The History Of Business Ethics Business Essay

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This report will examine the intricate relationship between societal norms, business ethics and corporate behavior. Business ethics is a complex mixture of personal beliefs, economic theory and political philosophy(Pojman and Fieser, 2011). The fundamental issue revolves round the question whether individual ethics have a role to play in corporate ethics or do they occupy two distinct fields which do not overlap.

The issue of business ethics is linked with the code of practice in an organization. This linkage is further reinforced by the changes taking place in technology which makes the scanning and transfer of information much easier.


1.1. Concept of Business Ethics

There is a view, articulated by eminent scholars such as Friedman, which holds thatthe ethics of the business manager is to earn maximum profit for the shareholders, whose money is put at risk in the business, while complying with all the laws operating in the environment where the business is located(Rendtorff, 2009). It is implied that in the process of earning a profit, the business meets its obligation to employees by paying them market determined wages and to society by paying its taxes.

Those who oppose this view say that its moral vacuum is clear if a situation where a small town hit by a cyclone resulting in power supply disruption is considered. The manager of a hardware shop in that town with diesel generators could ask a very high price for them. If he does not do so, there is an opportunity cost for the shop owner. On the other hand, it is clear that as an individual the hardware shop manager is not acting ethically if he makes an undue profit from this opportunity. The ethical principles that he must follow as a manager cannot be different from those that he must follow as an individual.

This is the dilemma posed by the issue of business ethics.

1.2. Company as Moral Agent

Related to the dilemma posed by business ethics is the issue of whether the business organization can be treated as a moral agent. The issue that needs to be considered is whether it is reasonable and accurate to treat the company as a person with the capacity for making moral choices(Homann, Koslowski and Luetge, 2007).

There are indeed many similarities between companies and natural persons. Both require inputs from outside to survive: the natural person requires oxygen and food whereas the company requires finance and other resources. Both have a thinking portion as part of their structure: the natural person has the brain and the company has the board of directors. Both also have a portion of themselves devoted to action: the natural person has limbs and the company has the CEO and various executives.

However, there is a major dissimilarity that cannot be overlooked. It is widely believed by people of different religious faiths and also by agnostics that the natural person has a soul. While it is indeed clear that the company has something like a culture, it is difficult to postulate that the company has a soul. This is because of the stark reality that the company is an entity created by a nexus of contracts between individuals, each of who has the capacity for free will.

It is therefore wise to seek the middle ground that the company is a quasi-person who acts through individuals. Individuals are a mixture of morality traits and competence traits and this influences their actions,as shown below.

Morality and Competence Traits

Fig 1: [Source: Made by Author, 2012]

In selecting executives, the company must hence consciously choose those with high competence traits as well as morality traits.

1.3. Code of Practice and it's Benefits

A major implication of business ethics and the concept of the company as a moral agent is the evolution of a Code of Practice. This seeks to promote compliance with the law and the emphasis in the code is on practical and relevant measures. The Code is not legally binding in itself but represents a moral commitment made on behalf of the quasi-person by natural persons.

The key elements of a Code of Practice are as below(Leonard J. Brooks and Dunn, 2010):

Elements of Code of Practice

Fig 2: [Source: Made by Author, 2012]

Commitment to compliance

The company makes a formal commitment to comply with the provisions of the law and best business practice. This must be reinforced by something like a statement by the Chairman of the company.

Identify responsible personnel

The company must designate a senior executive as Compliance Officer to ensure that compliance is followed in letter and spirit.

Draw up a list of best practices

The company, in keeping with the nature of its business, must compile best practices for critical areas of operation.

Provide relevant information and training

The company must ensure that information required is freely provided to personnel within the company and that adequate training is provided to make the Code implementable in practice.

Consultation with Compliance Officer

The company must encourage personnel, when they are in about an appropriate course of action, to seek the advice of the Compliance Officer in the matter.

Auditing of practices and learning from experience

The company must set a practice of keeping records of transactions and having them audited at regular intervals to ensure that a practice of learning by experience comes into play. The objective must be to learn and not to criticize inadvertent errors.

There are several examples of organisations which have evolved a code of practice. The Association of British HealthcareIndustries (ABHI) believes business ethics is a key issue for its industry. This is particularly important in view of the fact that there is a lot of overlap with health care professionals in the development of medical devices. ABHI is keen to ensure that the companies and their staff both adhere to the highest standards of professional behavior. ABHI hence is interested to provide them a framework to assist them in this process.

In order to become a member of ABHI, a company must agree to abide by the ABHI Code of Business Practice. The minimum standards of professional behaviour expected of members in their practice in the UK, Europe and elsewhere are specified in this Code(Association of British Healthcare Industries, 2012).


