Definition of Business Ethics
Business ethics is:
“…a study of what is right and wrong human behaviour and conduct in business. Business ethics is a study of the perceptions of people about morality, moral norms, moral rules and ethical principles as they apply to people and institutions in business”
The above mentioned definition depicts the following characteristics of business ethics:
- Business is an integral part of human society and should be subjected to moral rules and moral evaluation. This further implies that businesses are expected to reflect honesty across business activities
- Business ethics caters to all stakeholders that directly or indirectly influence a business’ operations, distribution, services, company’s image, pricing and quality of products and services. Stakeholders include, customers, employees, shareholders, creditors, environment, community and owners of a business
Reasons for business ethics
Improved employee and organizational morale – Conducting business in an ethical manner could include creating a motivational effect on the employees that can improve the overall performance of the organization. The motivation can be related to building communication between employees, conducting recreational activities or health and safety. For example, companies undertake regular (free) medical check-ups or organize sports’ day for employees or a forum that resolves conflicts among employees.
- Customer loyalty and attract new customers – Businesses act ethically when they are able to produce or provide good quality products or services and at expected prices of the customers that encourage customer loyalty and attract new customers. For example, consistency in the taste of food products (such as maggi noodles) or consistency in the performance of Birla white cement.
- Improved financial performance – There is a positive relationship established between business ethics and financial performance (return on investments, sales growth and profit) of the most well-known businesses in the world. These businesses include General Electric, Johnson & Johnson, etc and Indian companies like the Tata group of companies, Hindustan Unilever Ltd, Birla group of companies, etc
- Avoidance of negative exposures or performance backlashes – Negative exposures implies issues or problems that affect the image of the company or the company’s brand in a bad limelight. For example, Tata Motors’ first car ‘Indica’ when launched in the mid-1990s did not function in accordance to the expectations of the customers and adversely affected the image of Tatas. Legal matters or law suits among businesses can also lead to negative exposure. Legal matters among businesses can be related to default in payments for supplies, negative advertising regarding a competitors’ product, etc. Performance backlashes are related to a business’ inability to generate profits or revenue in the market that could also adversely affect the image of the company or its brand. (Any examples?)
- Attracting stakeholders – Businesses are required to maintain positive association with their existing stakeholders to sustain in the long-run. Accordingly, businesses can also attract additional stakeholders like shareholders’ who can invest their money in the business or suppliers and creditors in case businesses need to expand in different regions or markets. For example, a business never defaults in payments to their suppliers and suppliers supplied relevant raw materials on-time without compromising with quality.
- Community development and improvement – Any business needs to consume natural resources (water, land, etc) and non-renewable resources (oil, electricity, forests, minerals etc) that can pollute the environment through emissions of wastes, greenhouse gases and exploit the resources in order to gain profits. However, ethically running businesses realise the importance of restoring the resources around them mainly because it the same environment in which their business operates and directly faces issues related to health and safety of their stakeholders. Though all businesses generate wastes, some of them try to reduce the wastes through recycling, or generating electricity from wastes or harvesting rain water. Use of solar energy and energy efficiency solutions can also reduce the dependence on government-run electricity thus developing and improving the environment in and around the business.
Profit-motive & Business Ethics
The main motive of most businesses is profit-making. However, profit-making businesses understand moral values and norms of the society and profit-motive in businesses are generally considered as an ethical issue. Profit-motive as an ethical issue operates within two aspects of human conduct – freedom and structure of business. Freedom implies that owners of business have the right to decide the amount of profits they wish to earn and structure of the business governs the business activities that lead to profit-making and thus any monetary gain of a business is related to the structure of the business. This implies that profit-motive has a good side that supports ethical conduct and activities of a business and are explored below:
- Profit-motive motivates people to do something meaningful or provides a goal to pursue. For example, employees of a business could aim at saving for the future by earning incomes; owners can aim at expanding their operations for a higher market share by earning profits, etc. Ethically, businesses promote healthy competition among employees so that they work efficiently and in the industry it operates by providing good quality products and services at reasonable prices.
- Profit-motive enables problem solving among businesses. Business owners learn to cope with various obstacles and risks (operational and financial) in order to earn profits. Profit-motive promotes cleverness and ingenuity for running a business. Ethically, businesses ensure the profits generated are equally distributed with reduced risks spread across stakeholders.
- Profit-motive encourages productivity. The desire for earning money encourages people to be more productive. The products / services provided by businesses also contribute to enhancing human life and further encouraging increased productivity. Ethically, businesses operate with a holistic vision of producing and distributing products and services that can be consumed not only by the end-customers but also by the employees / owners of the business. The benefits of consuming businesses’ products and services could reach to everyone directly and indirectly related to the businesses.
- Profit-motive generates potential capital. This implies that the profits earned by the business can be reinvested to establish new businesses leading to job creation and more goods and services to the public. The new businesses can also be related to restoring community values (by building hospitals, educational institutes, etc).
Without business ethics, profit-motive in a business could lead to rivalry instead of healthy competition, greed and exploitation instead of equity in wealth and social costs in the form of wastage of resources, pollution and harm to environment.
