Ethical Responsibilities of Business

Abstract

This article explores the ethical responsibilities of business. Business ethics became a hot-button issue in the wake of the corporate scandals that were exposed in the late 1990s through the early 2000s. Businesses do not exist in a vacuum, but rather they play a vital role in sustaining economic growth, providing jobs, giving employees access to health care, and more—businesses can and do exist for the betterment of our society. However, people run businesses, and human nature sometimes manifests itself in unethical conduct. The way toward maintaining ethical business standards is by examining the moral character of business people, employees, and consumers and adhering to the basic moral codes of trustworthiness, respect, responsibility, fairness, caring, and citizenship. In short, the ethical responsibility of business is to be a good corporate citizen, and adhering to moral codes is a responsibility that we all share.

Overview

Whether it was fraudulent accounting practices of publicly traded companies, front running of stocks and investments by mutual funds, the raiding of pension funds by businesses heading for bankruptcy, manipulative sales and lending practices by multinational banks, or the predatory lending practices of consumer finance companies, recent decades have seen an increase in the exposure of corporate malfeasance. These episodes are not limited to a particular industry, and a similar strain runs through all of these events: a lack of business ethics. However, there is a growing business ethics movement that has been ushered in through increased regulatory scrutiny by state and federal government agencies, class action lawsuits, and the initiatives of consumer advocates and not-for-profit organizations dedicated to the social responsibility of business.

Business ethics may seem like an ambiguous or even counterintuitive term. After all, the primary objective and responsibility of any business is to make and maximize profits. There are times, however, when the means employed to make profits conflict with a society's moral and legal codes. Essentially, business ethics are rules geared toward establishing and maintaining trustworthiness in a business or commercial setting. While it may be hard to identify, there is a growing business ethics movement in the wake of the aforementioned business scandals. Moreover, state and federal regulatory agencies have stepped up their monitoring activities across multiple lines of business.

Increasing Regulations and Legal Action. For example, the accounting scandals that ultimately led to the much-publicized demise of Enron (and the loss of thousands of jobs as well as the retirement funds of many former employees) and the prosecution of Tyco's former chief executive eventually prompted the United States Congress to enact the 2002 Sarbanes-Oxley Act. In 2004, the Financial Services Agency of Japan ordered a multinational bank to close one of its foreign private banking divisions after an investigation revealed manipulative sales and lending practices. Later, a major New York–based commercial banking institution was fined for laundering billions of dollars for criminal enterprises emanating from Russia, and this led to the bank's eventual acquisition by a larger banking entity. At the state level, following the subprime mortgage crisis of 2007–2008, a number of regulatory agencies responsible for overseeing consumer loans and mortgage lending were empowered by state legislatures to crack down on predatory lending practices, and quite a few consumer finance companies and multistate mortgage banks were held accountable for charging excessive points and fees for unsecured consumer loans as well as loans collateralized by residential dwellings.

Not only have the actions by regulatory agencies affected business practices, regulatory scrutiny has opened the door to class-action lawsuits. Whether these were brought by firms representing shareholders who claim they were defrauded by accounting practices that did not truly represent the value of a company, or other actions on behalf of consumers who were harmed by so-called predatory lending practices of consumer finance companies, such lawsuits have resulted in multimillion dollar settlements and these, in turn, have had a significant impact on profits. However, in a controversial practice, several businesses adopted arbitration clauses in the 2010s that forced customers to settle disputes with the company though arbitration, preventing customers from joining others in a class action lawsuit. In some cases, regulatory oversight and legal actions were prompted by the initiatives of consumer advocates and not-for-profit organizations. In short, concerned citizens at the grassroots level are paying close attention to how companies operate and holding them accountable for their actions.

Corporate Ethics and Social Responsibility. While the Enron and Tyco scandals were front-page news, these prosecutions are not the norm. At times, the potential financial benefit from behavior that is short of ethical may seem to be worth the risk for some decision makers. However, in the long run, good ethics is good for business, as a company's professional reputation can have a positive impact on its relationships with customers and vendors and enable it to develop strategic alliances with other similar businesses. Professional reputation is a matter of perception, and society's perceptions closely link business performance to a company's social, environmental, and ethical conduct. Consumers have become increasingly concerned that businesses should be responsible not only for ensuring that they provide quality products but also for treating employees fairly. In light of the increased regulatory scrutiny, legal actions, and consumer advocacy, corporate social responsibility has become a growing concern for many business entities.

