Business Ethics

BUSINESS ETHICS: The term ethics refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business Ethics are the accepted principles of right or wrong governing the conduct of business people. Ethical decisions are those that are in accordance with those accepted principles of right and wrong, whereas and unethical decision in one that violates accepted principles. This is not as straightforward as it sounds

Managers may face ethical dilemmas, which are situations where there is no agreement over exactly what the accepted principles of right and wrong are, or where none of the available alternatives seems ethically acceptable.

UNETHICAL BEHAVIOR: Self-dealing occurs when managers find a way to feather their own nests with corporate funds. Classic examples of this behavior include: Senior managers who treat corporate funds as their own personal treasury, raiding them to support a lavish lifestyle. Senior managers who use their control over the compensation committee of the board of directors to award themselves multi-million-dollar pay increases or stock option grants that are out of proportion with their contribution to the corporation. Instances where individual managers award business contracts not to the most efficient supplier but to the one that provide the largest kickback. In these cases managers are not acting in the best interests of their shareholders and are instead consuming funds that should legitimately go to shareholders. Some of this behavior is illegal; some is technically legal but unethical because it violates the basic right of shareholders to a fair return on their investment. For an example of self-dealing, consider the former CEO of Tyco International, Dennis Kozlowski. Kozlowski treated Tyco as his personal treasury, drawing on company funds to purchase a $30 million Manhattan apartment and a world-class art collection. Kozlowski even used company funds to help pay for a lavish $2.2 million birthday party for his wife in Italy! Kozlowski ultimately was charged with securities fraud, found guilty of looting Tyco of $97 million, and was sentenced to jail term 8 to 25 years. Information Manipulation

Information manipulation occurs when managers use their control over corporate data to distort or hide information to-enhance their own financial situations or the competitive position of the firm. Many of the accounting scandals that swept through American companies in the early 2000s involved cases of information manipulation. For example, the now-bankrupt energy trading firm Enron hid significant debt from shareholders in off-balance sheet partnerships. This practice misled investors about the level of risk Enron had assumed and supported a much higher stock price than was justified. When the scale of hidden debts was finally revealed, Enron quickly collapsed into bankruptcy, resulting in losses of over $100 billion for shareholders. Information manipulation is unethical because it violates the right of investors to accurate and timely information. Information manipulation can also take place with nonfinancial data. This occurred when managers at tobacco companies suppressed internal research that linked smoking to health problems, violating the right of consumers to accurate information about the dangers of smoking. When evidence of this came to light, lawyers brought class action suits against the tobacco companies, claiming they had intentionally caused harm to smokers. In 1999, the tobacco companies settled a lawsuit brought by several states, which sought to recover health care costs associated with tobacco-related illnesses; the total payout to the states was $260 billion! Anticompetitive Behavior Anticompetitive behavior includes a range of actions aimed at harming actual or potential competitors, most often by using monopoly power to enhance the prospect of the firm. For example, in the 1990s the Justice Department claimed that Microsoft used its monopoly in operating systems to force PC makers to bundle Microsoft's Web browser, Internet Explorer, with Windows and to display Internet Explorer prominently on the computer desktop. Microsoft reportedly told PC makers that it would not supply them with Windows unless they did this. Because the PC makers had to have Windows to sell their machines, this was a powerful threat. The alleged aim of the action, which is an example of tie-in sales (illegal under antitrust laws), was to drive a competing browser maker, Netscape, out of business. The courts ruled that Microsoft was indeed abusing its monopoly power in this case, and in a 2001 consent decree the company agreed to stop the practice.

Putting the legal issues aside, action such as that allegedly undertaken by managers at Microsoft is unethical in at least three ways. First, it violates the rights of end consumers by unfairly limiting their choice; second, it violates the rights of downstream participants in the industry value chain, in this case PC makers, by forcing them to incorporate a particular product in their design; and third, it violates the rights of competitors to free and fair competition.

