Business Ethics & Responsibility: Theories, Definition, Principles, Examples

Business ethics addresses issues of right and wrong in decision making, but how does one decide what is right and what is wrong.

Importance of Business Ethics

Business ethics addresses issues of right and wrong in decision making.

Law also tells us what is right and wrong but often law is the minimum acceptable standard. Some issues are not legislated for and this is where ethics often starts.

Why is it important?

• Being (seen to be) ethical can be good for business.
• Business has an increasing influence in society.
• It has the potential to contribute to society.
• Business malpractice is damaging to individuals, organisations and society
• Stakeholders require a more ethical approach

Business Scandals in the Past

The range of business scandals include:

• The banking crisis
• UK MPs’ expenses
• Various tax avoidance scandals (Panama Papers)
• Environmental catastrophes like the Gulf of Mexico oil spill
• High-value fashion stores using child labour
• Collapse of major companies like Carillion where employees lose their jobs and senior executives leave with protected pay and bonuses.
• VW (volkswagen) Emissions scandal

Different types of business exists: Small or medium privately owned business where the owner is the manager, Multi-national corporation, Public sector organisation, Charity or other organisation with a social purpose.

Similar levels and types of unethical behaviour occur in businesses, government organisations and CSOs (civil society organisations e.g. charities, non-profits etc..). There is also a focus on different stakeholders – shareholders, the general public, donors and service users – which leads to different approaches to ethics.

There are however some key differences even with businesses.

Small businesses will lack the resources of larger organisations. Managers in small businesses often have a more informal trust-based approach to managing. They often see staff as their most important asset.

Not every country will have laws for the following:

• Forbidding the testing of products on animals
• Forbidding the sale of landmines to oppressive regimes
• Prohibiting employees joining a trades union

However many people will feel strongly about these issues, making them an ethical debate.

Legal responsibilities of companies are made clear through the various laws. There are laws on health & safety, equal opportunities & discrimination, employment and commercial contracts; taxes, pollution, packaging. Disclosure of information depends partly on the type of firm- more expected of a limited liability company than a sole proprietorship.

“In one sense, business ethics can be said to begin where the law ends.” (Crane and Matten, 2010).

The scandals listed could lead you to think that business ethics is a contradiction. But, Business ethics often deals with issues where there is no clear view of which choice is right or wrong.

Business ethics and social responsibility

Chryssides & Kaler (1993) note:

Business ethics, like ethics in general, is centrally concerned with conduct.

It essentially questions about whether we ought or ought not to perform certain kinds of actions; about whether those actions are good or bad, right or wrong, virtuous or vicious, worthy of praise or blame, reward or punishment.

Consequently…the point of the exercise is to resolve questions of conduct.

Theories Related to Business Ethics & Responsibility

Agency Theory and Agency Problem

Agency theory examines the relationship between principals and agents (acting for the principals) and focuses on how conflicts of interest can arise and how they can be mitigated.

The agency problem refers to the conflicts of interest that arise between principals and agents, resulting in decreased overall organizational performance.

Read more on Agency Theory and Agency Problem

Board Diversity

Board diversity plays an important role in governance as it promotes transparency, ethical behavior, and responsible decision-making.

Read more on board diversity here.

Corporate Social Responsibility (CSR)

“Corporate responsibility (CR), also known as corporate social responsibility (CSR) or business sustainability, addresses the ethics of an organisation’s activities and how it operates in a way that is viable over the long term. These two factors are intrinsically linked, as a business that damages the systems on which it depends will ultimately be unsustainable.”

Read more on Corporate Social Responsibility (CSR)

Corporate governance

Corporate governance refers to the set of practices and rules that are used to direct and control a company so that the interests of the various stakeholders are balanced.

This is done by ensuring transparency, accountability, and responsibility.

Read more on Corporate Governance here.

Social Responsibilities of Corporations

There are various arguments for Social Responsibility:

• Corporations cause social problem – pollution
• Access to substantial resources – major impact
• Corporate activities have social impact
• Corporations need stakeholders, not mere shareholders…
• Enlightened self interest: the corporation takes on social responsibilities to promote self interest

‘Grey’ Areas

Social responsibilities can cover a range of issues: responsibilities for health, safety, ‘fairness’; consultation within the firm; to nearby communities, to the country or countries within which the firm operates or the world egg CO2 emissions; to suppliers.

Some definitions are broader or looser than others.

Demands for social responsibility are multiple: less pollution (but there are several types of pollution), better treatment of workers in developing countries (wages, working conditions, use of child labour etc.); more sustainable use of finite resources e.g. fish, forests, agricultural land.

Views on Business Ethics and Social Responsibility

Torrington, Hall & Taylor (2005) p.718-719

‘There is one and only one social responsibility of business: to use its resources and energy in activities designed to increase its profits as long as it stays within the rules of the game, engaging in open and free competition, without deception and fraud.’ (Friedman 1963).

Milton Friedman’s perspective

Only human beings have a moral responsibility for their actions.

It is managers’ responsibility to act solely in the interests of shareholders – any other purpose is theft from shareholders.

Social issues and problems are the proper province of the state rather than corporate managers.

He criticised CSR for the following reasons:

• Corporate philanthropy (organisations giving money to a charity) distorts the profitability of a company. Companies exist to make profits not save the planet
• Corporations should not use shareholder funds to support good causes. Such donations reduce company dividends
• Corporations cannot possess responsibilities. Corporations are social constructs – only individuals can have responsibilities (Fisher & Lovell, 2006, p. 311-314)

More Views on Social Responsibility

‘In pursuit of profits, won’t businesses act immorally whenever necessary? Aren’t executive salaries out of line? Isn’t dramatic inequality wrong? Isn’t it wrong to subject workers and middle managers in their mature years to so much insecurity? Isn’t it wrong to let people go abruptly and without a parachute? (Novak 1996).

‘Wealth or value creation is in essence a moral act.’ (Hampden-Turner & Trompenaars 1993).

Hartman, DesJardins and MacDonald (2015) state “social responsibility is what a business should or ought to do for the sake of society, even if this comes with an economic cost”.

They identify three levels of responsibility:

• A duty NOT to cause harm – not selling a product that causes harm is an example. This is often covered by legislation as well as being an ethical viewpoint.
• A duty to prevent harm (even when you are not the cause) – a company providing a drug free to those at risk of disease is an example. Merck provide a drug to prevent river blindness free in some of the poorest parts of the world
• A duty to do good – volunteering is an example of this, where one does not have to do that thing, but chooses to.

Hartman, DesJardin and MacDonald (2015, p.4) define business ethics as “a process of responsible decision making”.

They too commented that historically business ethics has been viewed as a contradiction (oxymoron) and something that interferes with the efficient running of a business.

Ethical leadership in business’ aim is to “create the circumstances within which good people are able to do good and bad people are prevented from doing bad” (p.12)