Compliance Procedures. In order to enhance corporate social responsibility, companies are increasingly concerned that they have efficient compliance procedures in place to ensure that their business practices adhere to the regulatory guidelines of their particular business. Having a clearly defined compliance program enables a company to integrate compliance into its business model. By doing so, they have awareness of the potential regulatory issues that can arise in the event of an audit by a regulatory agency. This knowledge can empower an organization to take proactive corrective steps prior to the commencement of an adverse regulatory action. Moreover, having effective compliance systems in place will create positive working relationships with regulatory agencies.

The goal of regulatory agencies is not to be an impediment to business. After all, if their goal were merely to put companies out of business, there would be no business to regulate, and thus no need for regulatory agencies. Thus, companies and governmental agencies must have a symbiotic relationship. By realizing this, business people will understand that there is no need for an adversarial posture with the agency that regulates its business and that establishing harmonious relationships with regulators will be good for business in the long run.

Enforcing an Ethical Culture and Compliance. The challenge for many business enterprises goes beyond legal and compliance initiatives. Business owners and executives need to raise the bar and to consider whether their business decisions are ethical. This requires decision makers to develop and encourage a culture of ethics and compliance, and this can be a daunting task. There are numerous pressures confronting business in addition to increasing sales, maintaining competitive advantage and market shares, and being profitable. Mergers and acquisitions, downsizing, and outsourcing have dramatically changed the shape of corporations. In many cases they do not have the luxury of time to develop a "corporate culture" as their personnel goes through greater turnover today than in previous eras.

Despite these pressures and considerations, there is still a need for companies to develop a code of ethics that is communicated to all their employees. While ethical behavior should start at the top, with owners, executives, and managers adhering to moral standards, developing an ethical culture also requires having ethical employees. As we have seen, in order to adhere to regulatory guidelines and maintain its professional reputation, a company needs to have effective compliance procedures and internal controls in place. The goal is to create a code of ethics. In many instances, a corporate code of conduct is a written policy and is sometimes incorporated into a company's mission statement.

The Mission Statement. A mission statement defines the purpose of an organization, its reason for existing, as well as the goals of employees who work for the organization. If the goal of the organization is to provide quality products and also adhere to a code of ethics, there are standard moral principles that should be incorporated into its code of ethics. These may be lofty notions to some, but ethics are essentially virtues that many people learn from their families. Some of these virtues include integrity, justice, competence, and utility.

• Integrity means to be open, honest, and sincere.
• Justice relates to being impartial, having sound reason, and being conscientious.
• Competence is being capable, qualified, and reliable.
• Utility means being practical and useful.

Not only should a code of conduct be based on the foregoing virtues, the code should incorporate the following basic values of moral conduct: trustworthiness, respect, responsibility, fairness, caring, and citizenship.

These are not merely theoretical notions, but rather virtues and ethical standards that will be reflected in the way a company conducts its business, how a business treats its employees, and the organization's relationship with its customers and vendors. Simply put, an ethical business enterprise is one that pays its bills expediently, treats its employees fairly, and provides quality products and service to its customers. Unethical behavior such as not paying vendors for their services, or subjecting employees to hostile work environments, or not having reliable customer service will undo an organization in the long run.

Financial Reporting and the Sarbanes-Oxley Act. Further, because of the Sarbanes-Oxley Act (SOX), publicly traded entities must have higher standards of ethical conduct as it relates to their financial reporting requirements. Essentially, a company's income statements and balance sheets must accurately reflect the company's financial standing. This means that their revenues, liabilities, and net worth must be bona fide, and executive officers are now required to attest to the accuracy of those statements.

In this regard, there have been numerous violations discovered where financial reports contained deficiencies. These deficiencies are usually related to the timing of revenue recognition as well as contracting practices. The timing of revenue recognition and contracting practices are directly related to relatively straightforward if not mundane matters such as accurately tracking accounts receivable and inventory accounts.

Essentially, certain companies were found to have practices that were deemed to be improper revenue recognition. One of these practices concerns the treatment of accounts receivable. Certain companies were found to have been backdating invoices in an attempt to lower their outstanding or uncollected receivables for a particular quarter that gave the appearance of greater cash flows at the close of a quarter. Another deficient practice has been termed "channel stuffing." Here, a company attempts to boost sales results by shipping more products to subsidiaries or vendors prior to the end of a reporting quarter. This gives the appearance of higher sales figures and reduced inventory, and thus greater revenue for that quarter.

