Understanding Business Ethics

1. What is Ethics?

Ethics is the principle of right and wrong, and the morality of the choices involved. It’s also important to define what ethics is not. Ethics is not emotions, the role of law, or religion. It’s not necessarily the science or norms of a society. It’s also not simply following the law, because it’s perfectly possible to follow the law yet be an unethical person.

EXAMPLE

Someone finds a lost wallet with a lot of cash inside. The right thing to do, from an ethical standpoint, is to return it to its owner, even if there's no law requiring it.

Characteristics of Ethics:

• Subjective and shaped by culture--Ethics vary from one culture to another and often depend on personal beliefs, traditions, and societal norms rather than universal rules.
• Guided by moral principles rather than laws or status-- Ethical behavior stems from a sense of right and wrong based on moral values, not just compliance with written laws.
• Focused on what should be rather than what actually is-- Ethics emphasize ideals and aspirations for how people should act, aiming for fairness and integrity.
• Shapes behavior even when no one is looking-- True ethics influence actions privately and publicly, encouraging individuals to do the right thing regardless of external supervision or consequences.

Ethics is ultimately about following the same standards in ALL situations, even in business situations.

hint

Being ethical means doing the same thing in your personal life as you would in your professional life.

Business ethics is closely tied to what ethics is. It’s the principles of right and wrong and the morality of the choices made within the business world. Essentially, what we’re doing is taking the principles or the definition of ethics and applying it in the business context. It encompasses all aspects of business behavior, covering both personal actions and organizational practices.

EXAMPLE

Patagonia, an outdoor clothing company, is renowned for its business ethics and prioritization of environmental responsibility. As part of its business strategy, Patagonia donates 1% of sales to environmental groups, incorporates recycled materials into many products, encourages repair over replacement, and advocates for the protection of national monuments. This dedication to ethics has earned the company loyal customers and significantly reduced its environmental impact.

Managerial ethics is, again, simply ethics. It is the principles of right and wrong, and the morality of the choices made in the context of management. It explores the moral challenges and choices that managers encounter in organizations, including how they interact with employees, make key decisions, and balance the needs of various stakeholders.

EXAMPLE

Johnson & Johnson's 1982 Tylenol crisis was a turning point. After seven people in Chicago died from cyanide-laced Tylenol, CEO James Burke took swift action. He recalled 31 million bottles nationwide, a cost of over $100 million, and halted production and advertising. He also pioneered tamper-proof packaging, which became an industry standard, and offered free replacements for recalled products.

Johnson & Johnson's ethical response set a new benchmark for crisis management, ultimately strengthening consumer trust. The company's approach was remarkably similar to Bud Light's in 2023, when it faced a significant sales decline due to social media backlash.

Managerial decisions impact employee behavior. How you hire or fire, the wages you pay, or the working conditions at your business are all ethical decisions, and they can greatly impact employee attitudes and productivity.

IN CONTEXT: Lawful vs. Ethical

Being lawful means following the rules set by a legal system and authority, whereas ethical action is based on moral values or principles that may vary depending on personal standards, even when the law doesn’t require it.

When a multinational corporation sets up offshore accounts to lower their tax liability, some may see this as unethical, but it's perfectly legal. On the other hand, if a nurse gives extra pain relief to help a patient, even if it's against medical laws, it's considered unlawful by the law, while others might view this action as compassionate and ethical.

Managerial ethics decisions can also impact behavior toward an organization. Do you have conflicts of interest or allow them? A conflict of interest is a circumstance in which a person’s or organization’s private interests could potentially interfere with their professional duties or decision-making. This conflict can lead to bias and compromise the integrity of decisions made in the business setting.

EXAMPLE

If you have an employee working for you but who also works for a direct competitor, they will have a conflict of interest since they have an advantage in both places.

You, as a manager, might have a personal relationship with a supplier and favor that supplier when making purchasing decisions, even if other suppliers offer better quality or price.

Another aspect of business ethics important in maintaining trust with customers is confidentiality. Confidentiality is keeping private trusted data out of the hands of the public and other people who don’t need to see it. This might include personal information, such as credit card numbers or addresses. Giving this information out, or not protecting it appropriately, might be considered unethical.

think about it

Imagine a local boutique, where customers can fill out an email list with personal information such as their phone number, email, and full name. This list is often taped to the checkout counter, potentially for other customers to see. Do you think this would be a violation of confidentiality?

Collusion is an attempt by businesses to conspire to the disservice of customers, businesses, or the general public. To explain collusion, we can look at price fixing, which refers to competitors working together to raise prices or manipulate the stock market to get more profit by charging more for their product.

