Business Ethics
(by S. Lioukas)
Business Ethics – principles and standards that
determine acceptable conduct in business
Exec who allegedly made $270M off Enron to pay SEC
$31.5M
The Role of Ethics in Business
Unethical and/or Illegal
•
•
•
•
Accounting fraud
Deceptive advertising
Unfair competitive practices
Internet theft
Types and Incidences of Observed
Misconduct
Many business issues may seem straightforward and easy to resolve
on the surface, but are in reality very complex.
2-3
Individual: types of “bullying” behavior
Abusive and intimidating behavior
“Bullies” behavior:
2-4
Sources of Unethical Behavior in
Organizations
Conflict of interest –
– Advance personal interests over others’
interests
– Benefit self at the expense of the
company
Bad “apples’ or bad “barrel”?
2-5
Least Corrupt Countries
2-6
C7-S4
Sources of the Business Ethos
BUSINESS
ETHICS
RELIGION
CULTURE
LAW
PHILOSOPHY
Three Approaches to Ethics
 Conventional Approach
 Principles Approach
 Ethical Tests Approach
The Conventional Approach
Behavior or act
that has been
committed
compared with
Value judgments
and perceptions
of the observer
Prevailing
norms of
acceptability
Three Major Principles
 The Utilitarian Ethic
 The Rights Ethic
 The Theory of Justice
Utilitarianism
 Act so as to produce the greatest ratio of
good/evil
 Look at the costs and benefits of
alternatives, sum them, and chose the
option with the greatest benefit
Utilitarianism:
Strengths & Weaknesses
 What are the Strengths of Utilitarianism?
– Clear, simple guideline
 What are the Weaknesses of
Utilitarianism?
– Could justify suppression of human rights
Kant’s Categorical Imperatives
 Provides Foundation for Duties,
Moral Rights
 Universality – Would I want everyone
to behave according to that rule?
 Reversibility – Would I want that rule to
apply to me?
 Treat individuals as autonomous ends,
and so never solely as means.
Respecting their autonomy to chose
Perspectives on Justice
 The Basic Notion in Justice Theory is
Fairness
 Perspectives on the Meaning of Fairness
– Egalitarianism - equality
– Socialism - need
– Capitalism - effort, merit, contribution
– Libertarianism - free choice, contracts
 Which Perspective is Dominant in Society?
Three(+1) Spheres of Justice
1. DISTRIBUTIVE JUSTICE
Refers to distribution of benefits and burdens
Discrimination only for fair, relevant reasons
Rewards proportionate to efforts and achievements
2. RETRIBUTIVE JUSTICE
Applies to punishment of wrongdoing
Blame fairly imposed
Punishment proportional to crime
3. COMPENSATORY JUSTICE
Covers compensation for injury
Compensation should be adequate
4. PROCEDURAL JUSTICE
rules of representation, legislative, regulatory rule making
Grievance, hiring, firing, performance review, etc. procedures
A principle centered approach to ethical
problems
Step 1
Ask
Utility
Do benefits
exceed costs?
Yes
No
Rights
Are human
rights
respected?
Yes
No
Justice
Are benefits
and costs
fairly
distributed?
Yes
No
Step 2
Compare results
If yes is the answer to all
three questions, it is
probably ethical
If no is the answer to all
three questions, it is
probably unethical
If the answers are
mixed, it could be either
ethical or unethical
Step 3
Assign priorities to
Utility
Rights
Justice
Ethical Tests Approach
 Focus - A simple, practical heuristic (rule
of thumb) that can guide decision making
 Examples
– Test of common sense (The Intuition Ethic)
– Test of one’s best self
– NY Times Test (making something public)
 (The Disclosure Rule)
– Test of ventilation (reaction by others)
– Test of the purified idea (OK’d by authority)
– Gag Test
International aspect of ethics
 “Man is the measure of all things” Protagoras
(490-420 BC)
 Man = Each individual man (human), Plato’s
interpretation
 Man = Society, different societies different ethics
 Man = Humanity
 Plato’s approach: Ethics are independent of
humanity
Donaldson (1996)
 Respect for core human values, which
determine the absolute moral threshold for
all business activities.
 Respect for local traditions.
 Context matters when deciding what is right
and what is wrong.
The Dilemma of the
Multinational Corporation
Home Country
Stakeholder
Pressures
The
Multinational
Corp.
Host Country
Stakeholder
Pressures
Ethical Choices in Home vs. Host
Country Situations
International Law
Global Codes of Conduct
ETHICAL
IMPERIALISM
Home Country
• Ethical/moral
standards of
home country
CULTURAL
RELATIVSM
Broad
Middle Ground
Mix of Home and Host
Country Standards
Application of Ethical Principles
(see notes)
Host Country
• Ethical/moral
standards of
host country
Corporate Corruption
Why do managers act in unethical ways?
Or
What are the sources of corporate
corruption?
The Arthur Andersen Story:
Founding
 In 1913, in Chicago, a new accounting firm was founded by two
young CPAs.
 On December 1, 1913, Arthur E. Andersen (a 28 year old of
Norwegian descent) and Clarence M. DeLany founded the
company Andersen, DeLany & Co.
 In an environment where accounting was not synonymous to
honesty, the firm stood out for its integrity.
 Arthur Andersen’s motto was "Think straight, talk straight."
The AA story: the railway
company incident
 Andersen notices that the railway company was not properly accounting for its
maintenance charges, which should have been part of its operating expenses.
 He informed the company, but received no response.
