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What is Business Ethics?

definition

Business ethics outline the legal and moral guidelines that companies should follow in order to do the right thing and develop public trust – Often, ethical practices help boost an organization’s reputation.

🤔 Understanding business ethics

Business ethics – aka corporate ethics – is a broad area of study that examines how a company should act toward a variety of groups including consumers, employees, shareholders, regulators, and competitors. The field provides guidance on many ethical and moral issues that can arise in routine business activities and influence our world. There are some situations where the law dictates what companies must do, but there are also just best ethical practices. Business ethics helps to create trust between companies and their consumers by outlining fair and equal treatment. The area is popular today because trust is becoming harder for companies to maintain, and consumers are also expecting companies to contribute more to social good initiatives – like the environment.

example

Think about the last time you bought something for yourself. You probably wanted to feel good about that purchase. One way that consumers like you can achieve this is by doing business with companies that promote ethical behavior and have socially responsible initiatives. For example, Bombas – the direct-to-consumer apparel brand most known for its socks – uses a one-for-one business model. This means that for every pair of socks you buy, Bombas donates one pair to someone in need. TOMS, a retail company, originally made this mission-based model famous. They donate shoes and eyeglasses to children in need, and also participate in efforts to make clean water more accessible.

Takeaway

Business ethics is like sportsmanship during an athletic event…

During sporting events, athletes are expected to behave ethically and treat other competitors with fairness and respect. Some of these expectations come from the actual rules of the game, and athletes may receive punishment for failure to comply with them. Other standards of sportsmanship come as a result of common courtesy – Fans might think less of an athlete who does not display good behavior. Business ethics is similar. There are specific rules of business ethics mandated by law while other standards are simply guided by common courtesy and doing the right thing.

Tell me more...

What is the role of ethics in business?
What are the types of business ethics?
What are some examples of ethical practices?
What are some examples of unethical practices?
How do you ensure ethical practice?

What is the role of ethics in business?

The concept of business ethics was popularized during the 1960s and 1970s. Around that time, companies realized that running ethical businesses could have a significant impact on their profits – acting morally was important to consumers and they might stop doing business with institutions they viewed as unethical. Since then, the topic of business ethics has become a core part of the standard curriculum at business schools in the US. For example, at the University of San Diego, you can receive a minor in law and ethics through the business school.

Fair treatment of both employees and customers is a critical element of business ethics. For a company to be successful in the long run, many experts believe it should place a premium on building trust with customers so that they are loyal and spread a good word to others. To run a successful company, businesses also need a team of good, reliable employees – Ethical practices can help with recruitment and retention of this talent.

In addition to the general moral guidelines outlined by business ethics, there are also laws that govern this field. Many federal and state statutes prohibit certain unethical behaviors by companies. For example, there are laws that prevent companies and individuals from engaging in insider trading, which is the practice of trading an organization’s security – like a stock or bond – based on important (aka material) nonpublic information.

In recent years, customer expectations for how companies should act have grown and many companies have been in the spotlight for their business practices. Conglomerates like Nestlé S.A., the food and drink producer, have been boycotted because of some perceived irresponsible marketing and environmental practices. When highlighted by the media, this type of behavior can cause the public to take a hard look at and reconsider the other companies they patronize.

Consumers today also place a high level of importance on corporate social responsibility (CSR) – aka corporate citizenship. This expectation requires companies to look closely at their impact on the local and global community, environment, and economy. Examples of CSR include donating to a local or national nonprofit organization, reducing your company’s environmental footprint, and encouraging employees to volunteer for local causes.

Business ethics is essential for all organizations because of the impact that corporations and even small businesses have on society. A company that prioritizes ethical behavior can add incredible value to its community and the lives of its individual employees and customers.

What are the types of business ethics?

Business ethics can be broken down into a number of categories based on the responsible party for acting ethically – either the individual, managers, company, or law.

Personal responsibility

Personal responsibility refers to the ethical code that an individual personally lives by regardless of their employment. Each of us maintains our own set of moral standards, which we can and should bring with us into the workplace.