EXAMPLE

RealPage, a real estate software company, is accused of illegal coordination of rent prices among landlords through its rent-setting algorithms. The lawsuit says that the software allows landlords to share information and set collective rents, which resulted in rent increases in eight states (OPA, 2025).

terms to know

Ethics

The discipline concerned with what is morally good and bad and morally right and wrong.

Business Ethics

The principles of right and wrong and the morality of the choices made in the business world.

Managerial Ethics

The principles of right and wrong and the morality of the choices made in the context of management.

Conflict of Interest

A circumstance in which the judgment of an individual or group may be impaired because of a difference in primary and secondary interest.

Confidentiality

Keeping private trusted data out of the hands of the public and other people.

Collusion

An attempt by businesses to conspire to the detriment of customers, other businesses, or the general public.

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2. Making Ethical Decisions

Making ethical decisions involves several thoughtful methods and processes that help ensure fairness, integrity, and respect for others. Some different ways to understand ethical decisions include:

1. Utilitarian method
2. Rights-based approach
3. Justice approach
4. Virtue ethics approach

One common approach is the utilitarian method, which involves evaluating the consequences of each possible action and choosing the one that results in the greatest good for the greatest number of people. Another method is the rights-based approach, where decision-makers consider whether an action respects the fundamental rights of those affected. The justice approach focuses on fairness and equality, ensuring that decisions do not favor one group unfairly over another. Additionally, the virtue ethics approach encourages individuals to act in ways that reflect moral virtues such as honesty, compassion, and courage.

In many situations, there may be no simple right or wrong answers. Yet there are several questions you can ask yourself, and a couple of self-tests you can do to help you make the right ethical decision.

step by step

1. Ask yourself, “Are there any legal restrictions or violations that will result from the action?” If so, take a different course of action.
2. If not, ask yourself, “Does it violate my company’s code of ethics?” If so, again find a different path to follow.
3. Ask, “Does this meet the guidelines of my own ethical philosophy?” If the answer is “yes,” then your decision must still pass two important tests.
4. You must now ask, “How does it make me feel?” This enables you to examine your comfort level with a particular decision.

Many people find that, after reaching a decision on an issue, they still experience discomfort that may manifest itself in a loss of sleep or appetite. Those feelings of conscience can serve as a future guide in resolving ethical dilemmas. The final test involves the front page of the newspaper or social media posts:

5. The question to be asked is: “How would an objective reporter describe your decision in a front-page newspaper story, an online media site, or a social media platform such as Twitter or Facebook?" Some managers rephrase the test for their employees: “How will the headline read if I make this decision, or what will be the reaction of my social media followers?” This test is helpful in spotting and resolving potential conflicts of interest.

Another approach to ethical decision making is a formal process. The ethical decision-making process is a structured approach used to evaluate and choose among alternatives in a way that aligns with ethical principles and values. It typically involves the following steps:

step by step

The Ethical Decision-Making Process

1. Recognize the Ethical Issue: Identify whether the situation presents a moral dilemma or has ethical implications. Ask whether someone's rights or well-being might be affected.
2. Gather the Facts: Collect all relevant information to understand the situation fully. Consider who is involved, what the stakes are, and what laws, policies, or ethical codes may apply.
3. Evaluate the Alternatives: Consider different courses of action and evaluate them using various ethical perspectives—such as utilitarianism (greatest good for the greatest number), rights (respect for individual rights), justice (fairness), and virtue (moral character).
4. Consider the Stakeholders: Think about how each alternative affects the people involved or impacted. Consider perspectives from all stakeholders to understand the broader impact.
5. Make a Decision and Test It: Choose the action that best aligns with ethical principles and values. Ask yourself if you’d be comfortable if your decision were made public or if someone you respect would agree with your choice.
6. Act and Reflect on the Outcome: Implement the decision and later reflect on the results. Consider whether the ethical goals were achieved and what could be learned for future decisions.

Let’s look at how this ethical decision-making process might be used.

IN CONTEXT: Too Good to Be True

Suppose a manager discovers that a top-performing employee has been falsifying sales numbers to earn bonuses.

1. The first step is recognizing that the behavior is dishonest and violates company policy.
2. Next, the manager gathers the facts by reviewing reports, confirming discrepancies, and consulting HR about company procedures.
3. They then evaluate alternatives:
   1. Ignore the issue
   2. Confront the employee privately
   3. Or report it formally
4. Considering ethical principles like fairness, honesty, and the rights of stakeholders, the manager decides to report the misconduct to HR and have a direct conversation with the employee.
5. After taking action, the manager reflects on the outcome, knowing the decision upheld integrity and reinforced ethical standards in the workplace.

terms to know

Utilitarian Method

An approach to ethical decision making that involves evaluating the consequences of each possible action and choosing the one that results in the greatest good for the greatest number of people.

