What is involved in an ethical business?

Nowadays in our global world, national and international competition forces businesses to act in certain ways to achieve particular goals. Every company environment is made up of different cultures, values and believes which makes ethical issues to a complex topic.

What is involved in being an ethical business and what are the benefits and disadvantages of being socially responsible?

The following assignment explains the need for and some aspects of ethics in companies.

It also gives a definition and a brief description on problems arising throughout global businesses and reviews a number of ethical frameworks and their application in company policies and practices.

The assessment summarizes different theories, styles, and advantages. It also compares disadvantages and addresses the importance of company profits. It will sketch ethical concerns supported by case studies. To complete the assignment adequate grounds for a conclusion will be assessed and own judgment will be added.

Introduction

In the early 1980s Britain’s estimated energy bill amounted to over twenty billion pounds per annum. Throughout the 1970s continually rising fuel prizes had a direct and damaging impact on business costs and profits.

“Energy use, graphs and tables” (1995-2002)

Available from: www.dti.gov.uk/graphs/521chart.gif [Accessed 1/12/2005]

People and organizations are increasingly concerned that supplies of energy and materials are likely to become scarcer and more expensive. Fossil fuels have finite geological limits and are subject to political, environmental and social questions. Whatever alternative sources may be developed in the future, days of plentiful and cheap energy are not going to return.

Debates on business ethics are concentrating on social and ecological responsibility of companies within society which is regarded to be crucial in the external self-presentation and public perception of (economic) organizations. In satisfying our needs, business must be aware of those diverse topics and should aim on achieving a sustainable development.

Sustainable development meets the needs of the present generation without compromising the ability of future generations to meet their own needs.

Companies’ positive responses to such issues are rarely altruistic. It is often for their own public relations or enforced by legislation.

Findings-main facts about business ethics

What does the word ‘ethics’ mean?

The word ethics originates from the Greek word ethos, meaning “custom or character”.

Definitions have included phrases like “the science of the ideal human character” or “science of moral duty.”

What defines business ethics?

Ethical business issues are identifiable problems, situations or opportunities requiring a choice between several actions. It is a set of values, beliefs, goals, norms and responsibilities that members of an organization recognize and share. Business ethics and morality refer to well based standards of right and wrong and prescribe what humans ought to do- usually in terms of rights, benefits to society, or specific virtues. It also relates to how a company conducts its business to make profit.

What is an ethical business?

An ethical business focuses on giving positive contributions (i.e. providing goods, services) to the community without causing damage to the environment, exploiting its workforce ( paying low wages), using child labor, or producing products which are dangerous content. A company will seek to balance financial and human needs of their stakeholders (employees, customers, suppliers and shareholders) and ensure that it is ecologically sustainable. Corporate businesses are undertaken to create an environment of strong held values, tradition and culture.

What relevance do ethics have in business?

Companies do not operate in a vacuum, they are part of society. People expect certain standards of behavior from businesses (i.e. addressing its environmental impacts; provide fair salary to employees that can increase motivation).

According to MORI research in July 2002, 80 % of the UK public believes that: “Large companies have a moral responsibility to society”.

The 2002 major national survey of public perceptions of energy use (2006)

Available from: http://www.tyndall.ac.uk/index.shtml [Accessed 10/05/2006]

Corporate ethics- A growing trend

In a world of finite resources, wasteful use of energy/materials is increasingly regarded as ‘anti-social behavior’ and subject to diverse geological and political constraints. Environmental groups and political parties campaign to stop the destruction of ecology and resources. Efficient use of energy provides benefits individual enterprises and a wider society. A socially responsible business will respond to public demand for improved efficiency and includes consumer wants for now and the future.

Firms are increasingly aware that ethics are a unique selling preposition in today’s business life. Companies are incorporating social responsibility programs into marketing decisions. Increasing evidence indicates that being ethical results in valuable benefits: It can enhance public reputation and therefore increase profits.

“A recent study discovered that 84 percent of U.S. respondents have incorporated business ethics. A study found that 71 percent of UK companies used codes of ethics in 1991.”

“The 2002 major national survey of public perceptions of energy use” (2006)

Available from: http://www.tyndall.ac.uk/index.shtml [Accessed 11/05/2006]

Introducing strict ethical/environmental considerations in financial markets (FTSE Good Index) shows outperforming conventional stock exchange indices. “Figures for the Dow Jones Sustainability Index (ethical index) in the US show that it outperformed the Dow Jones Global Index by 46 %.”

Griffiths, A.; Wall, S. ;( 2005); Economics for business and management; 1st ed.; UK, Prentice Hall; pp. 149

The ethical code-Code of conduct

Ethical codes formalize rules and standards and reflect values and missions of a company.

Leaders and members must have an obligation to operate in a consistent way meeting core objectives and society needs. Contributing to local, national and international communities by adopting a code of conduct can ensure honesty, fairness and respect in the organization and its environment it operates in.

