Published by MBA Skool Team, Published on October 27, 2012
Ethics are the amalgamation of moral principles that have evolved over a period of time. These are essentially regarded as something present for common good. But is it good for a business? Ethics are often considered to be the very anti-matter to profitability in business. Is it true? We shall be exploring ethics, the historical influence of businesses on shaping of ethics, the issues related to ethics and examining how each of them affects business in this paper on the subject. A brief conclusion also ensues towards the end of the study.
Businesses are artificial entities with a monetary vision and hence cannot have ethics of their own. It is only the people involved in the process who possess it. Thus, it can be said that businesses assume the ethics of the people who run it. Initially during the boom of business enterprises i.e. during the industrial revolution, the businesses were largely owner driven and hence the owners drove the ethical values of the business. During this period there was no need to codify the ethical values as the owner himself was running the business. However, the businesses grew over a period of time and the owners had to employ people to run the business. The advent of the joint stock companies brought in a new dimension to the business. The ownership and management was separated. This set the stage for codification of ethical practices. These ethical values became the prescription or rather an instruction sheet from the owners to the managers of the company.
The businesses continued to follow the codified ethical practices without fail till the societal values and moral fibre started decaying. More businesses created competition and only the person who provided goods at the cheapest rate survived. Initially, it was thought that technology could be a differentiating factor. But it was not to be so. Newer business started opting for the easy way out and started violating these standards either for their personal gains or for the gains of their businesses. These violations started resulting in large scale damage to the societal good. As is common, when societal good is ignored, there is no choice left but for the government of the day to step in. The government felt that ethical and moral practices need to be standardized just like every other aspect of business. Thus was born the legal sanctions that made most ethical practices mandatory. Many of the business laws that we have today were in the domain of ethics is because of the natural process achieved by the absence of voluntary compliance for ethics.
India, with its abundant resources often fills the gaps in the supply chain and hence forms an important link of the business mechanism. The examination of ethics and its effects in businesses here takes into factor a number of variables that could lend an interesting dimension to the subject.
Let us take a little discourse into history. The country became free after 250 years of foreign rule in the year 1947.The businesses were scarce and the opportunities available were also scarce. Hence the companies did not live up to moral standards which they were supposed to follow. During this period, ethical companies stood to lose as their counterparts who were not following any of these laws were making better and better margins. During this period there were a few multi nationals in India who were advertising their ethical standards. What also compounded it was the fact that people in India never gave great importance to these standards. All that was important was the price - the lesser, the better. Thus, an arduous task for the government was to set into motion the enforcement mechanism that would prevent the companies to violate laws with impunity.
Globalization changed the paradigm once again. The ethical practices which had the sanction of law got implemented with vengeance in the next few years as the international community refused to do business with companies who were violating established law. Globalization opened new markets for countries such as India and China who could follow the laws of their respective countries and still export products at dirt cheap rates. The freeing up of the investment restrictions brought in fresh businesses into the country and along with it came, the need for following the moral standards. The competition in the factors market forced companies to increase their compliance. The western businesses started crying foul as the businesses in their own country were following a moral code which was much above the legal code of their eastern counterparts. Hence the businesses in these countries decided to enforce their moral code of conduct on the businesses in India and China and thus, the ethical standards which were a forgotten topic in India for close to 40 years after independence came alive once again.
But a fundamental question that needs to be addressed is if ethics in business is necessary. Any businessman would equate the purpose of a business to profitability and say that all means to that are ethical. But is it so? Indeed not! Ethics are required fundamentally because it prevents cheating. It maintains social order and without it chaos would reign. So obviously the discussions as to whether ethics is required or not is defunct!
An interesting aspect that is thrown up during the course of discussion of business ethics is the issue of companies that make instruments of harm. For eg. How important will ethics be to a company that manufactures cigarettes or guns? Very often ethics and morals get confused and replaced from time to time. So it is necessary to differentiate between the two. While ethics are the standards or codes of behaviour expected by the group to which the individual belongs, a person’s morality is essentially independent and subjective to one’s definition of right and wrong. To differentiate between ethics and morals, let us take the case of a criminal lawyer. While defending a person accused of murder or rape could be morally wrong, professional ethics demand from him to protect his client as vociferously as possible. The example of a gun maker is pretty similar. Hence, while considering such companies/ businesses, it is necessary to keep the differences in mind.
