BUL3310 Exam 2 Review Chapters 5 6 7 12 13 CHAPTER 5 I BUSINESS ETHICS ETHICS is the study of what constitutes right and wrong behavior Ethics focuses on morality and application of moral principles to BUSINESS ETHICS focuses on what constitutes ethical behavior in the everyday life business world Business Ethics is NOT a separate kind of ethics WHY IS BUSINESS ETHICS IMPORTANT Understanding business ethics is important to the long run viability of a business the well being of its employees management and officers directors THE MORAL MINIMUM The minimal acceptable standard for ethical business behavior is compliance with the law BUT the law DOES NOT and CANNOT express all ethical requirements IE An action that is legal could be unethical Standards in a company s policies codes must also guide decisions GRAY AREAS IN THE LAW Due to the fact that there are so many laws regulating business it is possible to violate a law without realizing it There are also gray areas of law in which it is difficult to predict how a court will rule Courts sometimes decide these matters by determining whether or not a consequence was foreseeable The best way to avoid punishment by violating the law in these areas is to act responsibly and in good faith SHORT RUN PROFIT MAXIMIZATION In the short run unethical behavior may lead to increased profits In the long run it leads to costly lawsuits settlements and fees bad publicity and ultimately reduces profits IMPORTANCE OF ETHICAL LEADERSHIP Management must set and apply ethical standards in which they believe in personally employees will tend to follow their superiors example 1 Ethical conduct can be created by not tolerating unethical behavior setting realistic goals and periodic employee reviews Those who allow unethical behavior to occur encourage its continuance CREATING ETHICAL CODES OF CONDUCT Most large corporations have codes of conduct that express the firm s willingness to be legally compliant and to the welfare of those who will be affected by the firm s corporate existence Some large corporations emphasize ethics through employee ethics training programs The Sarbanes Oxley Act of 2002 requires firms to set up confidential systems for employees to report any suspected illegal unethical financial practices II ETHICAL TRANSGRESSIONS BY FINANCIAL INSTITUTIONS A STOCK BUYBACKS If a management company believes its stock price is too low below the fair value the company will use its own funds to buy shares of its own stock increasing the share price This is beneficial to corporate executives who have stock options that allow them to buy shares at the lower price and sell them at the higher price This is NOT ILLEGAL even though it seems improper B EXECUTIVE DECISIONS A firm that decides to financially overextend itself will be at risk of failure IE American International Group AIG issued a huge amount of insurance guarantees on financial contracts When too many of the insured events occurred the firm could not afford to reimburse all of the contracts it guaranteed nearly leading to the company s failure The company s executive officers were also spending company funds on expensive luxury events The combination of the two actions makes the firm s actions appear to be unethical C EXECUTIVE BONUSES Company commissions and bonuses can be paid for conduct that will ultimately lead to negative consequences for the firm IE Commissions may be paid on the purchase of a risky asset such as a loan with high probability to default Commission will be paid even though the loan will eventually default hurting the company Such occurrences contributed to the subprime mortgage crisis of 2007 III APPROACHES TO ETHICAL REASONING ETHICAL REASONING is the process by which an individual examines a situation according to their moral standards ethical standards Standard Ethical Reasoning approaches include the following A DUTY BASED ETHICS 1 RELIGIOUS ETHICAL STANDARDS when an act is prohibited by religious teachings it is considered unethical and should not be committed regardless of the potential benefits consequences Religious standards involve compassion 2 KANTIAN ETHICS Immanuel Kant believed that people should be respected b c they possess different qualities than other physical objects Kant s categorical imperative is that individuals should evaluate their actions by thinking about what would happen if everyone acted the same way 3 THE PRINCIPLE OF RIGHTS since we value the principle that people have rights such as life and liberty then when determining whether or not a business decision is ethical we must evaluate how that decision will affect the rights of others employees customers society B OUTCOME BASED ETHICS 1 UTILITARIANISM is a belief that an action is ethical IF it produces the greatest good for the greatest number This approach is highly criticized b c it perceives the general welfare of living human beings as plus or minus signs scattered across a cost benefit worksheet C CORPORATE SOCIAL RESPONSIBILITY 1 STAKEHOLDER APPROACH under this approach the firm s duty to its shareholders should we measured against its duties to others who may hold a greater stake or be more affected by a particular decision such as employees 2 CORPORATE CITIZENSHIP theory that argues business firms should pursue goals that society deems important b c firms have high levels of wealth and power influence Some firms publish annual corporate social responsibility or social sustainability citizenship reports to highlight their 3 A WAY OF DOING BUSINESS some argue that corporate promotion of social goals should be pursued as a way of doing business rather than a activities special program Meaning businesses should primarily operate to promote society s well being instead of doing a few things on the side every year Some suggest that such activities should be relevant and significant to a firm s stakeholders 4 EMPLOYEE RECRUITING AND RETENTION a firm that is focused on being socially responsible will please and therefore retain its employees especially environmental young workers IV MAKING ETHICAL DECISIONS GOAL to ensure that all corporate persons think more broadly about how their decisions actions will affect other employees shareholders customers and the community Guidelines include the following 1 THE LAW Is the proposed action legal 2 BUSINESS RULES AND PROCEDURES Is the proposed action consistent w company s policies and procedures 3 SOCIAL VALUES Is the proposed actions
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