Developing a code of conduct

Developing ethical behavior in an organization can be achieved by enforcing rules and standards that describe what the company expects of its employees and managers. To ensure ethical conduct, open communication and coaching staff are essential.

Other important development factors include:

Training/ including employees in developing a code of ethics.

Clear channels of communication, trust and good employee-manager relationships

Improved motivation to achieve objectives and goals

Adhering to the guidelines of an ethics code

A code of conduct requires shared commitment to achieve and develop high standards of production for its success. Open communication and coaching staff are essential but can introduce high costs and conflicts between share-and other stakeholders.

Does being an ethical policy bring advantages?

Being socially responsible enhances/protects corporate reputation and motivates/encourages loyalty and trust in organizations relationships.

For example an ethical policy can reassure investors and stakeholders about the company’s approach to its non-financial risks by providing a license to operate.

Where do Ethical issues arise from?

Ethical issues generally arise when marketers fail to understand risks of function, value or use of a product. Pressures can arise from substituting inferior materials to minimize costs or failing to inform customers about existing conditions or changes in product quality. Many car, gas and tobacco companies have experienced negative publicity associated with design or safety issues (as well as global warming, water pollution, noise and congestion issues) that resulted in control of their behavior by laws, regulations and higher taxations. Developing and selling a product which does not harm the environment refers to ‘green marketing’ and must focus on long-term as well as short-term results. Most organizations participating ethics are beginning to realize that they have traded short-term profit margins for long-term morale and productivity.

No matter what laws or regulations are passed onto the business, ethics cannot be externally imposed. Buying a healthy product, without considering its prize or shopping for bargains-neither side is immoral or unethical. Ethical companies will focus on all types of consumer wants and try to ensure working within their social mission.

Taking social responsibilities towards stakeholders and evaluating the effects of a company’s activity in its microenvironment (social auditing) involves/includes:

Social auditing

Benefits for company

No difference between employees(equal rights)

Increased motivation, established social performance

Identification of ethical values and social objectives

Easier identification of criticisms and meeting company objectives

Understanding and applying customers views+ providing information for pressure groups

Easier to measure performance/ results to make informed decisions about impact of activities, gaining new customers

Improving brand and image

attracts employees and perhaps leads to higher sales

Management setting example to incorporate ethics

Employees convinced being ethical improves organization (including profits)

Being unethical can lead to:

less resources for future generations and environmental damage due to wasteful use of energy

high level of unit cost in economy which leads to being uncompetitive in world markets and trading performance

increased poverty due to unfair distribution of money (i.e. wasting money on luxuries)

price increase of non-renewable fossil fuels, leading to high expenditure on overseas supplies

increase of private costs (i.e. wages, rent) and social costs (i.e. noise, pollution)

violation of laws or company policies

unfair balance to parties concerned both in the short-term as well as the long-term

increase of private benefits (i.e. profits) and social benefits (benefits to the rest of the society)

Becoming a socially responsible company has many advantages. However, managers of company’s hold different views of moral positions.

And sometimes, organizations have to choose between being an ethical company or striving for increased or kept profit.

Often, companies and customers find themselves in an ‘ethical dilemma’ by choosing between local or ‘global’ spending. When money is spent globally, cheaper products are bought, creating a short-term advantage. This can have a negative impact on undeveloped countries if the buyers exploit their monopoly power and pay unfair prices to poor countries.

Businesses therefore have to weigh up long-and short term decisions.

Suppliers can increase profits by raising prices or reducing the quality of a product (bargaining power of suppliers). Therefore, underdeveloped countries with no other substitute products available have to accept the competitor’s demands or choose inefficient but cheaper companies to do the job. An example is the case study from Stuart Wall and Bronwen Rees book. Both describe “Bribery and corruption by the World Bank as the single greatest obstacle to economic and social development. Poor infrastructure and higher pay from poor countries are often the result of bribes.”

Rees; B.; Wall, B.; (2004); International Business; 2nd ed.; England; Prentice Hall, pp. 212

Disadvantages of becoming a socially responsible business can include:

At first the costly,

costly, takes time and effort to introduce changes

change of business culture, expensive and time-consuming to promote new culture

loosing established customers

conflicts of aims between share-and stakeholders (paying increased wages can loose business profit)

new recruitment and redundancies of employees (difficult to be ethical since there is the need to get rid of staff in order to keep profit up)

time-consuming to adopt to new image

turning down low costs of production (i.e. labor)

costly to change working conditions for labor

being ethical introduces motivation which is not desired in every company

adapting to new policies may not be profitable

management and employees need training ( costs extra money)

organization may not be able to cope with extra pressure

increased quality of product will lead to raising productioncosts

In every company, profit is an important objective for success and decision making. Being ethical can benefit businesses, society and economy. But should trustees make bad investments for social responsibility?

Being an ethical company includes pressure of balancing profits and ethics at the same time (I.e. profits vs. exploiting stakeholders).

