by the object.
Some Unethical Practices of Employees
There are some employees who are not mindful of their moral obligations to their employers. They take advantage of their
position and the trust of their employees by committing unethical practices harmful to their employers’ interest these unethical
practices may be classified into conflict of interest and dishonesty.
1. Conflicts of Interest
A conflict of interest arises when an employee who is duty bound to protect and promote the interests of his employer violates
this obligation by getting himself into a situation where his decision or actuation is influenced by what he can gain personally
from it rather than what his employer can gain from it. Some common examples of conflicts of interest are:
a. An employee who holds a significant interest or shares of stock of a competitor, supplier, customer or dealer favors
this party to the prejudice of his employer.
b. The employee accepts cash, a gift or a lavish entertainment or a loan from a supplier, customer, competitor or
contractor. In this situation, the decision or action of the employee is influenced by his being indebted for a favor or
loan from a party with whom the company is doing business. He, therefore, cannot act impartially.
c. The employee uses or discloses confidential company information for his or someone else's personal gain. An
example is revealing his employer's formula or menu for a well-liked food to a competitor.
d. The employee engages in the same type of business as his employer. He may attend to his business only after
office hours because he has somebody to mind it for him but it is still unethical. An example is an auditor employed
full-time in a public accounting firm but maintains his own auditing office where he works after office hours.
e. The employee uses for his own benefit a business opportunity in which his employer has or might be expected to
have an interest.
2. Dishonesty
Business ethics is not just limited to business transactions with outside parties. It also covers employee-employer relationship,
especially with respect to an employee's honesty as lie carries out his assigned duties in the office. Examples of dishonest acts
of employees are:
a. Taking office supplies home for personal use.
b. Padding an expense account through the use of fake receipts when claiming reimbursements.
c. Taking credit for another employee’s idea.
5
lOMoARcPSD|17400748
Post Test:
A. Multiple Choice Questions
1. Examples of direct misrepresentation about the product include the following except
a. False advertising
b. Deceptive packaging
c. Mislabeling
d. Caveat emptor
2. Examples of indirect misrepresentation about the product include the following except
a. caveat emptor
b. deliberate withholding adverse information
c. business ignorance
d. false advertising
3. Examples of direct misrepresentation about the product include the following except
a. adulteration
b. short merging
c. short measurement
d. over persuasion
4. Interlocking directorship can be committed by
a. rank and file employees
b. members of the board of directors
c. top executive officers
d. middle-level managers
5. The following constitute unfair labor practices of an employer except
a. to restrain employees to form a union
b. to violate a collective bargain or agreement
c. to discriminate with regard to wages, hours of work
d. to terminate employment of employees found to have violated company policy or employment contract.
6. The following are examples of unethical practices of employers except
a. acceptance of gifts from a customer in exchange for a favor that is detrimental to its interest of his employer
b. engagement in the same type of business as his employer
c. disclosure of confidential company information to someone else for personal gain.
d. Application for a loan from his employer to settle personal liabilities.
7. The following are examples of dishonest acts of an employee toward his employer except
6
lOMoARcPSD|17400748
a. Working overtime upon instruction of his supervisor.
b. Bringing home office supplies for personal use.
c. Overstating business trip expenses by submitting false receipts.
d. Doing personal errands during office hours.
B.
1. What are the two most common types of unethical practices of business establishments as far as the products or customers
are concerned?
2. Give and explain briefly at least three ways of directly misrepresenting products.
3. How is indirect misrepresentation of a product undertaken?
4. What does “caveat emptor” mean?
5. When does over-persuasion become unethical?
6. What is “interlocking directorship” and why could it lead to unethical actions of a member of the board of directors?
7. Insider trading is considered an unethical practice. Why?
8. What are some of the unethical practices that executive officers may be guilty of?
9. Cite some unethical practices of employees to their employers.
10. Distinguish between direct misrepresentation indirect misrepresentation.
7