Business Ethics: Corporate Behavior, Scandals, and Standards

Introduction to Business Ethics

Ethics shape the way we choose to interact with one another, in both our business and personal lives (Hunkin, 2002). Ethics are implicated in many aspects of business: decision-making, adjudication, marketing and sales, financial reporting, human resources, performance evaluation, and leadership (Sims, 1994). Business ethics may be defined as "the application of general ethical or honest ideals of human behavior in business functioning in an open or mixed market economy." Businesspeople must be morally accountable not simply as citizens of a moral society, but as individuals engaged in competitive ventures (Frederic, 1995).

The issue of business ethics focuses on business conduct in light of certain underlying human values, such as investor satisfaction, quality service, and improved working environments. The ethical course of action in business is that which best adheres to the principles of morality and sound management practice. Ethics is, ultimately, concerned with the pursuit of the highest moral good (Sims, 1994).

Why Business Ethics Has Risen on the Public Agenda

What accounts for the growing importance of ethical behavior in business on the public agenda? Several interrelated factors must be considered. First, business has become increasingly global and, in the process, less easily held to account. Nevertheless, the need for accountability — particularly among large multinational corporations — remains acute. The ten largest corporations in the world directly employ 4.3 million people, with many more on their indirect payrolls, potentially twice that number. Consequently, how these companies conduct themselves carries substantial social and economic weight (Megone & Robinson, 2002). Public pressure for ethical accountability from major social institutions has prompted businesses to take more proactive steps in building and sustaining ethical work environments (Frederick, Hoffman, Kamm, & Petry, 1994).

A second factor has been the occurrence of major corporate disasters. The Exxon Valdez oil spill, the Maxwell affair, and the Bhopal industrial disaster all underscored questions of corporate accountability. Third, shareholder groups and governments alike have demonstrated heightened interest in ethical and environmental matters. The enactment of the Foreign Corrupt Practices Act is one example of governmental intervention in what were once considered purely business decisions — specifically, how far a company may go in pursuing acquisitions. Such interventions intensify the challenge of defining the boundaries of acceptable conduct in a world where business transactions move ever faster and grow ever more complex (Megone & Robinson, 2002).

Fourth, deregulation of utilities, elevated public expectations of business, and growing media scrutiny have all thrust ethical conduct into the spotlight. The demand within business to incentivize behavior ranging from ethical to unethical has grown considerably. There is mounting pressure on boards and CEOs to increase quarterly earnings and satisfy market expectations — a pressure that accelerated during the 1990s as more individuals and institutions invested in corporate equities. This pressure has arguably never been higher than it is today. The combination of market volatility, substantial executive shareholdings, and stock options creates incentives for aggressive and occasionally unethical management behavior. Moreover, much like an insect trapped by a Venus flytrap, once one begins down the ethics continuum, it becomes a very slippery slope (Hunkin, 2002).

Nevertheless, significant organizational costs arise when ethical misconduct by a company becomes public. Typically, sales fall and the company's reputation suffers. A notable example is the case of Beech-Nut Company. That company's reputation — built on trust as a brand sold to children and associated with safety and care — became seriously tarnished by the actions of corrupt executives. There are also broader societal costs associated with unethical business practices. Consumers who are manipulated into purchasing products they do not need, or who pay significantly inflated prices for goods or services, bear both a financial burden and a growing distrust of the broader marketing system (Jackson, 2005).

The Costs of Unethical Business Behavior

Certain groups are especially vulnerable to unethical business practices, including the poor, the elderly, people with physical or mental disabilities, children, and recent immigrants. Beyond the financial or physical harm suffered by individual victims, unethical behavior causes systemic damage to the integrity of the economic system, which depends on a high degree of trust in order to function equitably. Regardless of whether one favors a free-market or planned economy, most business researchers agree that financially competent firms offering superior products should be rewarded — not unscrupulous companies that gain an apparent advantage through deception. When an unethical business practice yields short-term benefits for less efficient companies, the gains of the competitive marketplace are undermined and diverted toward the unethical actor (Jackson, 2005).

Multinational companies currently operate in countries where facilitation payments, sexual discrimination, harassment, ethnic prejudice, and numerous other practices are not uniformly regarded as illegal or unethical. As China's rapid economic growth positions it as a major global power, a significant clash of business ethics between Chinese and Western business norms appears increasingly likely (Vickers, 2005). In the United States, it must be acknowledged that despite Sarbanes-Oxley and other legislative reforms, corporate cultures continue to be viewed with skepticism (Frederick, Hoffman, Kamm, & Petry, 1994).

The normative indictment leveled at American corporate business is extensive and damaging. Repeated criticism from many quarters over many years has condemned specific business practices and, in some cases, the institution of business itself. Greed, self-interest, ego-driven conduct, disregard for the needs and welfare of others, a narrow or absent social vision, an ethnocentric managerial philosophy imposed on non-industrial cultures, suppression of countervailing organizations such as trade unions, and systems of self-reward that few within or outside business have attempted to justify as fair or ethical — all of these characteristics have been attributed to the business world. Repeated case studies have documented these and other abuses, while countless conferences and seminars have voiced concern over the lack of social responsibility and ethical conduct among American businesses (Frederick, 1995).