 Then he informed the company’s president that he would mention this in his
report if the errors were not corrected.
 Furious, the president of the railway company came to Andersen’s office to
confront him.
 “There’s not enough money in the city of Chicago to induce me to change that
report!”
 Andersen lost the business.
 One month later the railway company went bankrupt.
The AA story: Andersen’s and
Spacek’s legacy
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Andersen (1913 – 1947), Spacek (1947 – 1973)
Honesty and Professionalism
Reputation for sticking to principle at the expense of losing customers
The AA way was focused on training so that all AA auditors would take the
same approach in dealing with a particular problem
AA established a training centre in St. Charles, Illinois and spent millions over
the years to train its people.
In 2000, the St. Charles centre had a permanent staff of 500.
AA always led the industry in developing new standards and procedures
AA was not afraid to take on all the other auditing firms and some industries
(Railways, Savings & Loans).
Are we talking about the same
company here?
The More Recent AA story
 Poor Ethical leadership after Spacek
 Enter consulting – different business with MUCH
higher fees
 Charging $ 150,000 for a cd
 Culture deterioration – the biggest sin became to
loose a customer!
 AA had quite a few similar problems before Enron
“…Usually, unethical or illegal behaviour
happens when descent people are put
under unbearable pressure to do their jobs
and meet ambitious goals without the
resources to get the job done right”
(B. Toffler, 2003)
Enron put itself in a similar situation
“This was Enron’s dirty little secret: a company built around trading
and deal making cannot possibly count on steadily increasing
earnings . . . As one former Enron managing director says, ‘A
business that had stable and predictable earnings that’s primarily
engaged in the trading of commodities is a contradiction in
terms.” (McLean and Elkind, 2003: 126)
Motive and Opportunity
 Very difficult to achieve desired results
without ‘cheating’
 Inadequate Control Mechanisms
 But this is not the whole story…
Trust Violators and their
Rationalizations
 One trust violator from the ones described by Cressey (1953)
‘borrowed’ thousands of dollars from the bank he was working
for.
 But was keeping track of exactly how much he had ‘borrowed’
on the back of the envelope where he kept the title papers of an
apartment he owned which he was planning to sell in order to
return the money to the bank.
 So when he was caught, in his mind it was not fraud, just bad
timing.
Types of Rationalizations
1.
2.
3.
4.
5.
“| was just following orders”
“Nobody got hurt”
“They deserved it”
“After what they did, this is nothing”
“I did it for the good of the company”
Types of Rationalizations
Sykes and Matza (1957)
Ashforth and Anand (2003)
1.
Denial of responsibility: The
delinquent defines ‘himself as lacking
responsibility for his deviant actions.’
(1957: 667)
1.
Legality: Actors may argue that acts
are not actually illegal
2.
Denial of responsibility …
Denial of injury: The delinquent can
argue that he/she did not really hurt
anybody.
3.
Denial of injury …
4.
Denial of the victim …
Denial of the victim: The delinquent
argues that the victims were not really
victims but deserved what they got.
5.
Condemnation of the condemners:
The delinquent argues that his
condemners are blaming him for
inappropriate reasons, they are
hypocrites.
Social Weighing: a broader version of
the
‘condemnation
of
the
condemners,’ the main idea is “we are
not so bad.”
6.
Appeal to higher loyalties …
7.
Metaphor of the Ledger: here past
good works are see as having earned
credit that counterbalances current
minor offences.
8.
Refocusing Attention: coping through
the shifting of attention away from the
so-called ‘dirty work.’
2.
3.
4.
5.
Appeal to higher loyalties: The
delinquent argues that he had to break
some rules for the greater good.
Facilitating Factors
1. Ethical Distance (too far to know who is hurt)
2. Organizational Complexity (can facilitate
rationalizations and increase ethical distance)
3. Shifting Baseline (loss of perception of change
with time)
4. Social Pressure (pressures from friends,
colleagues, bosses…)
5. Escalating Commitment
Shifting Base Line
Level of
morality
What the actor can see
Acceptable
Change
Acceptable
Change
time
Escalation of Commitment
“There are many instances in which individuals can become locked into a
costly course of action. Because it is often possible for persons who
have suffered a setback to recoup their losses through an even greater
commitment of resources to the same course of action, a cycle of
escalating commitment can be produced.” (Staw, 1981: 577)
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Vietnam
Enron
1st World War
…
MORE
 Motive
 Opportunity
 Rationalization
↓
 Escalation of Corruption
Escalation of Corruption
Regulations
Laws and regulations encourage
businesses to conform to society’s
standards, values, and attitudes.
Sarbanes-Oxley Act - 2002
2-42
Improving Ethical Behavior in Business
Codes of Ethics –
Formalized rules and standards that describe
what a company expects of its employees.
2-43
Codes of Ethics
National Business Ethics Survey (NBES)
According to the NBES, employees in
organizations with written standards of
conduct are more likely to report misconduct
when they observe it.
2-44
Codes of Ethics
Whistleblowing
The act of an employee exposing an
employer’s wrongdoing to outsiders, such as
the media or government regulatory
agencies.
2-45
Application to your company
Given our previous discussion about MORE, can you
apply what we discussed above to your own work
situations. More specifically, please
(1) Identify the Motives and Opportunities that might
lead one to unethical behaviour.
(2) Identify the possible Rationalizations that he/she
might use.
(3) Come up with any measures that you think might
prevent the above from occurring and leading to
escalation of unethical/corrupt behaviour.