Rights-Based Approach

An approach to ethical decision making in which decision-makers consider whether an action respects the fundamental rights of those affected.

Justice Approach

An approach to ethical decision making that focuses on fairness and equality, ensuring that decisions do not favor one group unfairly over another.

Virtue Ethics Approach

An approach to ethical decision making that encourages individuals to act in ways that reflect moral virtues such as honesty, compassion, and courage.

Ethical Decision-Making Process

A structured approach used to evaluate and choose among alternatives in a way that aligns with ethical principles and values

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3. Ethics as Company Culture

Most people choose between right and wrong based on their personal code of ethics. Would codes of ethics for businesses make their employees behave in a more ethical manner? Some people believe that will; others think that they are little more than public relations gimmicks.

EXAMPLE

If senior management abides by the code of ethics and regularly emphasizes the code to employees, then it will likely have a positive influence on behavior.

Consider the following headlines:

• Investment advisor Bernard Madoff was sentenced to 150 years in prison for swindling clients out of more than $65 billion (TIME, n.d.).
• Former United Airlines CEO Jeff Smisek leaves the company after a federal investigation into whether United tried to influence officials at the Port Authority of New York (McGregor, 2017).
• Renaud Laplanche, the founder of Lending Club, loses his job because of faulty practices and conflicts of interest at the online peer-to-peer lender (McGregor, 2017).
• Wells Fargo CEO John Stumpf fired after company employees opened more than 2 million fake accounts to meet aggressive sales targets (Hartung, 2016).

As these actual stories illustrate, poor business ethics can create a very negative image for a company, can be expensive for the firm and/or the executives involved, and can result in bankruptcy and jail time for the offenders. Organizations can reduce the potential for these types of liability claims by:

• Educating their employees about ethical standards
• Leading by example
• Various informal and formal training programs
• A code of ethics

Leading by example is one-way companies can create an ethical culture. Employees often follow the examples set by their managers. That is, leaders and managers establish patterns of behavior that determine what is acceptable and what is not within the organization.

EXAMPLE

Eric Yuan of Zoom took a large pay cut when Zoom was going through layoffs, to not only show solidarity but also to accept accountability (Treisman, 2023).

In addition to providing a system to resolve ethical dilemmas, organizations also provide formal training to develop an awareness of questionable business activities and practice appropriate responses. Many companies have some type of ethics training program. The ones that are most effective, like those created by Levi Strauss, American Express, and Campbell Soup Company, begin with techniques for solving ethical dilemmas such as those discussed earlier. Next, employees are presented with a series of situations and asked to come up with the “best” ethical solution.

Most large companies and thousands of smaller ones have created, printed, and distributed codes of ethics. In general, a code of ethics provides employees with the knowledge of what their firm expects in terms of their responsibilities and behavior toward fellow employees, customers, and suppliers. Some ethical codes offer a lengthy and detailed set of guidelines for employees. Others are not really codes at all but rather summary statements of goals, policies, and priorities. Some companies have their codes framed and hung on office walls, included as a key component of employee handbooks, and/or posted on their corporate websites.

learn more

Here are some examples of companies' codes of ethics:

• Microsoft
• Patagonia Code of Ethics
• Johnson & Johnson Code of Business Conduct
• Starbucks Standards of Business Conduct
• Nike Code of Ethics

term to know

Code of Ethics

A code that provides employees with the knowledge of what their firm expects in terms of their responsibilities and behavior toward fellow employees, customers, and suppliers.

REFERENCES

Jennings, M. M. (1996). Case studies in business ethics (2nd ed., pp. xx–xxii). West Publishing Company.

Hartung, A. (2016, October 13). Wells Fargo CEO Stumpf is gone: Is this the beginning of wholesale leadership change? Forbes. www.forbes.com/sites/adamhartung/2016/10/13/wells-fargo-ceo-stumpf-is-gone-beginning-of-wholesale-leadership-change/

McGregor, J. (2017, May 15). More CEOs are getting forced out for ethics violations. The Washington Post.www.washingtonpost.com/news/on-leadership/wp/2017/05/15/more-ceos-are-getting-forced-out-for-ethics-violations/

Office of Public Affairs (OPA). (2025, January 7). Justice Department sues RealPage for algorithmic pricing scheme that harms millions of American renters. United States Department of Justice.www.justice.gov/archives/opa/pr/justice-department-sues-realpage-algorithmic-pricing-scheme-harms-millions-american-renters

TIME. (n.d.). Top 10 crooked CEOs.TIME. content.time.com/time/specials/packages/completelist/0,29569,1903155,00.html

Treisman, R. (2023, February 8). Zoom announces layoffs and executive pay cuts. NPR. www.npr.org/2023/02/08/1155392099/zoom-layoffs-tech-jobs