4. Opportunistic Exploitation Opportunistic exploitation of other players in the value chain in which the firm is embedded is another example of unethical behavior. Opportunistic exploitation of this kind typically occurs when the managers of a firm seek to unilaterally rewrite the terms of a contract with suppliers, distributors, or complement providers in a way that is more favorable to the firm, often using the firm's power to force the revision through. For example, in the late 1990s Boeing entered a $2 billion contract with Titanium Metals Corp. to buy certain amounts of titanium annually for l0 years. In 2000, after Titanium Metals Corp. had already spent $100 million to expand its production capacity to fulfill the contract, Boeing demanded that the contract be renegotiated, asking for lower prices and an end to minimum purchase agreements. As a major purchaser of titanium, managers at Boeing probably thought they had the power to push this contract revision through, and the investment by Titanium Metals meant that firm would be unlikely to walk away from the deal. Titanium Metals Corp. promptly sued Boeing for breach of contract. The dispute was settled out of court, and under a revised agreement Boeing agreed to pay monetary damages to Titanium Metals (reported to be in the $60 million range) and entered an amended contract to purchase titanium. Irrespective of the legality of this action, it seems unethical because it violated the rights of a supplier to be dealt with in a fair and open way. Substandard Working Conditions Substandard working conditions arise when managers tolerate unsafe working conditions or pay employees below-market rates to reduce costs of production. The most extreme examples of such behavior occur when a firm establishes operations in countries that lack the workplace regulations found in developed nations such as United States. The example of Nike, given earlier, falls into this category. In another recent example, the Ohio Art company ran into an ethical storm when-newspaper reports alleged that it had moved production of its popular Etch a Sketch toy from Ohio to a supplier in Shenzhen province, where employees, mostly teenagers, worked long hours for 24 cents per hour, below the legal minimum wage of 33 cents an hour there. Moreover, production reportedly started at 7:30 a.m. and continued until 10 p.m., with breaks only for lunch and dinner. Saturdays and Sundays were treated as normal workdays. This translated into a workweek of seven 12- hour day, or 84 hours a week, well above the standard 40-hour week set by authorities in Shenzhen. Such working conditions clearly violated the rights of employees in China as specified by local regulations (which were poorly enforced). Is it ethical for the Ohio Art company to use such a supplier? Many would say not.

Environmental Degradation Environmental degradation occurs when managers take actions that directly or indirectly result in pollution or other forms of environmental harm. Environmental

degradation can violate the rights of local communities and the general public to clean air and water; land that is free from pollution by toxic chemicals or excessive deforestation that causes land erosion and floods; and so on. Large open areas called commons were free for all to use as pasture. The poor put out livestock on these commons to supplement their meager incomes. It was advantageous for each family to put out more and more livestock, but the consequence was far more livestock than the commons could handle. The result was overgrazing and degradation of the commons to the point where they could no longer support livestock. In the modern world corporations contribute to the global tragedy of the commons by moving production to locations in developing nations where environmental regulations are lacking or less strict than they are at home. There the firms are free to pump pollutions into the atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons. Although such action may be legal, is it ethical? Again, it seems to violate basic societal notions of ethics and clearly harms important stakeholder groups, including the general public and local communities.

Corruption Corruption can arise in a business context when managers pay bribes to gain access to lucrative business contracts. A recent example of corruption concerns the allegation that the Texas-based energy company Halliburton participated in a consortium that made $180 million in illegal payments to government officials (that is, bribes) to secure a $4.9 billion contract to build a liquefied natural gas plant in Nigeria. Corruption is clearly unethical: It violates several rights, including the right of competitors to a level playing field when bidding for contracts and, when government officials are involved, the right of citizens to expect that government officials will act in the best interest of the local community or nation, and not in response to corrupt payments that feather their own nests. According to Transparency International, an independent nonprofit organization dedicated to exposing and fighting corruption, businesses and individuals worldwide spend some $400 billion a year on bribes related to government procurement contracts alone! Transparency International has also measured the level of corruption among public officials in different countries.

The organization rated countries such as Finland and New Zealand as very clean, whereas countries such as Russia, India, Indonesia, and Zimbabwe were seen as corrupt. Bangladesh ranked last out of all 146 countries in the survey, Finland ranked first.