Leadership responsibility

A company’s professional leadership team also has a standard of ethics that they must meet in order for a business overall to be ethical. Managers often publicly represent the organization, meaning that their behavior will reflect back on the company. Additionally, many employees look to managers for guidance and leadership, so those in these positions need to display ethical behavior.

Corporate responsibility

At a more macro level, corporations have a responsibility to their stakeholders and the public to act ethically. Failing to do so can impact their public image and profitability – and even land them in legal trouble. Today, many people hold businesses to a high standard from both a legal and moral standpoint. They expect companies to do good for society, and may stop doing businesses with companies who fail to do so.

Legal responsibility

It’s possible that some individuals and companies don’t care about practicing ethical behavior to help their communities, garner positive public opinion, or increase profits. But there are still laws that require a particular standard of conduct. For companies who don’t follow those laws, there are consequences like fines and, in serious cases, imprisonment of company leaders.

Some of these laws govern the treatment of employees, such as minimum wage laws, worker’s compensation laws, and workplace safety standards.

There are also laws to ensure that companies don’t practice unethical financial behavior, such as lying on financial statements or stealing company money.

Another example of a legal responsibility that companies and employees have is the duty to report banned or recalled products that might be unsafe to consumers.

What are some examples of ethical practices?

Ensuring ethical practices in business is a great way to increase public trust and approval, boost profits, and stay on the right side of the law. Let’s talk about a few examples of ethical business practices.

Trustworthiness and Transparency

A surefire way for companies to maintain ethical behavior is by practicing transparency and honesty. If employees and customers feel that company leadership is honest with them and keeps promises, then the company is likely to be more successful. This type of transparency and trustworthiness can help increase sales since consumers know they can trust that business’ products.

One company that has received praise for its transparency is Hennes & Mauritz AB (H&M), a multinational clothing retailer. They remain transparent by sharing a list of their suppliers and updating it on a quarterly basis – It is publicly available online. This way, they are able to prove that they are sourcing their materials from companies they believe that their customers would support.

Respect for Employees

A company is only as successful as its employees. Due to this reliance on them for future success, showing respect to employees is of utmost importance for a business. Beyond what is legally required, treating employees well and taking steps to intervene if other employees, customers, or managers mistreat them are good ethical business practices.

Everlane, a clothing brand, is known for showing great respect to its employees. The company is famous for championing the rights and wellbeing of the individuals who make its clothing.

Respect for Customers

Customer centricity is a popular term in the media today and essentially means putting the customer first at every stage of their interaction with a company. Doing so is a great way for a company to both do the right thing and improve or maintain their public image.

Respect for customers also means respecting their right to privacy and helping to secure their personal information. Companies should refrain from sharing personal details about their customers with third parties.

Accountability

One of the best ways to ensure ethical business practices is to keep employees at all levels – from junior team members to C-suite executives – accountable for unethical behaviors.

Ensuring that employees are aware that action will be taken if unethical behavior occurs is an important element of accountability. This shows employees that they should feel safe in bringing forward unethical behavior they’ve witnessed. It will also send a signal to employees that punishment will take place if they act in an unethical manner.

Suppose a female employee reports to her manager that a male colleague has harassed her. If the manager disregards her concerns, she and other female employees may feel hesitant to report that kind of behavior in the future. But, if the manager takes action on the report, then coworkers will see that employees are held accountable for their actions.

What are some examples of unethical practices?

Unfortunately, despite the importance placed on ethical business practices and the laws surrounding them, there are still companies that engage in unethical behavior. Let’s look at some examples.

Mistreating employees

Mistreating employees is a bad practice, unethical, and often illegal. Unfortunately, some managers and company owners take advantage of their staff. Examples of this behavior include underpaying employees, providing unsafe working conditions, and committing or allowing for harassment of employees.

One of the largest employers in the US, Walmart Inc., has previously received negative publicity for mistreatment of its employees – This included a class action lawsuit for sex discrimination that involved practices like denying jobs to female candidates.

