1(R) BUSINESS ETHICS &

CORPORATE GOVERNANCE.
BUSINESS ETHICS & PROFITS
ETHICS IN BUSINESS,
CULTURE &ETHICS, VARIOUS
THEORIES OF ETHICS.
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Business Ethics & Profits.

Frequently, the impression of most people is that Ethics and Business are mutually
opposed to each other, and that if a company is Ethical, it can forget about making
Profits.
People also frequently seem to believe that a Profitable company must necessarily be
Unethical. This is like saying that a company can make Profits only through Unethical
Means.
This is absolutely wrong. There are examples galore, from the pages of history, where not
only have Ethical Companies made Profits, but more importantly, it is only Ethical
Companies which discharged its Social Responsibilities, that have survived Competition
and Turbulent Changes through the years and have contributed to Social Welfare and
have continued to flourish undiminished.
No doubt, all commercial Organizations are in Business to earn Profits. Earning Profits in
itself is not Unethical. However, it is very important that you use only Ethical Means to
Earn Profits and definitely not Unethical Means.
In fact we can say that it is Unethical for any company to make losses, because company
has a moral obligation to reward its Shareholders and also take care of all its
Stakeholders like Employees, Suppliers, Creditors, Customers, Financial Institutions etc.
A Company, which cannot make Profits and makes Losses, misutilizes national
resources, cannot pay back Creditors, does not give return on investment for its
Shareholders, makes huge liabilities, upsets the Economy, promotes inefficiency and
most importantly, cannot discharge its Social Responsibility.
Thus instead of Profits being Contradictory to Ethics, Business Ethics dictates that the
first responsibility of Business is to remain Profitable.

Business Ethics & Profits (Contd).

Businesses should earn Profits, generate Revenue for the Shareholders,
Employees and the Society and should also take care of the interests of all
its stakeholders. Hence, we can say that it is unethical not to make Profits.
Also it is Equally important to determine as to how much Profit a Company
should make and what means are to adopted to make the targeted Profit.
We must remember that Means are as Important as the Ends. For achieving
the End of Making Profits, Company should use only Ethical Means
Also the Company should use only Ethical Strategies to earn Reasonable
Profits and should not charge exorbitant Prices for their Products and
Services. Further, the Quality, Specifications and Commitments made
should be strictly adhered/fulfilled to all its Customers.
Businesses should be Economically Viable, should act as Trustees of all
Stakeholders and the Society and should also follow the Law of the Land,
where they are conducting Business.

Ethics In Business.
Ethics deals with Ideals.
Hence ethics is said to be Normative Science.
A Normative Science seeks to determine Norms, Ideals, Standards or Values.
It is generally recognized that there are three Ideals of Human Life, Viz, Truth,
Beauty, and Goodness.
They correspond to three aspects of our experience: Thinking, Feeling and
Willing.
Logic deals with the Ideal of Truth, Aesthetic deals with Beauty, and Ethics is
concerned with the Ideal of Good.
Ethics is not concerned with Human Conduct as it is, but as it Ought To Be.
It passes Judgments of Value upon Human Actions with reference to the
Moral Ideal.
The Judgments of a Normative Science like Ethics are Judgments of Value,
stating whether a Particular Conduct is in Conformity with the Moral Ideal or
the Ideal Of Goodness.

Ethics In Business (Contd).

Moral Judgments are not descriptive, but are Prescriptive.
They state What we Ought to Do, not What we Actually do.
They evaluate our Conduct as Right or Wrong.
Since Ethics is the Normative Science of Conduct, its Function is to Judge the
Moral Worth of Conduct with reference to a Norm or Ideal or Standard. The Scope
of Ethics is very wide.
Ethics covers virtually all aspects of our life, for there is no Conduct which is free
from Moral Considerations.
As A Science of Conduct, it is concerned with the Ideal or Standard to which our
Conduct should Conform to.
Hence Ethics enquires into the Nature of the Springs of Action or Impetus, the
Forces that Impel men to Action, Motives, Intentions, Nature of Voluntary and
Involuntary Actions etc.

Postulates (Pre Suppositions) Of Ethics.