Social responsibility is the act of exhibiting ethical behaviour in businesses. It is a state of being ethically or morally responsible for actions that contribute to improving the quality of life of an individual, institutions or the society at large. Accordingly, activities undertaken in businesses could encompass every social, economic and environmental aspect through social responsibilities. There are two dimensions of social responsibility for businesses – Internal and External as explained below:
a) Internal responsibilities – Internal responsibilities involve social compliances that focus on human resource welfare, good quality in products / services and favourable contribution to environment. Internal regulations include some mandatory, long-term and self-regulated initiatives of enterprises in the form of various standardizations and business associations in India and abroad. Some of the mandatory compliances considered by businesses include:
i. Water pollution act – Provides for the prevention and control of water pollution and for setting up of ‘Boards’ to prevent and control water pollution.
ii. Air pollution act – Provides for prevention, control and abatement of air pollution, for establishments of Boards and assigning these Boards relevant powers and functions relating to the same.
iii. Environment Protection act – Provides for protection and improvement of the environment and establishment of authorities that mandate prevention of environmental pollution and tackle specific problems related to the same.
In addition, there are some voluntary social compliance standards and certifications available for businesses that try to enable social responsibility across their business activities. These standards / certifications emphasize on rules of social accountability that address health, safety and fundamental rights of the enterprises’ employees and other stakeholders. The main purpose of such certifications is to protect and enhance the community and the environment. Following is an indicative list of major standards:-
- SA 8000 is a global social accountability standard for decent working conditions, developed and overseen by Social Accountability International (SAI). It contracts with a global accreditation agency, Social Accountability Accreditation Services (SAAS) that licenses and oversees auditing organizations to award certification to employers that comply with SA8000.
- AA 1000 provides a basis for designing, implementing, evaluating and assuring the quality of stakeholder engagement by organizations. It is developed by AccountAbility, a not-for-profit British organization.
- ISO 9001 specifies requirements for a quality management system where an enterprise’s products caters to the customers’ needs as well as applicable statutory and regulatory requirements. It is developed by International Organisation (ISO)
- ISO 13485 specifies requirements for a quality management system where an organization needs to demonstrate its ability to provide medical devices and related services that consistently meet customer requirements and regulatory requirements applicable to medical devices and related services
- ISO 14000 series is a family of standards for environment management systems and the supporting audit programme that is applicable to any business or organization, regardless of size, location or income. It is developed by International Organisation (ISO).
- ISO 22000 specifies requirements for a food safety management system where an enterprise, regardless of size and involved in any aspect of the food chain needs to demonstrate its ability to control food safety hazards in order to ensure safe food consumption.
- ISO 27000 series (27001 to 27008) have been specifically reserved for information security matters and aligns with other certifications such as ISO 9000 and ISO 14000
- OHSAS 18000is an international Occupational Health and Safety Management System (OHSAS) specification that was developed to cater to the health and safety obligatory needs of enterprises in an efficient manner. This specification comprises of two parts:
- OHSAS 18001 that specifies assists in controlling health and safety risks
- OHSAS 18002 that highlights procedures for implementation and registration
- ISO 26000 or ISO SR is a family of standards, underdevelopment, which will provide guidelines for social responsibility that will be applicable to any business regardless of its size, location or income.
b) External responsibilities – These responsibilities focus on community development by promoting education and social services through charities or donations. Examples of external responsibilities can include the following:
i. Creating social awareness regarding a cause through a business’ products / services. For example, Tata Tea’s “Jaago Re” concept
ii. Building educational institutes, hospitals, orphanages, homes for elderly, etc
iii. Contributing money through charities, donations in NGOs, educational institutes, hospitals, etc
iv. Enabling community participation and volunteering through blood donation camps, free medical-checks, eating healthy foods, etc
Need for Social Responsibility
- Easier access to capital – Businesses involved in activities related to social responsibility are looked upon as having capabilities of achieving long-term goals and can easily find credit from financial for future plans or expansions
- Positive brand equity – Businesses that indulge in social responsibility are able to build strong reputation or brand equity thus representative of being a reliable and responsible enterprise in the minds of its customers/buyers.
- Retention of human resources - Companies that indulge in internal social responsibility activities are able to create an extremely conducive work environment based on improved work ethics and conditions which ultimately results in enhanced development of human resources and reduced attrition rates.
- Improved productivity - Employee efficiencies are higher in a favorable working environment that can result in improved productivity and cost-savings.
- Strengthening relationship across stakeholders - Businesses that have formally implemented ESR activities through international certifications and standardizations can avail from integration with global supply chains. This integration can provide consistent business from domestic companies and MNCs in India and abroad
- Risk management - A socially responsible business with its enhanced relationship with its stakeholders (domestic and foreign) is in a favorable position to anticipate and respond to any regulatory, economic, social and environmental occurrences or surprises.
- Global presence and growth - Compliance to standards and certifications highlighted by select developed nations like US, Japan and countries in EU can facilitate reputation and continued business association for businesses involved in exports and imports.