Organizations have to invest in training, research, and product development. Only a few companies are immune to economic fluctuations and can stay committed to investment in societal behavior. For a new firm entering business, being ethical can mean less profitable short-run incomes that are desired to stay in competition. Larger organizations often have profit to enhance its reputation, creating greater long-term benefits even though is difficult to guarantee a big company’s ethical status due to its involvement in many business activities.

Customers expect quality products for a fair prize. Often, share-and other stakeholder get in conflicts due to increased prizes on the production of products.

Many regard the government as being slow on promoting ethical behavior. Old motorways and power stations are contributing factors to the collapse of many economies. Reconstructions are costly and businesses as well as customers are often the ones suffering higher prizes. For example there is a chance for the UK of loosing out on the new industry for wind farms. Green peace is backing up NPower, defusing local protests for ‘wind power’. Creating a new type of electricity shows economic responsibility but is the company socially responsible by defusing customers views about the massive turbines?

It can be argued that companies can use a of cost- benefit analysis to determine forecasts, outcomes and consequences. “Known to philosophers as utilitarianism, this principle is best known by the maxim: Do whatever produces the greatest good for the greatest number- Do what best is for the best for the greatest number of people.”

Rushworth, M., (1995), Good people make tough choices, NY, 1st ed., firesides books, pp.24

Some businesses, like Nestlé and Esso are acting accordingly to fixed rules, never mind the outcomes (Rule-based thinking).

Often associated the German philosopher Immanuel Kant, this principle is firmly based on duty- “On the way we ought to do, rather than we think what might work- Follow only the principle that everyone else will follow.”

Rushworth, M., K., Good people make tough choices, firesides books, NY, 1995, 1st ed., pp.24

Some organizations believe that shifting the business to an undeveloped country will reduce prices for production and wages for employees, therefore increasing profits for the company. This behavior seems ‘unethical’ even if it can lift people out of poverty and assists to international development and the finance for decommissioning for a cleaner environment.

“The website maketradefair.com shows that 68 % of people in the UK supporting Fair-Trade but ‘green products’ still command less than 1 % of the market.”

Make trade fair (2006)

Available from: http://www.maketradefair.com [Accessed 16/04/2006]

Some companies have had very bad publicity on this and are now trying to rebalance their practice.

It can be argued that supermarkets not promoting their (by putting products on bottom shelves) products enough. Another reason is the increased price on Fair-Trade products.

To underline the pressure of being a socially responsible business, the example of organic farming is given from the book “International Business, by Stuart Wall and Bronwen Rees.

Going organic includes changes in transforming middle-class specialties to a mass market phenomena for retailers. Farmers have to switch to natural herbicides and fertilizers which are benefits to society but can include extra costs (for the farmer and the consumer) and are easier to achieve with funding from the government.

“Those who buy organic food have to except higher prices because they are paying for sustainable, agricultural techniques and healthier food- People have to realize you don’t get something for nothing.” Simon Brenman, of ‘The Soil Association’.

Rees; B.; Wall, B.; (2004); International Business; 2nd ed.; England; Prentice Hall ,pp 223-224

To succeed with environmentally friendly products, the image of benefits must be clearly defined and a market segment consisting of consumer who are willing to pay for better quality must be found.

Countries have different cultures, values, beliefs and expectations. Companies operating internationally cannot transfer all business standards unchanged, expecting the business partner to understand their core values. For example, ethical codes tend to be seen as legal documents in the US whereas it is viewed as a social compact between company and its workers in Europe.

Financial institutions are more experienced in the channels of communication and are sensitive to indices of firm performance. Often, those institutions have profit maximizing objectives but also enough income to spend on promotion and technological innovations to reach their customers to be socially and economically responsible.

Promotion can create false or misleading advertising and manipulative/deceptive sales tactics and publicity. A major issue pertains the marketing of video games that promotes violence and weapons to children.

Not every company has the choice of being ethical or not. For example the tobacco industry is regarded as being irresponsible towards society but is reasonably safe during market collapses, as they tend to have a safe and predictable profit flow.

Defense companies benefited from higher arms spending following September 11 attacks on the US.

Nowadays, even ethical businesses agree to. An example is the retailer Body Shop, agreeing to the takeover by French cosmetics giant L’Oreal in a deal worth £652m. Anita Roddick, consultant, said the company’s values (like community trade) would not change. But the organization has yet to show its commitment to ethical issues.

“L’Oreal takes over Body shop” 2006)

Available from: http:// www.clarionledordger.com

[Accessed 12/05/2006]

Evaluation

Ethics refers to what is acceptable in a certain society. Organizational ethics is an important element and a unique selling preposition in business as it can determine beliefs and responsibility of the company in the eyes of society. However, it should not be assumed that ‘doing good’ is desirable or acceptable.

People expect certain ethical behavior from companies but they do not operate in a vacuum. Every country has different business values and views. Being social and ecological responsible in one country doesn’t mean it’s ethical in the other. It implies that there is no morality of being right or wrong in ethical businesses.

Companies focusing on future-orientated thinking are working within their social mission which can enhance public reputation and increase profits to remain competitive in today’s business world.