1)
2)
3)

To pass Moral Judgment on a Conduct, Ethics requires that the

concerned Person must:
Perform the Deed out of his own Free-Will and not Compelled to do it
by some overwhelming Force.
Be in possession of fully developed Rational Faculty, which can help
him Distinguish Right from Wrong, Good from Bad, and
Not lose his normal Personality, i.e. he must have a Unified and
Continuous Mental Life.
Actions which fulfill the above criteria, come under the Scope of
Moral Judgment. All other Actions do not come under the Scope of
Moral Judgment.
Stages Of Voluntary Action: 1) Every Voluntary Action is actuated by
a Spring of Action, that acts as the Impetus. It is a feeling of a Need
or Want. Example: When you feel Thirsty, you Desire to drink water.
Thus the first stage of a Voluntary Action is Mental or Internal.

Postulates (Pre Suppositions) Of Ethics (Contd)

2)
3)

The Second Stage of Voluntary Action is the External or Bodily Stage of

Action taken to Satisfy the Need or Want. When you feel Thirsty, you may
find a glass of water and drink it.
In this External or Bodily Stage, if proper means are Adopted, the Object of
Desire is attained and want is removed. The Removal of Want brings us
Satisfaction.
Thus the First Stage of a Voluntary Action is Mental or Internal, the Second
is External or Bodily Stage and the Third Stage is that of Consequences.
Motive Or Intention-What is the Object Of Moral Judgment?
The Feeling of Want itself is not sufficient to move us to act. When a man
is moved into Action, he must have , besides the mere feeling, the
Conception of an End to be attained.
The Motive that induces us to Act is the thought of Desirable End.
When, for example, a father punishes his son, the Good of the Son is his
Motive. Causing Pain to the Son is not the fathers Motive, but it is a part
of his Intention.
Thus Intention is a broader term, which includes the Motive or the Idea of
the End, and the Idea of Means.
In short, Intention=Motive+ Means Adopted.

Motive Or Intention-What is The

Object Of Moral Judgment?( contd)

An important question which arises in Ethics: When we judge a Conduct as

Good or Bad, do we judge it by its Motive alone or by Consequences?
According to some, if the Consequences are good, the Conduct is Good, if the
Consequences are Bad, Conduct too is Bad.
But this is not always so. Sometimes the Motive may be Good, but the Result
may be Bad.
Example: A Surgeon performs an operation, with utmost care to cure a patient,
but despite that, the patient dies. In this case, Motive is Good, but the
Consequence is Bad. The action of the Surgeon cannot be termed as Morally
Bad, simply because Consequence turns out to be Bad.
Another important Principle to be noted is that Means adopted are as important
as the End. In other words to achieve a Good End, the Means adopted should
also be Good.
Hence, we conclude that Morality of Action is judged by the Intention of the
doer, the term Intention being used in a wide sense to cover both immediate
or remote Intention, Conscious or Unconscious Intention, Formal and Material
Intention.

Importance Of Ethics In Business.

Ethics in Business matters, because there is much evidence to prove that

Unethical Behavior can cost a Company its Reputation, affect its Share Price
and lower its Profits.
Some of the Scandals in Business World have their origin in scant regard to
Morality.
Business Ethics are Rules of Business Conduct by which Propriety of Business
Activities may be judged.
There is a growing realization all over the world that Ethics is Vitally Important
for any Business and the Progress of the Society.
Experience has shown that Good Ethics is Good Business.
Commerce through Corruption, Administration through Bribery and Politics
through Blackmail in India has become the Rule rather than exception.
Corruption, Bribery and Nepotism are nothing but degradation of Values and
Professional Ethics.
Ethics and Human Values can save a Soulless Society from total death.
We must remember that Business satisfies only Hunger of the Body. Values
satisfy Hunger of Heart and Soul.
Ethical Behavior is essential for Long Term Success in Business.

Importance Of Ethics In Business.

(Contd)

1)
2)
3)

Ethical Behavior is essential from both Macro and MicroPerspective.

According to Macro-Argument, Unethical Behavior distorts the
Market System, that leads to an inefficient allocation of resources.
The Micro-Argument highlights the importance of Ethics to the
Individual Firm.
Unethical Behavior leads to decreased long term Performance.
The Market System leads to a more efficient way of allocating
Resources than any Command System.
The conditions required for efficient operation of the Market
System are:
The Right to Own and Control Property.
Freedom of Choice in Buying and Selling Goods and Services.
The Availability of Perfect Information regarding these Goods and
Services.

