GGSR:

Governance, Business Ethics, Risk Management and Control

Chapter 3
Ethics and Business

Learning Outcomes:
At the end of this lecture, you are expected to:

✓ Explain the nature of business from the moral perspective:

✓ Rationalize the importance of ethics in business:
✓ Apply the dynamics of moral reasoning as a framework for making ethical decisions in business;
✓ Justify the need for ethical propriety in business and the corporate world
✓ Identify and discuss the common ethical dilemmas and entrepreneurial risk.

Introduction and Core Values Integration

Business is part of human society. And since it is part of the complex web of interaction among institutions
and people, its activities must be viewed and examined from the perspective of morality. Business without
ethics threatens the survival of human society and in some cases, destroys the fiduciary relationships of
people. The study of Business Ethics paves the way for our common understanding of the fundamental
concepts of what is right and wrong in our human conduct and its implications to business as an important
human activity.
 You can develop a healthy, robust community that lives right with God and enjoy its results only if you
do the hard work of getting along with each other, treating each other with dignity and honor

James 3:18

Give more honor to others than yourselves. Do not be interested only in your own life, but be interested
in the lives of others.

Philippians 2:3-4

THE NATURE OF BUSINESS

“There are two educations. One should teach us how to make a living and the other how to live."

-John T. Adams

Business is as old as human civilization. In the beginning of human existence, men took care of their own
needs and wants. They hunted animals and cultivated the land for food and clothing and people simply
provided for their own. As time went on, some people became more proficient in doing one type of work
or in producing one or several types of goods. In doing so, other people sought their products and services
so that they need not spend more time, money and effort to acquire these goods that they need. The
"manufacturer" then found out that he could continue supplying the products or services to people if he
had enough funds or goods to barter with. He also learned that he could expand his trades if he was able
to acquire more capital needed to continue his entrepreneurial activities. The more he acquired funds,
the more he was able to supply goods and services to his customers. The requirement therefore is for him
to earn profit in order to stay in business and provide the goods and services needed by the customers.

For as long as people have needs and wants, there will always be business. Those who have capital will
continue to produce and sell goods and services that will satisfy the needs and wants of customers.

Business is an activity that is part and parcel of human society. Society will not exist without business.
Since business is an integral part of society, its activities must be examined from the ethical perspective,
in the same way that society examines politics, economics, government, culture and religion from the
moral point of view. The fundamental reason for examining the activities of business from the moral
perspective is for the promotion of the common good, protection of the Individual’s interests and the
preservation of human society in general. Without ethics, business will be a chaotic human activity
because there will be no common understanding and agreement about what is the right and wrong human
conduct.
Business is also a complex enterprise that involves major activities like purchasing, manufacturing,
marketing, advertising, selling and accounting. Businessmen deal with suppliers, customers, workers,
employees and even competitors.

Ironically, it is within this structure of interaction of people that a lot of questionable practices occur—
misrepresentation, questionable pricing policies, false advertising, misbranding, lying, adulteration, unfair
competition, and local price-cutting, among others. The bottom people's rights are being violated, their
values disrespected and the interest of the common good disregarded. Business is a good human activity.
However, it is the selfish motive and personal interests of unscrupulous businessmen that make business
bad and, in some instances, unproductive.

BUSINESS ETHICS
Business Ethics is the study of what is the right and wrong human behavior 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.

Business Ethics is the study, evaluation, analysis and questioning of ethical standards, policies, moral
norms and ethical theories that managers and decision makers use in resolving moral issues and ethical
dilemmas affecting business.

There are many businessmen who are not fair and honest in dealing with the said groups. For instance,
they exploit their workers, and they do not pay their creditors on time. They cheat their buyers by selling
poor quality products or use wrong weights and measures.

In the 1977 General Assembly, the Bishop-Businessmen Conference for Human Development drafted
the Code of Ethics for Philippine Business, among other things, the Preamble of the Code of Ethics states
that man has a dignity that must be respected, and that all the resources of the earth have been created
for his growth and development. And the rationale of business is to build an enterprise oriented to the
development of man.

