The Importance of
Business Ethics
Ned C. Hill, Dean
W. Steve Albrecht, Associate Dean
Marriott School of Management
Brigham Young University
Outline
• What is ethical behavior and why is it
important to business?
• The ethical value proposition
• Laws, policies and ethics
• Evidence that good ethics means good
business
• Is ethical behavior improving?
• Teaching ethics—the Ethics Maturity Model
Ethical Behavior
• Conducting one’s life in complete accord
with a firmly held set of values and
principles
• These principles may be derived from religious
beliefs, philosophical understanding, etc.
• Application should be in all areas of one’s life:
personal, family, business, social, etc.
• “Integrity” is the consistent application of ethical
behavior.
Foundations of Ethical Behavior
• Treat others as you would be treated
– Respect
– Honesty
– Trust
Taught in All Cultures
Judaism: What you hate, do not do to anyone.
Islam: No one of you is a believer until he loves for his brother what he loves
for himself.
Hinduism: Do nothing to thy neighbor which thou wouldst not have him do to
thee.
Sikhism: Treat others as you would be treated yourself.
Buddhism: Hurt not others with that which pains thyself.
Confucius: What you do not want done to yourself, do not do to others.
Aristotle: We should behave to our friends as we wish our friends to behave to
us.
Plato: May I do to others as I would that they should do unto me.
TREAT PEOPLE THE WAY
YOU WANT THEM TO TREAT YOU
Bad Ethics Increases Transaction Costs
Security
Party
A
Regulators
Lawyers Delays
Trade
Testing
Interest
Etc, etc!
Duplication
Party
B
Societal Costs of Unethical Behavior
1. Law enforcement and other security personnel
2. Physical protection (locks, electronic security, fences,
vaults, etc.)
3. A substantial portion of attorney and court system costs
4. Some welfare costs
5. Costs of collecting taxes
6. Wasted/misused investment funds
7. A substantial portion of accounting/auditing costs
8. A large fraction of costs for regulators and examiners
9. Some marketing/advertising costs
10.Costs for institutions like better business bureaus,
consumer protection agencies
11.Some costs of bankruptcy
12.Lack of investment from outside investors, tourists
Business Costs of Unethical Behavior
1.
2.
3.
4.
5.
6.
7.
8.
Loss of physical assets
Increased costs of security
Loss of customers—especially those who value ethics
Loss of employees—especially the more ethical
Loss of reputation
Increased legal costs
Higher costs of debt
Loss of investor confidence (lower stock price, difficulty
in raising funds, problems with lenders)
9. Regulatory intrusion
10.Costs of bankruptcy
What is the Cost of Lack of
Integrity in the US?
•
•
•
•
•
•
Employee fraud
Time theft
Industrial espionage
Counterfeiting
Employee dishonesty
Identity theft
$400 B
$230 B
$200 B
$200 B
$120 B
$ 50 B
(Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)
Levels of Constraints on Behavior
Ethical Behavior Tied to Set
of Values
Professional Standards
Legal Requirements
Ethical Issues Relating to Business
•
Honesty—communication and behavior consistent with facts
–
–
–
–
•
Disclosure of information
Promises/commitments
Laws and professional standards
Representation of others like shareholders (applies to board members)
Unfair competition
–
–
–
•
Refrain from bribes and excessive gifts (that sway judgment)
Avoid quid pro quo transaction
Comply with “anti-trust” laws (these relate to pricing, monopolistic practices)
Just compensation
–
–
•
Respect intellectual property (product piracy)
Treat employees fairly
Respecting rights of others
–
–
–
Treat others with fairness and respect regardless of age, religion, ethnic group,
sex, economic status, etc., especially children, women, and subordinates
Respect the community you operate in by paying fair share of economic costs
you create
Respect others and future generations by treating the environment well
Why Ethical Behavior Adds Value
• Better information
–
–
–
–
–
Trust from investors
Lower costs for audits, controls, investigations
Better allocation of resources
Customers will be more loyal (RC Willey example)
Lower costs from suppliers (automotive company
example)
– Attracting and retaining better employees
• Fair competition
– Lowers cost of business in economy
– Leads to better decision-making (do what’s best for
firm, not one individual)
– Improves competitive nature of a country’s economy
Why Ethical Behavior Adds Value
• Just compensation
– Creates a more vibrant, entrepreneurial economy
– Attracts and retains better employees
• Rights of others
– Draws upon talents of wider set of individuals
– Develops long-term respect from the community
(Godfrey study)
– Maintains the environment for long-term value to all
(Costa Rica)
• It’s the right thing to do!
Is There Evidence that Ethical Behavior
Yields Increased Value?
1.Study of 2,100 firms with very strong,
well-governed boards of directors
outperformed overall market 15% vs. 12.5%
in 2005
2.Firms with high level of “democracy”
outperformed “dictatorial” firms by 8% per
year in the decade of the 1990’s.
3.Philanthropy: Firms that contribute a
higher portion of their assets to the
communities in which they reside fare
better in an economic downturn.
How Important is Integrity in a Leader?
• In a survey of 54,000 people Integrity was
by far the number one attribute desired in
a leader
(Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)
Short-Term vs. Long-Term
• One party may gain temporary advantage
by unethical behavior
– Enron
– Livedoor
– Ghana Airways
• But in the long-term, individuals,
companies and society are hurt
Questionable State of Our Integrity
Did You Cheat to Get Into Graduate School?