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Unethical Behavior From A

Macro Perspective.
1)

2)
3)

4)
5)

Bribery: Bribery reduces the freedom of choice by changing the

conditions, under which a Decision is made. A Bribe is used to make one
choice more attractive to a Decision Maker. Greater appeal is created by
enhancing the Personal Gain associated with the choice by the addition
of an unearned Income Payment.
Coercive Acts: Coercive Acts, in the form of Threats that prevent a Seller
from dealing with certain Customers, decrease effective Competition.
This usually results in higher prices and often poorer Products.
Deceptive Information: Deceptive Information creates false impressions
and leads Buyers to select Goods and Services that provide less
Satisfaction than those which they would have purchased, had accurate
information been available to them.
Theft: Theft may lead to Break-Down of a Market. Theft increase the cost
of providing Goods and Services.
Unfair Discrimination: Unfair Discrimination often results in the purchase
of Services from less capable people or Sale of Goods and Services to
less capable People. This will result in lower level of Satisfaction.
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Macro Perspective-Ethics And Trust.

1)
2)

1)
2)
3)

Ethics is closely associated with Trust.

In order to develop Trust, Behavior must be Ethical.
If Trust is Important, and Ethical Behavior is necessary to obtain Trust,
then Ethics is as Important as Trust.
Trust in a Business setting reduces Costs, makes life more pleasant
and improves Efficiency.
Two Norms are to be Honored in all situations:
Commitments are to be honored in all situations.
One ought to produce a Good Product and stand by it.
Every Commercial Transaction has an element of Trust within itself and
Business would not run smoothly if Business People do not Trust each
other.
Trust involves three fundamental Issues:
Predictability.
Dependability.
Faith.

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Macro Perspective-Ethics And Trust (Contd).

1)

2)

3)
a)
b)
c)
d)
e)

Trust In Supplier Relations: Suppliers provide a Firm with Products and

Services it needs to conduct Business.
An Exchange Relationship is based on Trust between both Parties that
each will honor his Commitment and minimize Surprise. This will reduce
the risk involved in the Buying Process.
Trust In Customer Relationships: The Companys contact with a Customer
is mostly through its Sales Force.
A Salesman earns a Customers Trust by being Dependable, Honest,
Competent and Customer Oriented.
Customers rely on Suppliers to provide Goods and Services of Acceptable
Quality as Promised at Reasonable Prices.
Trust In Employee Relations: Trust applies to Peers as well as Superiors
and Sub-Ordinates. The following factors promote Trust in a Business
Organization.
Open Communications.
Giving Employees a Greater Share in the Decision Making.
Sharing Of Critical Information.
Trust Based Sharing of Perceptions and Feelings.
Trust is an Important Element in the Employee Empowerment Process.

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Moral Standards& Business Ethics.

Moral Standards provide tools for judging the Moral Value of a Decision.
Moral Standards are the Yardsticks of Business Ethics.
They provide the basis for deciding whether an act is Right or Wrong.
According to David Fritzche Business ethics is the Process of evaluating
Decisions, either Pre or Post, with respect to the Moral Standards of
Societys Culture.
In order to evaluate Decisions, we need a Tool Box of Moral Standards.
Moral Standards consist of Specific Moral Norms and General Moral
Principles.
Moral Norms Prohibit certain types of Behavior, such as Lying, Stealing,
and Killing.
We shall use Integrative Social Contracts Theory as the foundation for
evaluating the Ethical Dimension of Decisions.
Integrative Social Contracts Theory is a Normative Theory of Business
Ethics and it allows for Moral Diversity among various Cultures, while
maintaining Certain Universal Norms.
A Social Contract is an Informal Agreement regarding Behavioral Norms
that are developed from shared Goals, Beliefs, and Attitudes of Groups of
People.

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Integrative Social Contracts Theory.

Corporations enhance the Welfare of Society through the Satisfaction
of Consumers and interest of Workers by Leveraging Corporations
Special Advantages. This is the Moral Foundation of the Corporation.
The Social Contract also serves as a Tool to measure the Performance
of Productive Organizations.
When such Organizations fulfill the terms of the Social Contract, they
are Morally justified. When they do not, they should be condemned.
Hyper Norms are Universal and impose certain conditions on all
Business Activity.
The Macro-Social Contract functions at Global Level, provided specific
conditions under which Micro-Social Contracts may be developed.
Micro Social Contracts are Community Contracts developed to guide
Business Activity.

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Integrative Social Contracts Theory (Contd).