THE BUSINESSMAN'S MYTHS ABOUT BUSINESS ETHICS

Businessmen are not immoral. And it would be disastrous to judge and conclude that business people
commit unethical acts in doing business. Business, certainly is a good and productive human activity.
However, it is the businessman's wrong perception about the role that ethics plays in the world of business
that affects his moral judgment and decision making. Here are some myths that businessmen have about
Business Ethics (De George, 1982).
Myth # 1: Ethics and Business Do Not Mix

Some businessmen claim that Ethics has no place at all in business. This view is most likely grounded on
the assumption that business is an autonomous human activity where ethical standards do not exist and
that businessmen are free to do what they want. To claim that business is an activity which is independent
of morality is again a shortsighted view of the relationship between ethics and business. Since business is
part of human society and its activities operate within the structure of beliefs and value systems of people,
it must also be viewed and examined from the perspective of ethics. Any business activity that is devoid
of morality will bring more harm than good to people in particular, and the society in general.
Furthermore, the belief that ethics does not mix with business will only justify illegal activities and will
most likely promote questionable practices in business activities. Certainly, Ethics has an important place
in business.

Myth # 2: Ethics in Business Is Relative

Akin to the view that ethics is a private and subjective matter is the claim that morality depends on the
person himself and his environment. This is another wrong perception on the role that ethics plays in the
world of business. Some businessmen claim that morality is relative, which means, the fundamental
concepts of right and wrong depend on cultural and religious values of people. This implies further that
what may be considered a right action in one country may be unacceptable in another country. Abortion
may be legal in some countries but certainly not in the Philippines. If morality is relative then what is good
in one place may be evil in other places, and vice versa. And if morality is viewed this way, then who's
going to tell us which actions are good and which actions are bad objectively? The truth of the matter
principles that people share and agree upon regardless of religious orientations, cultural expressions and
value systems. so, all peoples around the world believe that murder is always wrong, that stealing is
always a bad action and bribery is always unacceptable. The study of Ethics paves the way for our common
understanding of the fundamental principles of right and wrong as reflected in our nature and conduct as
human beings.

Myth # 3: Good Business Means Good Ethics

Some businessmen claim that good business means good ethics. This certainly is a myth. A business may
be profitable but the means of acquiring profits may be questionable. Drug-trafficking is a profitable
business and so is human smuggling and the like, but they certainly violate some rules and values of
people. The study of Ethics in business encourages businessmen and managers to look closely into the
end and the means of doing business. Profit maximization is a good end in business but the means of
getting those profits must also be examined. The end does not justify the means.

Myth # 4: Business Is a War

Some business leaders and businessmen believe that business is a war. For them, the market is an arena
of gladiators trying to fight for survival and vying for the number one position. Because of this belief,
businessmen often resort to using predatory tactics to destroy the competitors in order to emerge as the
market leader. Business is a good human activity. And as an integral part of the society, it must promote
healthy competition and not destroy the competitors.

THE RELATIONSHIP BETWEEN ETHICS AND BUSINESS

Ethics plays an important role in business. Without morality, business will be a chaotic human activity.
Ethics is not a study of positive laws intended to govern and regulate the actions of people doing business.
The concern of ethics as a philosophical science is to discover that there are unwritten laws, written in the
hearts of men that should govern our human conduct where positive laws may be absent, and in some
cases, not very clear. The following arguments justify the significant role that ethics plays in the world of
business:

• Business is an integral part of human society. Therefore, the actions of individuals and institutions
in business must be subjected to moral rules and moral evaluation.

• In business, as in any other human endeavor, "what is legal may not necessarily be moral." People
tend to confuse legality with morality. An action may be legal but not necessarily moral, e.g.,
capital punishment (death by lethal injection). For some, this is legal but in truth, this is immoral.
Ethics provides us with a clear distinction between morality and legality.

• Laws are insufficient. They cannot cover all aspects of our human behavior. Laws are sometimes
absent or unclear in some areas of our human conduct. Ethics is the unwritten law, written in the
hearts of men. In the absence of the law, Ethics will help us discern the correct conduct to follow
based on the dictates of conscience and reason.

MORAL REASONING IN BUSINESS

The essence of studying Business Ethics is to provide the manager as a decision maker with a framework
for the resolution of moral issues and problems affecting business activities and the organization itself.
Moral reasoning is a process in which ethical issues and problems are benchmarked against a moral
standard so that a moral judgment is made possible. Since managers are tasked to solve problems of the
organization and its related activities, it is also the responsibility of managers to help in the resolution, if
not the prevention, of moral issues that may have adverse effects to the operations of the business.