2.1. Psychological Contract

The psychological contract between a company and its employees has been defined as 'the perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other' (Martin, 2006).These obligations are understandings and expectations of each other formed during the recruitment process.

The psychological contract is completely different from the legal contract which is normally a one-sided document to which the employee has contributed little beyond accepting it. The psychological contract on the other hand reflects ground realities better and has a much greater impact on day to day relationships at the workplace. It is the psychological contract which gives pointers to employees on what the nature of their workplace will be like.

However, the psychological contract is not enforceable in a court of law. It is based on a sense of fairness on either side.

A positive psychological contract leads to employee empowerment and a greater commitment towards achieving the goals of the organization. A negative psychological contract leads to loss of job satisfaction, commitment to the job and ultimately a feeling of alienation from the company and its goals.The management of a company must recognize that its primary duty as custodians of the company is to create a positive psychological contract with its employees as well as other stakeholders. It is much more productive to give adequate time and importance to this task and prevent the breakdown of the contract than to attempt to retrieve a broken down relationship.

A variety of reasons have caused the psychological contract to assume greater importance(Armstrong, 2002). The rate of change has increased significantly and this calls for greater commitment on the part of employees. The work load on the average employee has increased substantially for other reasons. The downsizing in organisations results in fewer employees having to do the same amount of work. Further, the use of part- time and flexi-time workers has increased and this also calls for more coordination work by the regular employees.

A graphic way of depicting the psychological contract is by means of the ICEBERG MODEL. In this model, the entire psychological contract is thought of as an iceberg which is largely immersed in the water. What is visible above the water, both to the employee and the employer, is a fraction of what exists below the water(, 2010).

Fig 3: [Source: Adapted from]

What are visible above the water level are the gross work that is put in by the employee on the one hand and the pay that he receives on the other. But there are several sub-issues on either side which are not visible above the water.

For instance, the gross work that is visible obscures the time put in by the employee, the nature of his skills and the level of his commitment.The pay that is visible does not acknowledge the training that has been received, the boost that recognition gives and the respect with which he is treated.

The iceberg concept fits the psychological contract concept in that much of the contract is unwritten and hidden. The sky and the ocean stand for market forces acting both on the employer and the employee and affecting the rise and fall of the iceberg. As the iceberg grows with the experience and commitment of the employee, more of what is unwritten becomes contractual. The concept can also happen in the reverse and hence it must be the objective of the organization to ensure a response to external forces which results in the iceberg rising.

2.2. Role of The Manager in Employee Empowerment

The psychological contract between the company and its employees is in reality largely a contract between the employee and his immediate line manager who is the face of the company for the average employee. The benefits of a positive psychological contract such as employee engagement and empowerment are hence largely dependent on the role played by line managers(Sloman, 2003).

The line manager, by virtue of his unique structural position in the organization, is ideally equipped to perform certain roles which will significantly improve employee involvement and empowerment. He can play a major part in defining job roles and helping the employee to understand his job better. He is in the best position to quickly recognize and reward, in an appropriate way, valuable employee contributions which may not be registered by the performance measurement system. He can help employees understand how the specific performance measures are linked with the larger goals of the organization. This contributes significantly towards convincing employees of the fairness of the measurement and reward system of the company(Guest and Conway, 2004).

Sometimes, line managers are not aware of their responsibility to help in empowering employees and assume that this is the responsibility of the HR function. The senior management of the company must lay particular emphasis on educating their line managers, providing them adequate support in this task and equipping them with the tools required to perform the task effectively. Companies that motivate their line managers and invest in talent management significantly outperform competition.

This competitive advantage is also sustainable. Many surveys have shown that it is intangible elements in the work climate more than monetary rewards which lead to greater engagement and empowerment. These intangible elements can only be provided by the line managers and are the toughest for competitors to detect and imitate.

Sometimes companies suspect that unethical acts are happening within the company and it may be necessary for the company to encourage employees to report on unethical behavior by their colleagues. Such situations must be handled by the line managers with great care and delicacy. Managers must help the 'whistleblowers' to go through the exercise with a clean conscience and not feel that they have let down their colleagues(Giacalone, 2005). Employees strengthened by such experiences and guided by tactful managers are often those who become the most empowered.


3.1. Code of Ethics - Concept & Importance

Ideally, the psychological contract between the company and employees must reflect the code of ethics of that organization.

The exercise of developing a code is worthwhile in itself. It forces the organization to think through its mission and in that context define its important obligations as a group and as individuals to society(Collins, 2009).

Indeed, the governments of many countries reward companies for having compliance policies, including code of ethics, in place.

