1. The Importance of Business Ethics
Ned C. Hill, Dean
W. Steve Albrecht, Associate Dean
Marriott School of Management
Brigham Young University

2. Outline What is ethical behavior and why is it important to business?
The ethical value proposition
Laws, policies and ethics
Evidence that good ethics means good business
Is ethical behavior improving?
Teaching ethics—the Ethics Maturity Model

3. Ethical Behavior
Conducting one’s life in complete accord with a firmly held set of values and principles
These principles may be derived from religious beliefs, philosophical understanding, etc.
Application should be in all areas of one’s life: personal, family, business, social, etc.
“Integrity” is the consistent application of ethical behavior.

4. Foundations of Ethical Behavior
Treat others as you would be treated
Respect
Honesty
Trust

5. YOU WANT THEM TO TREAT YOU
Taught in All Cultures
Judaism: What you hate, do not do to anyone.
Islam: No one of you is a believer until he loves for his brother what he loves for himself.
Hinduism: Do nothing to thy neighbor which thou wouldst not have him do to thee.
Sikhism: Treat others as you would be treated yourself.
Buddhism: Hurt not others with that which pains thyself.
Confucius: What you do not want done to yourself, do not do to others.
Aristotle: We should behave to our friends as we wish our friends to behave to us.
Plato: May I do to others as I would that they should do unto me.
TREAT PEOPLE THE WAY
YOU WANT THEM TO TREAT YOU

6. Bad Ethics Increases Transaction Costs
Party A
Party B
Security
Regulators
Lawyers
Delays
Trade
Interest
Etc, etc!
Testing
Duplication

7. Societal Costs of Unethical Behavior
Law enforcement and other security personnel
Physical protection (locks, electronic security, fences, vaults, etc.)
A substantial portion of attorney and court system costs
Some welfare costs
Costs of collecting taxes
Wasted/misused investment funds
A substantial portion of accounting/auditing costs
A large fraction of costs for regulators and examiners
Some marketing/advertising costs
Costs for institutions like better business bureaus, consumer protection agencies
Some costs of bankruptcy
Lack of investment from outside investors, tourists

8. Business Costs of Unethical Behavior
Loss of physical assets
Increased costs of security
Loss of customers—especially those who value ethics
Loss of employees—especially the more ethical
Loss of reputation
Increased legal costs
Higher costs of debt
Loss of investor confidence (lower stock price, difficulty in raising funds, problems with lenders)
Regulatory intrusion
Costs of bankruptcy

9. What is the Cost of Lack of Integrity in the US?
Employee fraud $400 B
Time theft $230 B
Industrial espionage $200 B
Counterfeiting $200 B
Employee dishonesty $120 B
Identity theft $ 50 B
(Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)

10. Levels of Constraints on Behavior
Ethical Behavior Tied to Set of Values
Professional Standards
Legal Requirements

11. Ethical Issues Relating to Business
Honesty—communication and behavior consistent with facts
Disclosure of information
Promises/commitments
Laws and professional standards
Representation of others like shareholders (applies to board members)
Unfair competition
Refrain from bribes and excessive gifts (that sway judgment)
Avoid quid pro quo transaction
Comply with “anti-trust” laws (these relate to pricing, monopolistic practices)
Just compensation
Respect intellectual property (product piracy)
Treat employees fairly
Respecting rights of others
Treat others with fairness and respect regardless of age, religion, ethnic group, sex, economic status, etc., especially children, women, and subordinates
Respect the community you operate in by paying fair share of economic costs you create
Respect others and future generations by treating the environment well

12. Why Ethical Behavior Adds Value
Better information
Trust from investors
Lower costs for audits, controls, investigations
Better allocation of resources
Customers will be more loyal (RC Willey example)
Lower costs from suppliers (automotive company example)
Attracting and retaining better employees
Fair competition
Lowers cost of business in economy
Leads to better decision-making (do what’s best for firm, not one individual)
Improves competitive nature of a country’s economy

13. Why Ethical Behavior Adds Value
Just compensation
Creates a more vibrant, entrepreneurial economy
Attracts and retains better employees
Rights of others
Draws upon talents of wider set of individuals
Develops long-term respect from the community (Godfrey study)
Maintains the environment for long-term value to all (Costa Rica)
It’s the right thing to do!

14. Is There Evidence that Ethical Behavior Yields Increased Value?
Study of 2,100 firms with very strong, well-governed boards of directors outperformed overall market 15% vs. 12.5% in 2005
Firms with high level of “democracy” outperformed “dictatorial” firms by 8% per year in the decade of the 1990’s.
Philanthropy: Firms that contribute a higher portion of their assets to the communities in which they reside fare better in an economic downturn.

