The Importance of Business Ethics

The system of moral and ethical beliefs that guides the values, behaviors, and decisions of a business organization and the individuals within that organization is known as business ethics.

Some ethical requirements for businesses are codified into law. Environmental regulations, the minimum wage, and restrictions against insider trading and collusion are all examples of the government setting forth minimum standards for business ethics.

What qualifies as business ethics in history has changed over time and the different areas of ethics are important to every business.

Key Takeaways

  • Business ethics involve a guiding standard for values, behaviors, and decision-making.
  • Ethics for business have changed over time but they're important for every company.
  • Running a business with ethics at its core from the top down is essential for company-wide integrity.
  • Behaving in a consistently ethical manner can lock in a solid reputation and long-term financial rewards for companies.
  • Employees tend to remain loyal to, and perform more effectively for, a company with a high standard of ethics.

Business Ethics

Ethics in Leadership

A management team sets the tone for how an entire company runs on a day-to-day basis. When the prevailing management philosophy is based on ethical practices and behavior, leaders within an organization can direct employees by example. They can guide them in making decisions that are beneficial to them as individuals and to the organization as a whole.

Building on a foundation of ethical behavior helps create long-lasting positive effects for a company. One such effect is the ability to attract and retain highly talented individuals. Another is a positive reputation within the community.

Running a business in an ethical manner from the top down establishes stronger bonds between individuals on the management team. This, then, creates greater stability within the company.

Employee Ethics

When management leads an organization in an ethical manner, employees follow in those footsteps. Employees make better decisions in less time when business ethics are a guiding principle. This increases productivity and overall employee morale.

When employees work in a way that is based on honesty and integrity, the whole organization benefits. Employees who work for a corporation that demands a high standard of business ethics in all facets of operations are more likely to perform their job duties at a higher level. They're also more inclined to stay loyal to that organization.

Impact of Bad Behavior

Enron Corporation, an American energy and commodity services company, collapsed after the Securities and Exchange Commission (SEC) investigated its improper accounting practices and revealed that the company hid massive losses and liabilities while paying its executives millions. Thousands of employees suddenly were left jobless. Several executives were convicted of federal crimes. The company's unethical behavior also led to the downfall of one of the oldest and biggest accounting firms, Arthur Andersen.

Ethics by Industry

Business ethics differ from industry to industry, and nation to nation. The nature of a business' operations has a major influence on the ethical issues with which it must contend.

Ethics Concerning Clients

For example, an ethical quandary can arise for an investment brokerage when the best decision for a client and their money runs counter to what pays the brokerage the highest commission. A media company that produces TV content aimed at children may feel an ethical obligation to promote good values and eschew off-color material in its programming.

Ethics Concerning the Environment

A striking example of industry-specific business ethics is in the energy field. Companies that produce energy, particularly nonrenewable energy, face unrelenting scrutiny on how they treat the environment.

One misstep, whether it's a minor coal ash spill at a power plant or a major disaster such as the 2010 BP (BP) oil spill, can force a company to answer for its actions. Numerous regulatory bodies and society at large may pursue whether the company skirted its duty to protect the environment in an aggressive pursuit of higher profits.

A stringent, clearly defined system of environmental ethics is paramount for an energy company if it wants to thrive in a climate of increased regulations and public awareness on environmental issues.

Companies such as Amazon (AMZN) and Google (GOOGL), which conduct most of their operations online, are not scrutinized for their environmental impact the way energy companies such as BP and Exxon (XOM) are. When it comes to protecting their customers' privacy and security, however, their ethics are examined very closely.

Ethics Concerning Privacy

A particular area in which technology companies must make tough ethical decisions is marketing. Advancements in data mining technology enable businesses to track their customers' movements online and sell that data to marketing companies or use it to match customers with advertising promotions.

Many people view this type of activity as a major invasion of privacy. However, such customer data is invaluable to businesses, as they can use it to increase profits substantially. Thus, an ethical dilemma is born. To what extent is it appropriate to spy on customers' online lives to gain a marketing advantage?

Benefits of Business Ethics

The importance of business ethics reaches far beyond employee loyalty and morale or the strength of a management team bond. As with all business initiatives, the ethical operation of a company is directly related to profitability in both the short and long term.

The reputation of a business in the surrounding community, among other businesses, and for individual investors is paramount in determining whether a company is a worthwhile investment. If a company is perceived to operate unethically, investors are less inclined to buy stock or otherwise support its operations.

Companies have more and more of an incentive to be ethical as the area of socially responsible and ethical investing keeps growing. The increasing number of investors seeking out ethically operating companies to invest in is driving more firms to take this issue more seriously.

What Is Meant by Business Ethics?

Business ethics represents a standard of behavior, admired values, trustworthy methods of operation, and respect for customers that a company incorporates, and insists that all employees adhere to, as it functions from day to day.

How Do Business Ethics Benefit Companies?

By behaving according to a high ethical standard, companies can strengthen the drive to succeed internally among executives, management teams, and staff. Furthermore, companies can attract and keep investors who themselves are attracted to companies that align with their own standards of ethical behavior. In other words, business ethics can help companies build long-lasting, solid reputations and financial success.

Why Do Some Companies Have Bad Business Ethics?

That's a good question, especially when the financial advantages arising from a high degree of ethical behavior can be so great. A couple of reasons may be that some CEOs, management teams, or employees may feel it's just easier to work outside of an ethical standard. They may reach certain financial goals faster and not care about the long-term repercussions. It may seem to be less expensive to work without moral and ethical boundaries. Where money is concerned, good ethics can be forgotten.

The Bottom Line

With consistent ethical behavior comes an increasingly positive public image. There are few other considerations as important to potential investors and current shareholders. To retain a positive image, businesses must be committed to operating on an ethical foundation as it relates to the treatment of employees, respecting the surrounding environment, and fair market practices in terms of price and consumer treatment.

Article Sources
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  1. Forbes. "5 Most Publicized Ethics Violations by CEOs."

  2. British Petroleum. "BP Initiates Response to Gulf of Mexico Oil Spill."

  3. Google. "Google Privacy Policy."

  4. Amazon Web Services. "Privacy Notice."

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