“Yes”
–
–
–
–
43% Liberal Arts
52% Education
63% Law and Medicine
75% Business
Source: Rutgers University survey of students
Questionable State of Our Integrity
MBAs
• 76% were willing to understate expenses that cut
into their companies’ profits
• Nearly all believe shareholder value is more
important than customer service
• Convicts in 11 minimum security prisons had
higher scores on an ethical dilemma exam than
MBAs
Questionable Integrity at Work
• 76% of employees observed a high level of
illegal or unethical conduct at work in the
past 12 months
• 49% of employees observed misconduct
that, if revealed, would cause their firms to
“significantly lose public trust”
KPMG 2000 Organizational Integrity Survey
Survey of Employees
• Most (65%) don’t report ethical problems
they observe
• 96% feared being accused of not being a
team player
• 81% feared corrective action would not be
taken anyway
• 68% feared retribution from their
supervisors
Source: Society of Human Resource Management
Deterioration in Honesty over Time
Year
College students who cheated in H.S.
Self-reported cheating
Believe cheating is common
Used cheat sheets
Let others copy work
Willing to lie to get job
Students who had stolen
1940 (20%)
1983 (11%)
1940 (20%)
1969 (34%)
1969 (58%)
2000 (28%)
2000 (35%)
Year
2007
2007
2007
2007
2007
2007
2007
(Based on several different ethics studies)
(85%)
(49%)
(88%)
(68%)
(98%)
(39%)
(38%
Another Study of Student Honesty
• Responses 50,000 college students at 69 schools
• 26% of business majors admitted to serious cheating on
exams
• 54% admitted to cheating on written assignments
• Journalism majors were worse with 27% admitting to
cheating on exams.
• The most honest—students in the sciences (19% reported
cheating on tests)
• Author observes “cheating has increased since he began
doing surveys 15 years ago”
• He partly blames technology—makes it easier to cheat
“Biz Majors Get an F for Honesty” by Donald McCabe published on February
6, 2006, by the Center for Academic Integrity
Will Our Ethics Improve?
Survey of High School Students
2007
• 74% cheated on an exam in the last year; 45%
45% said they did it at least twice in the last year
• 93% lied to their parents in the past year
• 78% have lied to their teachers
• 37% said they would lie to get a job
• 38% took something from a store in the last year
Josephson (2007)
Why is Dishonesty Increasing?
Modeling
Labeling
Honesty
Why Is Dishonesty Increasing?
• Bad Modeling/Lack of
Good Modeling
– Makes up our news—
more explicit than ever
– Focus of TV/movies
– Dishonest “leaders”
– Sports, business,
entertainment “heroes”
– Good models are rare
• Lack of Positive
Labeling
– Home….average
family spends 10 hours
less time together a
week than 20 years ago
– Vocabulary of
kindergarten children
– Schools
– Churches
Confession of Fraudulent Executive
• Even when put in jail, I didn’t feel like a “criminal.” I
somehow felt we were different and I started noticing
every white collar guy I did talk to began every sentence
with: “all I did was.” Once you’re in jail and you start
feeling the animosity the other prisoners have toward
white-collar guys, where they say to you, “you’re no
different than us,” “you’re just a thief,” “you use other
words.” Even the word “embezzlement” is a nice
word…they said “you’re a thief, you lie to people and take
their money, that’s what I do to” and that hit me like a ton
of bricks.
Mike Morze, ZZZZ Best
Can Ethical Values be Taught?
Level 1: The Foundation
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others
Personal Ethical Understanding
• Concepts of right and wrong, fair play, respect
for rights of others, honesty, personal integrity
• Best learned in the home at an early age—and
follow-up is needed throughout life
• Institutions (churches, schools, etc.) can help
• Difficult to “back fill” in adulthood
Level 2: Application to Business
Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others
Application of Ethics to Business
Situations
• Fraudulent practices, misleading advertising,
unfairness
• Can be taught in management education and
organizations—provided students have a personal
understanding of ethics
• Taught by modeling (cases and personal example
are helpful)
• Can be reinforced by policies, codes of ethics,
training
Application of Ethics to Business
Situations
• Businesses can teach through proper modeling:
“Companies also have to further strengthen ethics
management and social responsibility activities to
improve their public image’’
Korean Commerce-Industry-Energy Minister Lee Hee-beom
Level 3: Ethical Courage
Ethical Courage
Willingness to Pay the Price for Ethics
Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others
Ethical Courage
• It is not sufficient to simply understand ethical
principles
• One must have the courage to pay a price for
being ethical
• Examples can be helpful—case studies showing
people willing to stand up for ethical principles
• Again, it helps to have “practiced” ethical
behavior over many years—especially in small
things
Level 4: Ethical Leadership
Ethical Leadership
Helping Others to be Ethical
Ethical Courage
Willingness to Pay the Price for Ethics
Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others
Ethical Leadership
• The ability and willingness to encourage others to
behave ethically
• Can be taught through cases, problem solving,
study of successful organizations
• Includes
– Developing an organizational climate that fosters
ethical behavior
– Structuring policies that encourages ethics
– Behaving ethically while facing the pressures of
leadership
The Importance of Ethical Leadership
Honest Employees
Will be Honest Always
Swing Group
Dishonest Employees
Policies Won’t Help Much
Could Go Either Way
Ethical Leadership will significantly impact an
organization since the vast majority, in this view,
can be influenced to behave ethically.
Importance of Ethical Leadership
Honest Employees
Will be Honest Always
Swing Group
Dishonest Employees
Policies Won’t Help Much
Could Go Either Way
Strong Ethical Leadership—induces the middle
group to behave as if they were the honest
employees.
Importance of Ethical Leadership
Dishonest Employees
Honest Employees
Will be Honest Always
Policies Won’t Help Much
Swing Group
Could Go Either Way
Weak Ethical Leadership—permits the middle
group to behave as if they were the dishonest
employees.
Which Way Will
Your Organization
Swing?
“Good Ethics Means
Good Business”