Also, it is often said that responsibility begets ethics. Also, in today’s world, business ethics is also interchangeably used with corporate social responsibility. But to what extent are these assumptions valid? In my opinion, the basic difference between the two arises from the domain to which they are applied. While CSR is usually concerned with end result, ethics take into consideration the means to end. Let us look at an example to drive the point home. A company that pays regular dividends and uses proper waste management techniques could be termed as a socially responsible company but at the same time, if it doesn’t care about the working conditions in its factories which could be really poor, then is unethical. However, a company which is responsible could be forced to become ethical if it is not since any bad news eventually negates the greater good that the company is trying to do.
Let us once again consider the Indian scenario. It can be safely assumed that the market is divided into a large number of segments and businesses have sprung up that cater to specific segments. While Louis Vuitton goods will have its niche market to feed, the jackets or apparels of inferior quality available downtown will appeal to some others. The costumer buying the latter isn’t too bothered about the condition of the workers or if they have been paid a fair price as long he feels that he has made a good bargain with the seller.
But a person going into a Louis Vuitton showroom will look for a symbol that probably says Fair-trade. Not that he patronizes the concept but it’s just that he believes that a brand of that stature has to be ethical. So though the company would be able to charge a premium on a product if it chose to advertise it as ethical, the costumer will not move away from the brand in the absence of it. So when it comes to production, ethics or the lack thereof and its advertisement by the company will be sorely dependent on the brand value of the business. A business that caters to the common man would not be able sustain the higher costs that come with adopting better ethics since the consumption isn’t ethic driven.
This brings us to the next question. Can any business be termed as perfectly ethical? Perhaps not! For a business to be ethical, the established norm of today is that all the parts/ operations involved must be ethical (determined by means of laws). But obviously, there aren’t laws for everything. For example, many would say that the company being honest about its goods is equal to being ethical. But again, doesn’t marketing employ a few lies to exaggerate the product and don’t we all know it? So is such a business ethical? A simpler way to possibly define ethics and ethical behaviour is to extrapolate the societal philosophy to a business. Since the main aim of any business entity is to make profit, such an enterprise that employs morally/ ethically wrong practices to achieve it will be automatically rejected by people.
However, this is not always obvious. A product that is manufactured using fair practices say in India will be priced at a considerably higher rate than something which would be manufactured in say China. Putting aside the issues related to quality or marginally lower cost of labour, this is not achievable unless the workers are under-paid and the conditions of working acutely miserable. But a company from USA that buys the Chinese good from an Indian distributer can claim itself to be ethical since it does not have direct contact with the Chinese makers in the supply chain. But is it fully ethical? In the right sense it may not be but nobody cares since it is a win-win situation.
Let us take a look into the functional areas of business ethics. It includes everything that a business does ranging from production to marketing and sales! So when we tend to analyse the question with this broad range in mind, it is obvious that it definitely pays for a business to be ethical at least in the long run if not today. For example, a company that cooks up its balance sheets will make some short-term gains but it loses all credibility once the fraud is exposed. This will definitely cause its shares to collapse and cause an immediate rejection of the brand by the costumer.
Hence, if we are to adopt the wide definition, the matter ends there. Hence, it is the approach to ethics that matters in this context. The most widely accepted view today is that if a company abides by the law of the land, it is ethical. In fact, this is the right way to go about it as well since it gives a measurement standard by which businesses can be evaluated even if certain things do tend to be missed out in this definition. While an approach that takes into account social obligations is obviously more comprehensive, it is vague and often dependent upon personal opinions of good and bad to substantiate it.
Now, whether it would pay to be ethical or not in this regard would solely depend upon implementation. The reason why ethics have come into focus as discussed earlier is because of its better implementation in the western world. With better implementation of ethics as laws, it would be untenable for a business to be unethical as the costs involved (penalties, fines etc) would be multi-fold times that of what is required to actually implement ethical practices. So obviously it will pay to be ethical in this regard. But when there is an obvious lack of implementation of laws (due to various reasons like corruption or bureaucracy), the companies generally tend to slack off and as is common in today’s madly competitive world become unethical.
This article has bee authored by Siddeshwar. P from BMS College of Engineering.
Views expressed in the article are personal. The articles are for educational & academic purpose only, and have been uploaded by the MBA Skool Team.
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