Business Ethics

Why Should Business Be Ethical?

Graphics courtesy of MediumOpens in new window Why should business be ethical? What prevents a business from piling up as much profit as it can, in any way it can, regardless of ethical considerations? The major reasons why business organizations should promote a high level of ethical behavior are

1. to enhance business performance,
2. to comply with legal requirements,
3. to prevent or minimize harm,
4. to meet demands of business stakeholders, and
5. to promote personal morality.

1.     Enhance Business Performance

Some argue that one reason for businesses to be ethical is that it enhances the organization’s performance, or simply: ethics pays.

Businesses are increasingly recognizing that ethics pays and are encouraging ethical behavior by their employees. Senior leaders recognize that ethical actions can directly affect their organization’s bottom line.

Costs to business of unethical behavior go far beyond government fines. News reports of a company’s ethical or unethical behavior has been shown to affect its share in either direction respectively. Such reports influence a firm’s share between 0.5% and 3%.

Organizations with bad reputations face increased recruiting costs, especially when recruiting women and more experienced employees.

One survey found that 71% of U.S. workers said they would not apply for a job at a company with a bad reputation. By contrast, organizations with good reputations find it easier to recruit desirable employees, enjoy lower costs to bring these candidates on board, and have greater retention among employees.

2.     Comply With Legal Requirements

Doing business ethically is also often a legal requirement. Two legal requirements, in particular, provide direction for organizations interested in being more ethical in their business operations. Although they apply only to U. S.-based organizations, these legal requirements also provide a model for organizations that operate outside the United States.

The first is the U.S. Corporate Sentencing GuidelinesOpens in new window, which provide a strong incentive for businesses to promote ethics at work.

The sentencing guidelines come into play when an organization has been found guilty of criminal conduct and is facing sentencing for the criminal act. To determine the sentencing, the judge computes a culpability (degree of blame) score using the guidelines, based on whether or not the organization has

• established standards and procedures to reduce criminal conduct;
• assigned high-level officer(s) responsibility for compliance;
• not assigned discretionary authority to “risky” individuals;
• effectively communicated standards and procedures through training;
• taken reasonably steps to ensure compliance—monitor and audit systems, maintain and publicize reporting systems;
• enforced standards and procedures through disciplinary mechanisms; and
• following detection of offense, responded appropriately and prevented reoccurrence.

Another legal requirement imposed upon U.S. businesses is the Sarbanes-Oxley Act of 2002 (often referred to as SOX)Opens in new window. This law seeks to ensure that organizations maintain high ethical standards in how they conduct and monitor business operations.

For example, the Sarbanes-Oxley Act requires executives to vouch for the accuracy of a firm’s financial reports and requires them to pay back bonuses based on earnings that are later proved fraudulent, called clawback. The act also established strict rules for auditing firms.

3.     Prevent or Minimize Harm

Another reason businesses and their employees should act ethically is to prevent harm to the general public and the organization’s many stakeholders. One of the strongest ethical principles is stated very simply: Do no harm.

One need only look at the examples of outright greed and other unethical behavior by leaders in the financial community that contributed in part to the long-lasting Great Recession in the United StatesOpens in new window and around the world.

These leaders’ unethical actions were responsible for significant harm to many stakeholders in society. Investor’s portfolios dropped in value, retirees saw their nest eggs dwindle, hundreds of thousands of employees lost their jobs, and many small businesses failed.

The “do no harm” principle encompasses more than economic consequences to stakeholders. The loss of salary, retirement funds, and investment value indeed generate significant economic harm to the employees and investors affected by organizational indiscretions. It has also been shown that psychological and emotional harm is likely to manifest as well.

4.     Meet Demands of Business Stakeholders

Another reason businesses should be ethical is that stakeholders demand it. Organizational stakeholders expect that organizations will exhibit high levels of ethical performance and social responsibilityOpens in new window.

If employees view their organization as ethical, they likely take greater pride in working there, have higher overall work satisfaction, and are willing to recommend the organization as a good place to work. In addition, consumers who consider organizations as being ethical or involved in socially responsible programs are more inclined to purchase these organizations’ products.

5.     Promote Personal Morality

A final reason for promoting ethics in business is a personal one. Most people want to act in ways that are consistent with their own sense of right and wrong. It shows how a lack of personal morality by the organization’s leader can adversely affect employees.

Being pressured to contradict their personal values creates emotional stress. Knowing that one works in a supportive ethical climate contributes to one’s sense of psychological security.

The next literature focuses on the relationship between ethics and businessOpens in new window. More specifically, the ethical standards of an organization have a major influence on how it conducts business. Business ethics can be viewed as the behavior stands of leaders and other members, and the way in which business is carried out at different levels.