Deceptive product information

Another example of an unethical business practice is misleading consumers about products via deceptive marketing practices in an attempt to increase sales. This deception can be harmful to customers, and eventually the company if and when the truth comes out.

For example, in 2019 the Federal Trade Commission penalized several companies, including cosmetics company Sunday Riley Modern Skincare, LLC, for deceptive practices, such as purchasing fake customer reviews and providing fake indicators of social media influence (e.g., likes and followers).

Lying on financial statements

Whenever a company lies on a financial statement, such as a balance sheet or income statement, they are engaging in unethical (and illegal) behavior. The Securities and Exchange Commission (SEC) and the generally accepted accounting principles (GAAP) set out legal and ethical guidelines for these statements, but companies still engage in this deceptive act.

The scandal first published in 2001 about Enron Corporation is probably one of the most famous examples of a company lying on financial statements. The company committed several ethical and legal violations, including failing to mark down debts on their balance sheet, overstating income, committing tax fraud, and reporting projected income from assets before the revenue materialized.

Employee misuse of time or resources

Not all unethical business practices are the direct doing of company leadership — Employees themselves also engage in unethical behavior. Misusing company time or misappropriating resources are two of the most common examples of this.

An employee might misuse the company’s time by working on personal matters during work hours or failing to show up on time for their shift. Misappropriating company resources may include using company technology for personal matters or stealing company property.

How do you ensure ethical practice?

As a business owner or manager, you want to ensure that you run your business ethically and that your employees act accordingly. Because your personal and business ethics can affect everything from your legal standing to brand reputation and profitability, it’s in your best interest to maintain ethical practices. But how do you do that?

Start with management

Firstly, business ethics starts at the top and trickles down. According to survey results from the Ethics Resource Center, a consortium of three nonprofit organizations, 60% of ethics violations in the workplace begin with the manager. Additionally, employees are more likely to defer to their manager’s behavior, even if they have ethical concerns about a particular situation – In these cases, an issue may not be raised by a subordinate.

Have clearly written ethical guidelines

To enforce ethical standards within your company, you must first write those standards. By having a formal set of guidelines or code of conduct available to employees, you’re making sure everyone is on the same page. You can distribute these guidelines in an employee handbook or post them around the office. The more clear your company’s policies are, the easier they are to enforce.

Train employees on your company’s ethical standards

It’s not enough just to have a written code of ethics — You also have to train your employees on those ethical guidelines. Ethics training is something that all employees should undergo when they first start working at a company. But your company can do even better by holding regular training sessions and workshops where employees can be challenged to solve hypothetical ethical dilemmas. This can help employees practice their ethical decision-making skills.

Create a clear process for employees to report ethics violations

Reporting ethically questionable behavior can be challenging for employees, especially when the behavior is that of a close coworker or even a manager. For that reason, it’s vital to have a clear process for employees to report violations they see. Equally important, employees should be able to do this confidentially so that they don’t have to worry about retaliation or judgment from others. Deciding whether to report a superior for unethical behavior can be a considerable dilemma for employees, and you want to make it as easy for them as possible to do the right thing.

Reward ethical behavior and punish unethical behavior

If you’re going to have ethical guidelines at your company, there should also be a process in place in case someone violates those guidelines. Everyone should know what the punishment will be for violations. Depending on the violation, the punishment may be a demotion, suspension, or termination. In less severe situations, it might be something more along the lines of a verbal warning or a note in someone’s human resources (HR) file.

In addition to punishing unethical behavior, it’s equally essential to reward ethical behavior. Rewarding this type of behavior helps show employees that you notice their ethical practices, especially when they go above and beyond.

Make business ethics a part of the workplace culture

One of the best ways to ensure an ethical workplace is to make ethics a part of your corporate culture and corporate governance. One way you can do this is by placing a premium on the treatment of both customers and employees. Advocating for the respect of everyone involved in the business will send a positive message to employees and the public.

You can also create an ethical workplace culture by practicing corporate social responsibility (CSR) to positively impact the community, environment, and society as a whole. You can encourage this culture by running donation programs or finding volunteer opportunities for employees.

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