Manipulating financial statements in such a manner is a violation of the Sarbanes-Oxley Act. Not only have companies and the responsible individuals been convicted of fraud under SOX, investors have also suffered undue hardship as the value of the companies' stock price fell dramatically in these cases. And this opened the door to class action lawsuits. Defending against these suits can be quite expensive, and this can have a material adverse affect on a company's profits, its reputation, and its viability as a business entity. In short, not having ethical standards can have serious implications as it relates to financial reporting requirements. Causing financial losses to its investors is not a theoretical matter, it is an endeavor that can stain a business's reputation and eventually cause its demise.

Hostile Work Environments. An ethical organization is one that also treats its employees well. Many companies meet this standard simply by providing jobs, giving employees access to health care, and creating professional work environments. However, there have been many instances where unethical conduct as it relates to work environments has been revealed. For example, sexual harassment lawsuits have been brought when employees were subjected to a hostile work environment. A hostile work environment can be one where a superior makes outright and unwanted sexual advances on a subordinate, or even where inappropriate comments by people running the mailroom take on a sexual tone. Most organizations have clearly defined policies regarding these matters and policies and procedures to ensure that hostile environments are not sustained.

Allegations of sexual harassment are not the only situations that indicate a hostile work environment. Such an environment also includes the use of obscene language, verbal abuse and intimidation, and derogatory comments about a person's ethnic or racial background, religious affiliation, gender, and/or sexual orientation.

How does this relate to the virtues and moral values mentioned above? If a company adheres to the basic moral values of caring and citizenship, hostile work environments would not arise. A business that aspires to fairness and trustworthiness is one that expediently pays it vendors for services provided. By not treating its vendors fairly, a company can jeopardize its professional reputation by undermining its professional relationships. An organization that believes in responsibility will ensure that its people are held accountable for their performance. That can be the performance of the controller, who is responsible for maintaining books and records and financial reporting, or the human resource manager, who is responsible for implementing the company's policies and procedures as they relate to treatment of employees, or the compliance officer, who is responsible for developing and implementing policies and procedures that adhere to regulatory guidelines.

The overriding moral value is respect. In fact, respect is the foundation of any relationship. Respect is not an abstract notion. To be respectful is to recognize the value of other people. At the end of the day, business organizations are not "brick-and-mortar" entities. Companies are not automated enterprises that run on their own. Business enterprises are made up of people. How people relate to one another within an organization is directly related to the ethical values of the business. Therefore, it is the shared responsibility of all the people in an organization to treat each other (the internal customer), as well as its customers with respect. Customers who perceive a business is not treating them with respect will find another business to provide them with the goods or services they desire. Employees who feel that their coworkers or superiors are disrespectful will find another job. In the final analysis, though, the first relationship any individual has is with oneself. If people have self-respect, they will treat others respectfully, and they will also respect the organizations that they work for, shop at, or invest in.

Viewpoints

Business enterprises do not exist in a vacuum; they are integral to society. A company that seeks to maintain ethical standards will better serve society. To be a good corporate citizen is not much different than for an individual to be a good citizen. The moral values required for each are the same. Further, under the law, in many cases businesses are considered persons, and there are legal ramifications that go with that distinction. But beyond the legal ramifications that we are well familiar with by now, there is a difference between the letter of the law and the spirit of law, and the latter really speaks to ethics.

While we have seen many instances of unethical corporate behavior and the harm that arose from that behavior, it is a reasonable proposition that an unethical business will not survive in the long run. At the same time, if this is true, one might wonder why such instances of unethical conduct occurred in the first place. If unethical business practices can trigger regulatory scrutiny that might cause a business's demise, then it seems prudent for businesses to implement and maintain ethical practices.

Although government agencies and attorneys general have far-reaching abilities and ample resources, their regulatory enforcement actions are limited in scope and usually aimed at large organizations with so-called deep pockets; that is, businesses with financial resources that make it worthwhile to commence a regulatory action or a legal proceeding. While it may be of little value for an organization to spend needless amounts of time, resources, and money defending itself against regulatory enforcement actions or litigation, businesses that have ample financial resources are often successful in mitigating the damage of such proceedings. It is possible, therefore, that certain business decisions that might not appear ethical are made with the inherent regulatory or legal risks carefully considered. At times, the potential for financial gain may exceed the risk of financial losses that might occur in the event of an enforcement action or lawsuit. Moreover, in light of the fact that enforcement actions and class action lawsuits are more likely to be aimed at companies that have ample financial resources, smaller companies can engage in unethical practices and are less likely to be detected.