Characteristics of a Good Moral Standard (Shaw, 1999):

✓ A good moral standard is one that looks at the issue as something that is very serious, e.g., murder,
graft and corruption, stealing.
 ✓ A good standard must be grounded on good moral argument. A good argument is an argument
that always tells the truth. A solid moral argument leaves no room for loopholes and counter
arguments.
✓ A good standard should be objective and not subjective. It should be universally accepted and
should apply to all. What is good for one person should be at the same time good for everybody.
✓ A good standard, when violated, brings about feelings of guilt, shame and remorse of conscience.

Requirements for a Good Moral Judgment

✓ A good moral judgment must be logical. This means that the decision maker must arrive at an
informed resolution of the issue based on logical reasoning.
✓ A good moral judgment must be based on facts and solid evidence. The information used in the
process of moral reasoning must not come from weak sources like hearsay, rumors and grapevine.
✓ A good moral judgment must be based on sound and defensible moral principles. A weak ethical
principle is open to a lot of criticisms.

THE MORALITY OF PROFIT-MOTIVE

People go into business fora number of reasons. Some go into business for personal satisfaction. Others
are in business to earn a livelihood. Still others are in business because they want to serve the society
through the goods and services they offer to the customers. But the most common, if not the most
dominant reason why people go into business, is to make a profit. Business as an activity is unthinkable
without profit as motive.

Businessmen consider profit as a form of anticipated reward or a compensation for the efforts they spend,
skills they apply and returns for the capital they invested in putting up and organizing the business.

Traditionally, businesspeople have looked at the profit motive as the most important aspect of business.

The view of Milton Friedman, a noted economist, reflects this sentiment. He says that the "only
responsibility of business is to make profit so long as one stays within the rules of the game and engages
in open and free competition without deception or fraud."

Peter Drucker, an equally famous management guru on the other hand, disagrees with this view and says
that, "the primary responsibility of business is to look for customers and satisfy their needs and wants."
Following this line of thinking, Drucker is simply hinting that, albeit, profit is an important aspect of
business, there are other factors that the businessman must also consider in doing business such as
customer satisfaction, quality products, after sales policies, fair and reasonable pricing, among others.

Because of these differences of opinions, the issue of profit-motive is a subject matter that needs to be
carefully considered in the study of Business Ethics. Is profit-motive in business good or bad? Is it moral
or immoral?
The Assumptions of Profit-Motive:

Understanding the nature and morality of profit motive starts with the examination of some given factors
and assumptions in which the idea of profit-motive operates. These factors are the following:

Profit-motive in business is an ethical issue. Since business is an integral part of society, its activities,
including profit-making, must be examined from the perspective of morality. However, in business, the
concept of what is a reasonable profit is still a subject of endless debates.

Profit-motive as an ethical issue operates within the two important aspects of our human conduct—
freedom and the structure of business. The element of freedom implies that businessmen have the right
to decide on the amount of profit they want to earn in the process of selling goods and services to
customers. The structure of business, on the other hand, is a tacit guideline that governs business
activities including profit-making. Thus, any business activity is aimed at a monetary gain because that is
part of' the structure of business. The ultimate criterion therefore of gauging the success or failure of
business is its ability to generate profits.

The Good and the Bad Sides of Profit-Motive:

Just like any other ethical issue, profit-motive has two sides—the good and the bad. Fr. Moga, S.J. (2004),
describes vividly the positive and negative implications of profit-motive:

The Good Side of Profit-Motive:

✓ Profit-motive motivates people to do something meaningful, e.g., it gives human life a goal to
pursue and something to live for.
✓ Profit-motive promotes ingenuity and cleverness in running a business, e.g., business leaders and
entrepreneurs have to struggle hard to overcome obstacles in order to achieve success.
✓ Profit-motive makes people productive. Because their desire for money, businessmen have
become productive and some of their products have been useful and have enhanced the quality
of human life.
✓ Profit-motive generates potential capital for the business. Profit is potential capital, something
that can be invested to establish new businesses. In this way, profit also results in more jobs and
more goods and services for the public. The society as a whole thus benefits from the profits
gained by a profit-oriented capitalist.

The Bad Side of Profit-Motive:

✓ Profit-motive promotes rivalry among competitors. Sometimes the competition becomes so stiff
that it results into a "dog-eat-dog" world of business where success is achieved by competing with
others and pushing them down in order that one's own business might succeed. This certainly
dehumanizes business as an important human activity.
✓ Profit-motive makes people focus only on making money, that is, to sell as many goods as possible
without considering whether or not these products satisfy the needs and wants of consumers and
end-users.
 ✓ Profit-motive turns the businessman from being a reflective and a questioning person because he
focuses his attention only on the practical activity of making money. Thus, a life centered on profit
only results into a narrow view of existence, deficient in many important dimensions of human
life.
✓ Profit-motive promotes self-interest the common good. It has, to some extent, benefited some
businessmen but it has also created some social costs that many people, if not the majority, have
to bear, e.g., depletion of the natural resources, toxic wastes being thrown into the rivers,
pollution of the environment and disregard for the next generations to come.

