Business ethics or corporate ethics dictates the policies and best practices that address ethical morals and hardships faced while operating a business. The best practices or code of conduct are applicable to all stakeholders associated with the corporate including individuals and the entire organization and how the stakeholders should conduct themselves to maintain an ethical decorum and legality while running a business. A clearly defined business ethics basic guideline helps taking decisions when the company or an individual stakeholder faces an ethical predicament.
Need for Business Ethics
“Ethics is knowing the difference between what you have a right to do and what is right to do”
said by Potter Steward (former American lawyer and judge)
The concept developed in 1960s-70s as globalization started taking world business to the next level. With rising interaction and an increasing focus on customer satisfaction, respecting cultural norms, social causes started to become an integral part of the process to connect a chord with the customers. For adding maximum value, corporates started following practices that showcase honesty, transparency, equality, integrity, loyalty, respect, compassion, and fairness. It also assisted in building brand value or goodwill in the market, along with creating a trust level with customers or clients.
As a company expands, its communication within existing stakeholders and new stakeholders increases. For the business to operate smoothly, rules and regulations set by the company help the stakeholders to follow ethical guidelines and conduct themselves virtuously with each other. Business ethics also supports fair practices being conducted in the business and adhering business commitments. The best practices assist in deciding the right path and not to take a wrong path for immediate business gains. It ensures that when two entities or individuals carry out a business deal, there is fairness maintained in the agreement.
For example, suppose a TV manufacturing company expects quality spare parts from its suppliers in a given time, the suppliers are liable to remain committed to the business deal i.e. to provide spare parts that have all gone through quality checks, and not a single defective part should reach the manufacturer which may lead to production hassle or customer loss for the manufacturer. If a supplier fails to comply with quality issues or time commitment, the manufacturer can experience considerable criticism from its end-users.
Another example would be that of insider trading. Insider trading is the purchasing or selling of a public company's stock or other securities because of access a piece of nonpublic information regarding the company. For example, a director or a stakeholder of a publicly traded company gets to know that the company is set to announce a development that may trigger the share price of the company comparatively higher. On the basis of the information, the said stakeholder buys a share of a certain amount at lower prices and once the price goes up, sells them making a huge profit. The practice is illegal as all stakeholders who possess shares of a publicly traded company, were not aware of this development and only a few sitting inside the company could access this data and earn profit whereas a fair practice calls for information to be used only when it’s available for all shareholders associated with the company.
How to ethically frame a code of conduct?
While framing a code of conduct, an organization must take into consideration that the guidelines should take into considerations societal responsibilities and causes and should be virtuous. Four schools of thoughts have been in use to frame business ethics, including deontological, utilitarian, virtuous, and communitarian approaches.
Deontological: The theory focuses on framing code of conduct on the basis of “duty” or obligations irrespective of the consequences that will stem out from following the code of conduct. The theory had been promoted by Immanuel Kant, who believed that morality arising from respect for one another, and the proper behavior should be the underlying factor for ethical reasoning.
Utilitarian: The Utilitarian approach calls for actions that will lead to the ideal outcome for a given business scenario or problem. The actions will be based on a greater good with less impact on any stakeholder involved. However, there has to be clarity in the ethical line of reasoning on what is considered best and why, as the term “best” can be relative for each stakeholder involved.
Virtue Ethics: This point of view focuses on the virtue that will be obtained from the actions taken. The actions will focus on the fact that the result obtained is desirable without being connected with any certain behavior or decisions. Hence, the behavior has to be rational and virtuous to ensure it is valid, beneficial, and valuable.
Communitarian: In this perspective, the individual decision-maker ask about the duties owed to the communities in which they participate. This is a relatively simple frame of reference, where the individual decision maker will recognize the expectations and consequences of a given decision relative to the needs, demands and impacts of a certain preferred community.
Here are more examples
Conflict between company stakeholders: In case of conflict between two stakeholders in an organization, it is always advisable to treat the matter with utmost impartiality. Giving preference or being partial to any one party is considered to be unfair to the other party. This demonstrates unethical conduct. Management team or supervisor should provide solutions to the problem, which is fair and ethical to both the parties. An unfair final decision will ultimately hold the organization, and the supervisor jointly responsible for the adverse effect.
Transparency while dealing with shareholders or customers: The Company should always be transparent regarding its dealings. Whether with shareholders or customers, the information provided on any development or about the company and its products should always be accurate and real. The disclosures should not be wrong or partial for attaining capital gains. If a company engages in providing incorrect material or partially disclosed information, it is considered to be unethical as the customers or shareholders may experience loss based on the wrong information.
For example, a food and beverage company are expected to declare the name of its ingredients while labeling the product. If any discrepancy is found in labeling, the entire lot of that product is recalled from the market, as intake of that product may lead to health hazards for the consumer. Such incidences lead to business loss and goodwill of the company.
Equality in the wage system: An organization should follow an unbiased wage system where discrimination regarding gender, race, or LGBTQ should not take place.