However, the energies and effort of a business enterprise are of better use when they are generating profits. To paraphrase the late economist Milton Friedman, the business of business is business. Friedman believed that the social responsibility of business is to generate profits. Although the purpose of this paper is not to debate the merits of Friedman's economic theories, perhaps he was right, to some extent. A business that believes its social responsibility is to generate profits will conduct itself in a manner that will prove to be successful. In so doing, a business's success will contribute to the economic growth of a society. This will provide people with jobs and opportunities for growth.

Considering the importance of business ethics, then it is self-evident that to sustain itself, a business enterprise needs to attract and retain qualified and competent people. This reinforces one of the four virtues mentioned earlier. In addition to competence, the other virtues include integrity, justice, and utility. With respect to the last of these, the simple question here is whether the goods or services a company is providing are useful. Of course, that is a matter of debate; after all, in a consumer-driven society, there are many goods sold to and purchased by the public that are of dubious utility. An organization that is delivering valuable and useful goods, services, or commodities is acting for the betterment of society. One can look to the technological innovations of recent years and see that our economies have become more efficient.

In the final analysis, the social responsibility of a business is to be profitable, as this will contribute to sustaining economic growth. A business that incorporates a code of ethics into its business practices will protect itself from regulatory and legal actions and will enhance its relationships with its employees, customers, and vendors. In so doing, a business can ensure its viability, and that is an ethical responsibility as well.

Terms & Concepts

Accounts Receivable: Money owed to a business entity for goods, services, and merchandise purchased on a credit basis.

Business Ethics: Rules geared toward establishing and maintaining trustworthiness in a business or commercial setting.

Business Model: The means by which a company generates revenue and profits, how it serves its customers, and the strategy and implementation of procedures to achieve this end.

Compliance Procedures: Business practices and procedures that adhere to federal, state and regional laws, rules and guidelines.

Corporate Culture: The beliefs, attitudes, and behaviors of an organization and its employees that determine a corporation's character.

Financial Services Agency: The government organization in Japan responsible for overseeing the banking, securities and exchange, and insurance sectors.

Inventory Accounts: The name given to an asset of a business relating to merchandise or supplies on hand or in transit at a particular point in time.

Mission Statement: A statement of the core purpose of an organization, why it exists, how it intends to conduct its business, and the expectations of the employees in achieving these aims.

Moral Conduct: A rule or habit of behavior that is right or wrong according to socially accepted norms.

Predatory Lending Practices: Lending practices aimed at minority groups or senior citizens who have weaker credit ratings and financial resources than other demographic groups. Government investigations that began in the late 1990s have revealed that senior citizens and minority groups are ultimately charged more fees or offered higher interest rates for consumer loans.

Regulatory Agencies: Federal, state, and regional government agencies that are responsible for enforcing laws, rules, and guidelines.

Sarbanes-Oxley Act (SOX): Federal law in the United States enacted in 2002 that requires executives of publicly traded companies to attest to the accuracy of their financial statements and that also requires the organization to establish extensive internal procedures and controls to ensure compliance with the act.

Social Responsibility: The obligation of a business to conduct its business in a manner that is socially, environmentally, and ethically responsible.

Bibliography

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Suggested Reading

Crossman, J., & Doshi, V. (2015). When not knowing is a virtue: A business ethics perspective. Journal of Business Ethics, 131(1), 1–8. Retrieved from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=109555737&site=ehost-live&scope=site

Francis, R. D., & Murfey, G. (2016). Global business ethics: Responsible decision making in an international context. London: Kogan Page.

Jackson, K. T. (2005). Towards authenticity: A Sartrean perspective on business ethics. Journal of Business Ethics, 58, 307–325. Retrieved from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=17702725&site=ehost-live

Knox, S., Maklan, S., & French, P. (2005). Corporate social responsibility: Exploring stakeholder relationships and programme recording across leading FTSE organizations. Journal of Business Ethics, Part 3, 61, 7–28. Retrieved from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=18458717&site=ehost-live

Maclagan, P. (2012). Conflicting obligations, moral dilemmas and the development of judgement through business ethics education. Business Ethics: A European Review, 21, 183–197. Retrieved from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=72908670

Stango, M. (2006). Ethics, morals and integrity: Focus at the top. Healthcare Financial Management, 60 50–54. Retrieved from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=21081179&site=ehost-live

Wempe, J. (2005). Ethical entrepreneurship and fair trade. Journal of Business Ethics, 60, 211–220. Retrieved from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=18661643&site=ehost-live