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

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Presentation on theme: "The Importance of Business Ethics Ned C. Hill, Dean W. Steve Albrecht, Associate Dean Marriott School of Management Brigham Young University."— Presentation transcript:

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 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 Trade Security Lawyers Regulators Delays Interest Duplication Testing Etc, etc!

7 Societal Costs of Unethical Behavior 1.Law enforcement and other security personnel 2.Physical protection (locks, electronic security, fences, vaults, etc.) 3.A substantial portion of attorney and court system costs 4.Some welfare costs 5.Costs of collecting taxes 6.Wasted/misused investment funds 7.A substantial portion of accounting/auditing costs 8.A large fraction of costs for regulators and examiners 9.Some marketing/advertising costs 10.Costs for institutions like better business bureaus, consumer protection agencies 11.Some costs of bankruptcy 12.Lack of investment from outside investors, tourists

8 Business Costs of Unethical Behavior 1.Loss of physical assets 2.Increased costs of security 3.Loss of customers—especially those who value ethics 4.Loss of employees—especially the more ethical 5.Loss of reputation 6.Increased legal costs 7.Higher costs of debt 8.Loss of investor confidence (lower stock price, difficulty in raising funds, problems with lenders) 9.Regulatory intrusion 10.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? 1.Study of 2,100 firms with very strong, well-governed boards of directors outperformed overall market 15% vs. 12.5% in Firms with high level of “democracy” outperformed “dictatorial” firms by 8% per year in the decade of the 1990’s. 3.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 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 YearYear College students who cheated in H.S (20%) 2007 (85%) Self-reported cheating 1983 (11%) 2007 (49%) Believe cheating is common 1940 (20%) 2007 (88%) Used cheat sheets 1969 (34%) 2007 (68%) Let others copy work 1969 (58%) 2007 (98%) Willing to lie to get job 2000 (28%) 2007 (39%) Students who had stolen 2000 (35%) 2007 (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 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) 2007

24 Why is Dishonesty Increasing? ModelingLabeling 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 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 Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Level 2: Application to Business Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others 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 Ethical Courage Willingness to Pay the Price for Ethics Ethical Courage Willingness to Pay the Price for Ethics Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Level 3: Ethical Courage Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others 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 Ethical Leadership Helping Others to be Ethical Ethical Leadership Helping Others to be Ethical Ethical Courage Willingness to Pay the Price for Ethics Ethical Courage Willingness to Pay the Price for Ethics Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Level 4: Ethical Leadership Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others 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 Swing Group Could Go Either Way Dishonest Employees Policies Won’t Help Much Dishonest Employees Policies Won’t Help Much Honest Employees Will be Honest Always Honest Employees Will be Honest Always 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 Swing Group Could Go Either Way Dishonest Employees Policies Won’t Help Much Dishonest Employees Policies Won’t Help Much Honest Employees Will be Honest Always Honest Employees Will be Honest Always 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 Swing Group Could Go Either Way Dishonest Employees Policies Won’t Help Much Dishonest Employees Policies Won’t Help Much Honest Employees Will be Honest Always 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”


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