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THE ROLE OF ETHICS IN BUSINESS

ABSTRACT

This paper examines the growing emphasis colleges and business firms are placing on business ethics, as well as how it informs the lives of those who practivce it. Current views and legislation have only enhanced the significance of ethics codes, making them a crucial part of the corporate landscape. The increasing relevance of the costs of disregarding ethics in business is noted. Emphasis is placed on the importance of stressing business ethics in society, and on effective methods of teaching the concepts to students so that they will carry a strong ethical sense into the business world.

INTRODUCTION

Incorporating values and ethics into business decisions has become increasingly important to business people, universities, government, and the public in general. The costs of unethical behavior in business are high and rising, possibly due to new government regulation. Because of the scandalous last decade, the federal government is listening to the public outrage and taking a stronger stance on unethical business practices. Because of recent laws, it is vital for businesses to focus on securing and monitoring sound ethical policies. In addition, pressure is being placed on business schools to ensure that students graduate with a knowledge of ethical principles and the critical thinking skills necessary to analyze and make sound ethical decisions. This paper will examine the role American universities have taken regarding teaching ethics to business students and the implications this holds for students and society at large.

WHAT IS BUSINESS ETHICS?

Business ethics can be thought of in many different lights, and part of the reason that business ethics has become such a contemporary issue is because it cannot be defined precisely. Although most people have different standards of what is morally justifiable, society generally feels that there are certain values that should be set as the minimum ethical behavior. Most people believe that in order to meet the minimum ethical standards, a business must be honest, obey the law, and not directly infringe on the rights that our society holds as inalienable human rights. This, however, does not exhaust the definition of business ethics that many believe in. Some other ethical issues involve compensation of employees, j ob security for employees, hiring practices, waste management issues, pollution, and conflicts of interest. Sometimes companies face situations where ethical choices are in opposition. An example of this could be a logging company doing business in forests around the world. One ethical consideration must be protecting the rain forest from destruction. Environmentalists may propose that the company stop logging completely; however, this may bring up another ethical issue such as the preservation of jobs for loggers.

ARE BUSINESS ETHICS IMPORTANT?

There is empirical evidence that illustrates that of the 500 largest corporations in the U.S., two-thirds of them have committed some form of illegal behavior (Gellerman, 1986). This fact, combined with the many publicized accounts of illegal business operations including fraud, insider trading, and unfair hiring practices, has caused government, colleges, and businesses to increasingly focus on the role of ethics in business. The following illustrates some of the steps that government, colleges, and businesses have taken to ensure greater ethical considerations in the future.

In response to the increasing litigation concerning corporations accused of unethical behavior, the federal government passed the Sentencing Guidelines for Organizations in 1991. The objective of the guidelines is to encourage ethical corporate behavior by forcing all organizations to create ethics standards, convey these standards to employees, monitor employees, and deal with employees who have violated their corporate ethics standards. In order to help accomplish this goal, the government has allocated funds for three large studies on the effectiveness of corporate compliance programs.

ARE ECONOMICS STUDENTS LESS ETHICAL THAN LIBERAL ARTS STUDENTS?

The phrase "the invisible hand" implies that the market works efficiently when people act in their own interest. It is not by any means telling people to act selfishly, but simply pointing out that business is created because it is in a person's self-interest to go into business and make money. It is hypothesized that because economics students study Adam Smith and his idea of self-interest extensively, they may use Smith's theory of the invisible hand to justify selfishness and disregard for ethics. A study by Hoaas & Wilcox (1995) supports the idea that economics has made less progress in teaching ethics than any other discipline. A second study by Pizzolatto (1996) supports those findings.

A similar study compared the opinions of business students to humanities students in an effort to survey which group had a higher sense of personal ethics (Stewart & Felicetti, 1996). In this study, business students scored above humanities students in their levels of personal ethics. Although it is important to note that the sample size of this study was slightly less than 200 students.

STAKEHOLDER THEORY OF ETHICS

Another type of ethical reasoning is named the stakeholder view. This view states that any person or group that comes into contact with an organization has something at stake. Proponents of this theory believe that economic power is a function of many things, including the relationship each of the stakeholders has with the company. The organization can affect stakeholders positively or negatively. This view holds that instead of focusing only on the needs of the shareholders, the ethical firm will take into account all stakeholders when making decisions. Interest groups such as labor unions, environmental groups, and consumers are drawn to this view because it validates their interest as much as the interests of stockholders.