Some of the important elementsof a code of ethics are as below.

Elements of a Code of Ethics

Involve employees

Tailor-make your code

Consult key stakeholders

Outsource with care

Cite relevant examples

Scope of the code

Training of employees

Enforcement of the code

Sunset date

Fig 4: [Source: Made by Author, 2012]

Tailor-make your code

The code of ethics must reflect not only the nature of work of a particular organization but also the factors that differentiate the way that organization performs its task from others in the same business. Both aspects are equally important.

Involve employees

It is the employees whose working is most directly affected by the code. It is only proper that they should be involved in framing it. If the number of employees is too large to be manageable, a set of representatives can be consulted on their behalf. Involvement of the employees will make the acceptance of the code quicker and much more firm.

Consult key stakeholders

A very useful exercise during the preparation of the code is to be continually in touch on the issue with key stakeholders, particularly external stakeholders. External stakeholders, such as investors or customers, are not involved with the operations of the company in the normal course of events and hence a special effort is required to involve them.

Outsource with care

It is helpful in preparing the code to make use of an outside agency whose expertise in the subject and whose external perspective will be invaluable. However, one caveat is critical at this point. The code of ethics is a very 'personal' document and the core of the document must accurately and comprehensively reflect the views of the company.

Cite relevant examples

The intention of preparing the code must be to putin place a workable set of practices which will be referred to and adhered to by the executives of the company, as required. The implementation of this intention will be significantly strengthened when specific examples relevant to the working of the organization are made use of in the code.

Scope of the code

Great care must be taken to ensure that the provisions of the code apply to all executives of the company, regardless of their position or their stake in ownership. If the applicability of the code is not seen to be uniform, the acceptance of the code across the company will be under strain.

Training of employees

The implementation of the code should contain an inbuilt provision for adequate training of employees in its use and applicability.

Enforcement of the code

There is a view that the specific nature of the enforcement of the code need not be spelt out when the code is being framed. However, many experts differ from this view. They recommend that the code itself should make clear whether the provisions of the code are meant to be guidelines which will influence behaviour or are meant to be directives whose violation will be penalised.

Sunset date

The code itself must also specify when it will be due for review.

An excellent example of a company that has adopted a code of ethics is Accenture,USA. Accenture was a part of Anderson Consulting which was listed on the New York Stock Exchange as a public company on July 19, 2001 under the symbol ACN. Its net revenue in the fiscal year ending August 31, 2011 was $ 25 billion. The Ethics and Compliance program has been created by its Board(Accenture, 2012). The purpose of the program is to:

Ensure that Accenture personnel adhere to the highest standards of ethics.

Ensure that any violation of law by the Accenture personnel will be dealt with appropriately.

Ensure adherence to government laws relating to procurement. This applies to Accenture employees as well as third parties who act on behalf of Accenture.

Ensure that Accenture suppliers adhere to the same high standard of business ethics.

3.2. The Effect of Legislation on Company Ethical Behavior

Ethical standards of a company must be compatible with common morality, but they must go beyond this. They must interpret the common morality for the specific details of the work performed by the company.

It is a matter of historical fact that the standards of common morality have changed over the years. This is reflected in the ethical behaviour of companies since the behaviour standards of the company are set by the individuals who occupy prominent positions in it. This reinforces what was pointed out in an earlier section that the company must exercise great care in the selection of executives and must be guided by considerations of their competence as well as their morality.

Apart from the ethical behaviour of the company being determined by the personal standards of key executives, it is also determined by the laws that prevail in its area of presence(Wines, 2006). The law of the land prescribes actions that are legal and others that are illegal. Often, due to changes in circumstances, the standards of legal behavior change and new laws are framed to reflect this change. For instance, the Sarbanes-Oxley Acthas significantly changed the meaning of legal behavior for companies in the U.S(Ferrell, Fraedrich and Ferrell, 2011).

The complex nature of the impact of legislation on ethical business behavior becomes apparent when issues which arenot crystal clear come up for consideration. In such cases, the lack of ethical behaviour is relatively easier to spot in acts of commission than in acts of omission. It is in such situations that the limits to the impact of legislation on ethical business behaviour become apparent.


Business ethics evolve with society. A greater spread of educational and health facilities across the globe and a significantly higher degree of homogeneity in living conditions have given increased importance to the fact that all men are equal. Changing geo-political equations and changing economic strengths of different economic blocks have also reinforced this effect. Companies located in places earlier called 'the first world' must recognize and respect this change.

Equally, the impact of environmental damage on health is much better understood now. The relationship between operations of business entities and environmental damage is also more open to scrutiny and comment. This is another issue that has a significant effect on business ethics.