Ethical Considerations of Profit-Motive in Business:

✓ Earning profit is a good and valid activity in business. Commercial activities will be absurd without
the profit-motive. However, in the process of generating profit, an ethical discernment is required
for the businessman: Is my profit fair enough for me and my customers? Did I consider important
factors and parameters in making profit such as the costs of goods sold, overhead, mark-0ps,
profit margins, and the like?
✓ Making excessive profits is totally wrong. It leads to greed, avarice and manipulation of the
customers.
✓ Profit is not the "be-all and the end-all" of doing business. Certainly, there are other factors to be
considered in business such as, customers' satisfaction, respect for the environment,
enhancement of the quality of life and the preservation of the society.

THE CONCEPT OF MORAL RESPONSIBILITY

In the story of creation, as recounted in the third chapter of the book of Genesis (Gen. 3: 1—13), the first
man and woman committed an infraction against God's commandments. As told in this particular story,
Adam and Eve violated God's commandment by eating the fruit of the Tree of Knowledge. As a result of
this infraction, both Adam and Eve tried to run away and hide themselves from God. When confronted
about their disobedience, they tried to blame one another and eventually, also blamed the serpent. This
short metaphorical story reflects responsibility for bad or evil actions.

However, man is by nature a being and a creature who is supposed to be responsible and accountable for
his actions. The reason for this is twofold. 1) Man is rational being. This means he is capable of moral
judgment. Further, this also means that man is a thinking being, thus, he is aware of his intentions as well
as the consequences of his actions. Man therefore, knows what he is doing because he is a rational and a
thinking creature. 2) Man is a free being. his means that he has the capacity to exercise his choices. This
assumes that man is capable of choosing what is a good and a bad action for him.

These two assumptions provide the bases for giving praise, blame, reward and punishment for his actions.
These assumptions likewise provide the reasons why we are held responsible for our actions. These
assumptions, e.g., that we are a thinking and a free being, imply that we are capable of assuming
responsibility for our actions.
The author William H. Shaw, in his book Business Ethics (1999, pp. 163—165), came up with three
meanings of moral responsibility:

1. Moral Responsibility refers to holding to people morally accountable for some past action or
actions. This simply means people blame or praise for particular actions that they have performed.

2. Moral Responsibility also means care, welfare or treatment of others as derived from the specific
social role that one plays in the society. Thus, parents are responsible for taking care of their
children in the family, teachers are responsible for what occurs in their classrooms and doctors
are responsible for the treatments of their hospital patients. In this second sense, moral
responsibility implies a duty to be performed by a person depending on his role in the society.

3. Moral Responsibility likewise refers to one's capacity or making moral or rational decisions on his
own. According to Shaw, if a person is not morally responsible in this third sense, he or she cannot
be considered morally responsible in either of the other senses.

COMMON ETHICAL DILEMMAS IN BUSINESS

The common ethical dilemmas in Business are:

Truthfulness and Full Disclosure

Ethical business owners consistently strive to apply ethics-based concepts in practice, including
truthfulness and full disclosure. These two concepts are not only part of an ethical approach to doing
business but are also underlying requirements of several areas of law including fraud. A business that
makes/sells a product or service has responsibility for fully disclosing the truth about its products/services.
Lying to Customers
Other ethical dilemmas involve lying to customers. This could be lying about a product or service or about
how their private information is used. Once again, what is right or wrong will depend on the situation at
hand. However, considering how important customers are in the success of your business, lying to them
may very well be your downfall.

Nepotism
When you’re considering job candidates, it’s important that nepotism doesn’t drive hiring practices. Not
only is it unethical to hire a less qualified candidate purely because of their relationship to you, you also
do your company a disservice by not hiring the best person for the job. Make the success of your company
your primary goal and nepotism will never be able to get a foothold.

Overworking Your Staff

Small businesses sometimes ask too much of their employees without noticing. It’s a given that everyone
on a small team will have to pull their weight and wear multiple hats, but you need to be conscious of
where to draw the line. For example, if you hire someone for marketing, don’t just push them into a
different department because you need support there; it’s not what they signed up for.

