1.6 - Business Ethics
Encouraging Ethical Behavior
Unethical behavior can show up at any level of a business, from falsifying or hiding information, to misusing company property for personal gain, to causing harm to employees or customers through unsafe conditions or dishonest practices. Sometimes incentive structures like bonuses or sales targets end up pushing people toward these kinds of shortcuts if they feel pressured to deliver results no matter what.
Some examples: falsifying information could mean faking safety test results or inflating sales numbers in a report. Concealing information could mean hiding a known defect from customers. Misusing company property could mean using a company credit card for personal shopping. A well-known case of incentives gone wrong: in 2016, Wells Fargo was fined after it came out that employees, pushed by aggressive sales targets, had opened millions of bank and credit card accounts that customers never asked for.
To counter this, businesses use a few main tools. Codes of conduct lay out written guidelines for what's acceptable and what isn't. Ethics training teaches employees how to apply those guidelines in real situations, including how to handle conflicts and report misconduct. Internal repercussions, like warnings, demotions, or termination, show that ethical violations are taken seriously. And modeling ethical behavior, where leaders and managers actually walk the talk, sets the tone for what the company truly values.
Ethical behavior matters for business because it attracts customers who care about trust and fairness, helps attract and retain employees who want to work somewhere responsible, and builds brand loyalty. How a business responds to unethical behavior or tough ethical situations can shape customer relationships, employee morale, public perception, and ultimately profitability.
How Business Leaders Respond to Ethical Dilemmas
An ethical dilemma comes up when one core value, like transparency or fairness, conflicts with another core value or with a business goal. A classic example is being fully honest with customers versus protecting short-term sales.
For example, a manager who values empathy wants to keep every employee through a slow year, but the goal of staying profitable might call for layoffs.
When facing these dilemmas, leaders think about how their decision affects different stakeholders. Internal stakeholders are the people directly involved in running the business, like owners, managers, and employees. External stakeholders are people affected by the business without being employed by it, like customers, government agencies, and the community. Leaders weigh how each possible choice affects all these groups, along with the company's reputation and internal culture.
A stakeholder is anyone with a stake (a vested interest) in what the business does, meaning they gain or lose depending on its decisions. Suppliers and lenders are external stakeholders too, since they depend on the business paying them.
There are generally two ways leaders approach resolving these dilemmas. One is to evaluate the benefits and costs for each stakeholder group and pick the option that creates the greatest overall benefit or the least overall harm. The other is to choose whatever action aligns most closely with the business's vision, core values, and long-term goals, even if that path is harder or more costly in the short run.
Example: A toy company finds out that a small part on 10,000 toys it already sold could come loose and become a choking hazard. No one has been hurt yet. Recalling the toys would cost about $200,000. Staying quiet and only fixing future batches would cost almost nothing right now.
Stakeholder | Recall the toys | Stay quiet |
Customers (families) | Kids are kept safe, and trust in the brand grows | Kids could get hurt |
Employees | Extra work handling returns, but jobs are safer in the long run | Pressure to keep a secret; morale drops if it comes out |
Owners | Lose $200,000 now | Save money now, but risk lawsuits, fines, and a ruined reputation if anyone is hurt |
Government agencies | The company is cooperating with safety regulators | Could lead to investigations and penalties |
Community | Sees a business that does the right thing | Loses trust in the company |
With the first approach (greatest total benefit or least total harm), the recall wins: it costs the owners money, but it protects every other group and avoids much bigger costs later. With the second approach, if the company's vision is something like "safe, joyful play for every child," the recall is the only choice that fits. Here both approaches point the same way, but they don't always, and then leaders have to decide which one to rely on.