Understanding & Dealing with Business Ethics Issues

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

It doesn't take many days of following the news before you hear about a company being questioned about their ethics. In this lesson, we'll discuss the importance of business ethics, at every level of the organization.

Business Ethics

Often, we talk about business ethics like they are different than just 'normal' ethics. The reality is that ethics can always be defined simply as moral beliefs and principles that individuals and groups rely on when deciding how to behave. The difference is just the context in which they are applied.

In this lesson, we'll specifically talk about business ethics, which is especially important for two reasons. First, business ethics are becoming more and more important as government regulators put tougher laws in place on aggressive business practices and increase incentives for whistleblowers. Second, the very foundation of economics and business - the endless debate of capitalism versus socialism and the balance between the two - is, in fact, an ethical debate.

Really, What Are Ethics?

While the term 'ethics' is easy enough to define (see above), actually observing ethics and certainly trying to identify a set of shared ethical beliefs can be difficult. Those things that are not allowed, either personally or in business, aren't really ethics; they are laws, regulations, and policies. Keeping the law isn't an ethical decision; it's expected as part of the social contract, the unwritten, unspoken expectation we all have of each other as part of society.

As we discuss business ethics, there are a couple important things to keep in mind. The first is that there are different philosophies on ethics. As long as they are legal, one isn't more correct than the other; they are just different. The second thing to keep in mind is that ethics IS the gray area in which we have to make decisions every day, so often, there isn't an obvious, clear ethical answer to tough questions.

Let's take a look at a couple common situations in business and see what ethical questions we can identify. Remember, we aren't looking for legal issues - we are looking for those gray issues that someone will have to make decisions on based on their values and moral principles.

Examples of Ethical Situations

Here's an interesting statistic that can start the discussion for our first example. Fifty years ago, the average CEO made 50 times more than their average employee. If a company's average employee made $20,000 (remember, this was 1965), then the average CEO was making $1 million. Before we ask if that sort of pay discrepancy is ethical, do you want to know what it was in 2014? 350 times! If the average employee made $50,000, the average CEO made $17.5 million!

Now we can ask ourselves: is that ethical? What if, even though the average is $50,000, most of the workers make minimum wage, work part-time, and don't get health or retirement benefits? Is that compensation structure ethical?

There are a lot of stakeholders at play in that sort of decision, and that's what makes ethical decisions so difficult. If 'the company' (represented by the Board of Directors) has the ethical obligation to its stockholders, then it needs to be profitable. One could argue that being profitable requires a very skilled CEO, and it costs $17 million to get a good CEO. One could also argue that being profitable requires cutting costs, and by paying part-time workers minimum wage, the company doesn't need to pay expensive health benefits. So, the company is meeting its ethical obligations to its stockholders.

Or, does a company have an ethical obligation to society? After all, while a company is using their raw materials and machines to make something, they are polluting 'our' air and using 'our' roads to transport goods. Does that mean they have an ethical obligation to society? There's a good argument that they do.

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