Maintaining Control Over Employee Behavior

In today’s environment, it’s a must that you have guidelines in place as to what constitutes workplace
harassment, discrimination, and bullying. There should also be clearly set consequences for what happens
when these policies are violated.

Claiming Income
Many small business owners may get paid in cash for jobs or projects. So, it may be tempting to hide this
income rather than reporting it, especially given the fact that a business owner operates on tight margins.
However, it’s important to implement a transparent system and ensure taxes are paid and revenue is
reported accurately.

Sticking to Your Mission

For certain businesses (like finance), your mission is more than a marketing statement; it’s an ethical code
that needs to be upheld at all costs. When you’re just starting out and have limited resources, it might
seem tempting to ignore this to grow quicker and compete with the top players. But ignoring ethics will
always come back to bite you, no matter how far ahead you get.

Merging Personal and Business Accounts

It can be tempting to not report income, to put vacations on your business card, or to tap your business
account when you need some extra cash. But this kind of behavior is dangerous and represents a slippery
slope. Keep your business finances separate from your personal finances. Be reasonable with your
expenses. And don’t avoid or ignore doing proper payroll or paying quarterly taxes.

Hiring Someone to Write Fake Reviews

Many businesses creating an online presence are approached by third parties offering positive online
reviews in exchange for cash. The temptation is high as online reviews can go a long way in building a
brand. However, consumers are getting smarter at identifying fake reviews, so getting caught is real and
has very negative consequences.

BUSINESS/ENTREPRENEURIAL RISK
Businessman’ life is not just about rewards, successes and achievements, its destructive source can be
found within the energetic drive of successful entrepreneurs. Starting or buying a new business involves
risk. The higher the rewards, the greater the risks. An entrepreneur journey is full of risk and reward. Risk
shows the dark side of business, not all business owners are driven solely by monetary gain and the level
of financial risk cannot be completely explained by profit opportunity. Business/entrepreneurial risk is a
complex issue that requires far more than a simple economic risk versus — return explanation.

Entrepreneurs face some basic types of risk:

Financial risk
Financial risk is the risk of a business running out of finances.
Businessowners need to have a good financial sense in order to run a
business successfully. They need to manage cash flow, predict
demand and supply so that financial decisions can be taken properly.

Career risk
Some entrepreneurs start company after company
(aka “serial entrepreneurs”), others turn back to the
job market. Unfortunately, your resume can look
odd after a few years at startups, making it tough to
fit neatly into any well-defined corporate roles. And
if employers’ sense that you’d rather be starting
your own businesses than holding a job, they might
perceive you as a “flight risk”.
Family and social risk
The risk of walking away from security and career path to create
something new. The risk of taking yourself and your family into
an unfamiliar storm of stress and uncertainty. The risk that
you’ve miscalculated an opportunity, or your own internal
resources as you plunge into a new venture.

Psychic risk

It is greatest risk to the well-being of an entrepreneur, money can be

replaced a new house can be built, friends and family can adapt. But
some entrepreneurs who have suffered financial catastrophes have
not been able to bounce back specially immediately. The psychological
impact has been considered as the most serious one.

Environmental, Political, and Economic Risk

Some things cannot be controlled by a good business plan or the right insurance. Earthquakes, tornadoes,
hurricanes, wars, and recessions are all risks that companies and new entrepreneurs may face. There may
be a strong market for a product in an under-developed country, but these countries can be unstable and
unsafe, or logistics, tax rates, or tariffs might make trade difficult depending on the political climate at any
point in time. Also, some business sectors have historically high failure rates, and entrepreneurs in these
sectors may find it difficult to find investors. These sectors include food service, retail, and consulting.

Reputational Risk
A business's reputation is everything, and this can be particularly so
when a new business is launched and customers have preconceived
expectations. If a new company disappoints consumers in the initial
stages, it may never gain traction. Social media plays a huge role in
business reputation and word-of-mouth marketing. One tweet or
negative posting from a disgruntled customer can mean huge losses
in revenue. Reputational risk can be managed with a strategy that
communicates product information and builds relationships with
consumers and other stakeholders.
References:
Business Ethics and Social Responsibility 2nd Edition – Fr. Floriano C. Roa
Good Governance & Social Responsibility 1st edition – Win Ballada, Biore, Gonzales, Caparas, Burgos
Investopedia.com