STOCKHOLDER THEORY OF ETHICS

The traditional idea of ethics in economics is the stockholder theory, which states that management's largest responsibility is to the shareholders of the company. This theory states that if management makes a decision that decreases shareholder's returns, then management has acted unethically. This idea directly contradicts the stakeholder theory of business ethics and may seem harsh, but it is important to note that the shareholders make significant sacrifices for firms. Stockholders not only take financial risk, but in doing so, make the business possible. Without stockholders, many companies would not have the capital to operate. This theory is important in stressing that management needs to be accountable to the shareholders, and it also stresses the needs of stockholders to be compensated for their risk. It is possible that the stockholder view of ethics does not place adequate emphasis on other factors that are important to the firm's success.

THE INVISIBLE HANDSHAKE

Woller (1996) states that it is necessary to read both of Smith's books, An Inquiry Into the Nature and Causes of the Wealth of Nations and The Theory of Moral Sentiments, before attempting to analyze his theories. Woller (1996) believes that when these two writings are taken into consideration together they contradict the idea that the term invisible hand condones running a business with only self-interest as a concern. Smith believed that people are influenced not only by self-interest, but also by the combination of their moral sense and their self-interested side.

... all individuals possess a moral sense as well as a self-interested side. He (Smith) believed that human behavior was strongly influenced by this moral sense through certain naturally arising moral sentiments and through the exercise of individual conscience. To Smith, it was these moral tendencies of the individual, together with the moral connection to society that made free markets possible in the first place. As humans' business managers also possess this moral sense... The pervasive existence of managerial discretion and the indeterminacy of the business environment means that managers cannot avoid making moral choices, even should we desire they not do so (Woller, 1996).

INSTRUMENTAL VIEW OF ETHICS

The instrumental view of ethics illustrates that a firm can comply with the highest ethical standards and behave in such a way that would be economically rational. Instrumental ethics states that a firm will contribute to the goal of profit maximization by being an ethical, socially responsive firm. Thus a firm can serve both the stockholders and the stakeholders (Kotter & Heskett, 1992). In fact, the instrumentalist view holds that being unethical is ultimately very costly to the firm (Hill, 1990).

This can be seen in the examples presented in the beginning of this paper regarding GM, Texaco, and Home Depot. For example, a firm that treats employees unethically may deal with issues including high employee turnover. This turnover leads to expensive training, a period of time where new employees are less efficient and make more mistakes, and costly orientations for new employees. It will also see inflated human resources and administrative costs that stem from excessive hiring. These firms will also suffer from low employee morale, which often leads to lower productivity and possible unethical behavior from the employees. This will increase the cost of monitoring employees.

INVESTING IN BUSINESS ETHICS

If, as stated previously, ethical business is good business, then when a company decides to set and follow strong ethical policies, it can be looked upon as an investment. According to basic principles in finance, an investment is good if the present value of the cost of the investment is less than the present value of expected returns. The only time an ethical business situation cannot be looked upon as an investment is if it is a one-time deal that will have no effect on the future. In this case there are no future payoffs resulting from ethical behavior and thus no economic incentives to invest in such behavior. The classic example is the "snakeoil" salesperson who passes through town only once.

Since the ideas and goals of business ethics are very abstract, there is no easy way to measure them, but Moeckel (1997) finds it useful and important to make the attempt. The effects of ethics in dollar amounts could be measured in an attempt to get a rough cost estimate and figures that everyone will understand. The costs are classified into prevention costs, appraisal costs, internal failure costs, and external failure costs.

HOW TO TEACH AND ENCOURAGE ETHICS

Can ethics be taught to people who are 20, 30, or 50 years old? Harvard Business School took the position that ethics can indeed be taught to students and business people regardless of age. Piper (1993) stated that when an institution avoids teaching ethics, it is committing a great wrong to the students, faculty, and society as a whole.

A university that refuses to take ethical dilemmas seriously violates its basic obligation to society. A university that fails to engage its members in a debate on these issues and to communicate with care the reasons for its policies gives an impression of moral indifference that is profoundly dispiriting to large numbers of students and professors who share a concern for social issues and a desire for their institutions to behave responsibly (Piper, 1993).

CONCLUSIONS

As ethical behavior becomes increasingly important in business, there is a pressure on colleges and universities to focus on ensuring their students leave with the highest ethical backgrounds. There are conflicting studies about whether business students, and economic students in particular, have incorporated levels of ethics that are consistent with their peers in liberal arts schools. Regardless, students and faculty agree that additional studies in ethics would be beneficial.

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NOTE: PLAGIARISM IS STRICTLY PROHIBITED PLEASE MAKE A GOOD SUMMARY OF THE ABOVE TOPIC WITH GOOD HEADINGS AND SUBHEADINGS AT LEAST 500 WORDS