1)
2)
3)
4)
5)
6)
7)

1)
2)
3)
4)

The Essentials of Social Contracts theory are shown below:

Hyper Norms.
Universal.
Personal Freedom.
Physical Security.
Political Participation.
Informed Consent.
Ownership of Property.
Right of Subsistence.
Equal Dignity to All Humans.
Macro Social Contract.
Globally Based.
Moral Free Space.
Free Consent with Right to Exist.
Compatible with Hyper Norms.
Priority Levels.

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Integrative Social Contracts Theory

(Contd).

1)
2)
3)
4)
5)

Micro Social Contract. Community Based.

Individual Norms:
Do Not Lie In Negotiations.
Honor All Contracts.
Give Job Preference To Natives.
Give Preference To Local Suppliers.
Provide A Safe Work Place.
Hyper Norms are Universal Norms that are Equally applicable
to all persons Worldwide. Hyper Norms provide the Basis for
evaluating all other Norms.
They stand for the Basic Principles that are Fundamental to
Human Existence: Example- Human Rights, Ownership of
Property, Right to Live etc.
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Consequentialist Principles.

Consequentialist Principles Focus on the Outcome of a Decision.

A Decision is Ethical or Unethical based on the Consequences of the
Decision.
Egoism: Egoism is a Standard that focuses on Self Interest. Egoism is
equated with an Individuals Personal interest.
Decisions based on Egoism provide the most favorable Consequences
for that Party, regardless of the Consequences to other Parties.
This does not mean that other Parties must be harmed by a Decision.
However, benefits beyond the Party of Interest are of no concern to the
Decision Maker.
Self Interest may be Short-Run or Long-Run. Long-Run Self Interest is
often called Enlightened Self Interest, because it considers both the
direct and indirect Consequences of an Act over an extended period of
time.
Long-Run Self Interest takes into account the Impact of a Decision on
the relevant Stakeholders and the expected reaction of the Stakeholders.
Adam Smith has argued that Societys Interest is better served, when an
Individual peruses Long-Run Self Interest.

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Utilitarianism.

1)

2)
3)

According to the Utilitarian Principle, a Decision is Ethical, if it

provides a greater net Utility than any other alternative Decision.
The Decision Maker should evaluate each alternative Decision,
determine the negative and positive Utilities arising from all
alternatives and then select the one that yields the Greatest Net
Utility.
By using a Consequentialist Approach, a Manager will face some
difficulties as under.
It is very difficult to foresee all the Consequences of a Business
Decision. Accurate Forecasts of outcomes are required, in
situations, where little Data is available.
Many Decisions have Consequences that are not easily measured,
and often lack common measurement units.
Maximizing Net Utility may require actions that cause harm to some
people.

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Non-Consequentialist Principles.

Non-Consequentialist Principles consist of a set of Rules.

The Outcome of a Specific Decision is irrelevant and what matters is whether

the Decision is Ethical.
The Rules provide the guide to Ethical Decision Making.
Non-Consequentialist Principles are either Rights Principles or Justice
Principles.
Rights Principles: Rights Principles grant a person Moral or Human Rights
by virtue of being a Human being. These Rights are also associated with
Duties. It is ones Duty not to violate the Right of others, just as it is the Duty
of others to not violate his Rights.
Gerald Cavanagh has cited Six Rights that are basic to Business Activity.
These include:
Life and Safety.
Truthfulness.
Privacy.
Freedom of Conscience.
Freedom of Speech.
Private Property.
These Rights also create Prima Facie Duties.

1)
2)
3)
4)
5)
6)

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Non Consequentialist Principles (Contd).

1)

2)
3)

2) Justice Principles: Justice is associated with issues of Rights,

Fairness, and Equality. A Just Act respects your Rights. A Just Act
treats you Fairly.
Principles of Justice may be divided into Three Types- DistributiveJustice, Retributive Justice, and Compensatory Justice.
Distributive Justice: Society has many benefits like Income,
Wealth, Jobs, Education, Leisure, etc and burdens like Work,
Taxes, Social and Civil Obligations, which can be allocated based
on a) Equal Share to Each Person b) Based on Need c) Based on
Effort d) Based on Merit e) Based on Social Contribution.
Retributive Justice: Retributive Justice is concerned with
Punishment for Wrong Doing. The severity of Punishment should
be in proportion to the magnitude of the Crime.
Compensatory Justice: Compensatory Justice is concerned with
compensating the Party Injured by the Wrongful Act. This includes
necessary Medical Treatment and Services and Goods that are
needed to Rectify the Injury.

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