15. How Important is Integrity in a Leader?
In a survey of 54,000 people Integrity was by far the number one attribute desired in a leader
(Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)

16. Short-Term vs. Long-Term
One party may gain temporary advantage by unethical behavior
Enron
Livedoor
Ghana Airways
But in the long-term, individuals, companies and society are hurt

17. Questionable State of Our Integrity
Did You Cheat to Get Into Graduate School?
“Yes”
43% Liberal Arts
52% Education
63% Law and Medicine
75% Business
Source: Rutgers University survey of students

18. Questionable State of Our Integrity
MBAs
76% were willing to understate expenses that cut into their companies’ profits
Nearly all believe shareholder value is more important than customer service
Convicts in 11 minimum security prisons had higher scores on an ethical dilemma exam than MBAs

19. Questionable Integrity at Work
76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months
49% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”
KPMG 2000 Organizational Integrity Survey

20. Source: Society of Human Resource Management
Survey of Employees
Most (65%) don’t report ethical problems they observe
96% feared being accused of not being a team player
81% feared corrective action would not be taken anyway
68% feared retribution from their supervisors
Source: Society of Human Resource Management

21. Deterioration in Honesty over Time
Year Year
College students who cheated in H.S (20%) (85%)
Self-reported cheating (11%) (49%)
Believe cheating is common (20%) (88%)
Used cheat sheets (34%) (68%)
Let others copy work (58%) (98%)
Willing to lie to get job (28%) (39%)
Students who had stolen (35%) (38%
(Based on several different ethics studies)

22. Another Study of Student Honesty
Responses 50,000 college students at 69 schools
26% of business majors admitted to serious cheating on exams
54% admitted to cheating on written assignments
Journalism majors were worse with 27% admitting to cheating on exams.
The most honest—students in the sciences (19% reported cheating on tests)
Author observes “cheating has increased since he began doing surveys 15 years ago”
He partly blames technology—makes it easier to cheat
“Biz Majors Get an F for Honesty” by Donald McCabe published on February 6, 2006, by the Center for Academic Integrity

23. Will Our Ethics Improve? Survey of High School Students
2007
74% cheated on an exam in the last year; 45% 45% said they did it at least twice in the last year
93% lied to their parents in the past year
78% have lied to their teachers
37% said they would lie to get a job
38% took something from a store in the last year
Josephson (2007)

24. Why is Dishonesty Increasing?
Modeling Labeling
Honesty

25. Why Is Dishonesty Increasing?
Bad Modeling/Lack of Good Modeling
Makes up our news— more explicit than ever
Focus of TV/movies
Dishonest “leaders”
Sports, business, entertainment “heroes”
Good models are rare
Lack of Positive Labeling
Home….average family spends 10 hours less time together a week than 20 years ago
Vocabulary of kindergarten children
Schools
Churches

26. Confession of Fraudulent Executive
Even when put in jail, I didn’t feel like a “criminal.” I somehow felt we were different and I started noticing every white collar guy I did talk to began every sentence with: “all I did was.” Once you’re in jail and you start feeling the animosity the other prisoners have toward white-collar guys, where they say to you, “you’re no different than us,” “you’re just a thief,” “you use other words.” Even the word “embezzlement” is a nice word…they said “you’re a thief, you lie to people and take their money, that’s what I do to” and that hit me like a ton of bricks.
Mike Morze, ZZZZ Best

27. Can Ethical Values be Taught? Level 1: The Foundation
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

28. Personal Ethical Understanding
Concepts of right and wrong, fair play, respect for rights of others, honesty, personal integrity
Best learned in the home at an early age—and follow-up is needed throughout life
Institutions (churches, schools, etc.) can help
Difficult to “back fill” in adulthood

29. Level 2: Application to Business
Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

30. Application of Ethics to Business Situations
Fraudulent practices, misleading advertising, unfairness
Can be taught in management education and organizations—provided students have a personal understanding of ethics
Taught by modeling (cases and personal example are helpful)
Can be reinforced by policies, codes of ethics, training

31. Application of Ethics to Business Situations
Businesses can teach through proper modeling:
“Companies also have to further strengthen ethics management and social responsibility activities to improve their public image’’
Korean Commerce-Industry-Energy Minister Lee Hee-beom

32. Level 3: Ethical Courage
Willingness to Pay the Price for Ethics
Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

33. Ethical Courage
It is not sufficient to simply understand ethical principles
One must have the courage to pay a price for being ethical
Examples can be helpful—case studies showing people willing to stand up for ethical principles
Again, it helps to have “practiced” ethical behavior over many years—especially in small things

34. Level 4: Ethical Leadership
Helping Others to be Ethical
Ethical Courage
Willingness to Pay the Price for Ethics
Application of Ethics to Business Situations
Fraudulent Practices, Misleading Advertising, Unfairness
Personal Ethical Understanding
Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

35. Ethical Leadership
The ability and willingness to encourage others to behave ethically
Can be taught through cases, problem solving, study of successful organizations
Includes
Developing an organizational climate that fosters ethical behavior
Structuring policies that encourages ethics
Behaving ethically while facing the pressures of leadership

36. The Importance of Ethical Leadership
Swing Group
Could Go Either Way
Honest Employees
Will be Honest Always
Dishonest Employees
Policies Won’t Help Much
Ethical Leadership will significantly impact an organization since the vast majority, in this view, can be influenced to behave ethically.

37. Importance of Ethical Leadership
Swing Group
Could Go Either Way
Honest Employees
Will be Honest Always
Dishonest Employees
Policies Won’t Help Much
Strong Ethical Leadership—induces the middle group to behave as if they were the honest employees.

38. Importance of Ethical Leadership
Swing Group
Could Go Either Way
Dishonest Employees
Policies Won’t Help Much
Honest Employees
Will be Honest Always
Weak Ethical Leadership—permits the middle group to behave as if they were the dishonest employees.

39. Which Way Will Your Organization Swing?

40. “Good Ethics Means Good Business”