01/02/10

By Judith Irwin, Researcher at the Institute of Business Ethics, London

Business ethics is the application of ethical values to business behaviour. It applies to all aspects of business conduct and to every size of organisation. It is about discretionary decisions and behaviour guided by values and is relevant both to the conduct of individuals and to the conduct of the organisation. Business ethics begins where the law ends.

What is the difference between business ethics and an ethical business?

Business ethics relates to how an organisation conducts its business in order to make profit or achieve other goals. Any organisation can seek to do what it does in a way that takes ethics seriously. However, whether an organisation is judged to be an ethical business, may involve a subjective assessment of any of the following: the products and services it offers, its founding priorities, goals and values, its reputation among its stakeholders, the way it treats customers and staff and so forth.

How does business ethics relate to corporate social responsibility (CSR)?

If business ethics is about the application of ethical values, CSR is the expression of those values through policies and programmes involving a range of stakeholders. Essentially, business ethics is doing things ethically; CSR is often about doing ethical things. The Institute of Business Ethics (IBE) believes that an organisation cannot act responsibly without an embedded and inherent culture that is based on ethical values such as trust, openness, respect and integrity.

What are some examples of business ethics issues?

According to IBE/Ipsos MORI research published in October 2009, the three major business ethics issues of concern to the British public are executive pay (42%), sweatshop labour (25%), and environmental responsibility (24%) (for full results of the research see http://tiny.cc/r1BDk). Other business ethics issues that companies, both large and small, may face include: bribery & corruption; speaking up, gifts and hospitality; conflicts of interest; diversity; health and safety; political donations and lobbying.

What are ethical dilemmas?

An ethical dilemma involves a situation that makes a person question what is the ‘right’ thing to do. Ethical dilemmas make individuals think about their obligations, duties and responsibilities. Dilemmas may arise from a clash of personal, organisational and professional values. These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer. A majority of people will agree, for example, that it is morally unacceptable to pretend that someone else’s work is their own. However, complex ethical dilemmas can involve conflicting ideas of what is right.

For SME owners/managers, the pressures of cash flow and limited resources can mean that they are frequently confronted with ethical dilemmas, including:

‘my cash flow is limited – do I delay payment to my suppliers and to the Inland Revenue?’

‘do I meet a deadline to supply a key customer even though I know the product is faulty? If I don’t meet the deadline I may lose the customer’

‘my business may not survive if I don’t accept this contract — but to secure it requires me to pay a kickback. What should I do?’

Why is it important for SMEs to behave ethically?

High ethical standards are just as important to SMEs as to larger companies, but the key issues and concerns can be very different. Smaller organisations may not see business ethics as a priority nor might they have the resources available to invest in an ethics programme. Today’s multinational corporations were yesterday’s SMEs however, and IBE suggests that SMEs address ethical standards and commitments as early as possible. Many companies make the mistake of only tackling ethical behaviour once a problem has arisen. A reputation takes years to build, but can be lost overnight following an ethical lapse.

In addition, SMEs are increasingly finding that having an ethics policy is a condition of tendering for contracts as larger businesses extend their ethical standards to companies in their supply chains. SMEs that are familiar with these demands will have a competitive advantage.

Those owners/managers of SMEs that have been on the ‘receiving end’ of unethical business practices or have suffered a reputation hit will understand the importance of having good, trusting relationships with customers, employees, suppliers and the community.

An organisation that is based on sound ethical values is likely to attract high quality employees, can help the organisation to ‘stand out from the crowd’, enhance its reputation and generate trust amongst customers. Staff may also feel more motivated and loyal to the organisation and workplace productivity may increase.

How can your organisation start to address business ethics?
Whereas in large organisations there may be a structured ethics programme, SMEs operate on a much more informal basis where there are close relationships between staff, and employees have an implicit understanding of acceptable and unacceptable behaviour. As an SME begins to grow however, the dynamics of the business may change and a more formal and explicit approach to ethical values may be needed.

Actions that an owner/manager can take to encourage a strong ethical culture in an SME include:

1)Identify the core values to which the business wishes to be committed and held accountable. Such values might include: responsibility, integrity, honesty, respect, trust, openness, fairness and transparency. They are not to be confused with business values such as quality, profitability, efficiency, reliability and customer service. Ethical values must underpin the businesses mission statement, strategy and operating plan.

2)Translate ethical values into guidance for all employees on how to act responsibly in different circumstances. In large organisations this is usually manifested as a formal written ‘code of ethics’ which explains the organisation’s approach to ethical issues, sets out its ethical commitments and standards, and provides guidance to staff on how to react to ethical dilemmas. A small company can also have a formal code of ethics with which to guide its employees. This may simply consist of one page outlining the organisation’s values and where/who to go to in the case of an ethical dilemma.

3)In order for a code of ethics or an ethics policy to be effective in influencing behaviour and decision making, it needs to be strongly embedded in an organisation’s culture, ie “the way we do things around here”. Values and their relevance to what the staff do could be posted on the office notice board, short dilemmas could be discussed at team meetings, or e-learning tools such as that offered by the Institute of Business Ethics (Understanding Business Ethics: e-learning tool, £10, available from www.ibe.org.uk) are examples of effective ways to embed ethical values.

4)Strong leadership is essential in embedding ethical values in any size of organisation. In a report by Laura Spence entitled ‘Priorities, Practice and Ethics in Small Firms’ (available from http://www.ibe.org.uk/publications/listofpublications.htm), 100 small firms in the UK were surveyed on their social and ethical concerns. The results showed that owner/managers run their businesses in ways which are consistent with their own values and principles and that employees tend to follow the lead of the owner/manager in how they behave in their own role.

For further information, see ‘Business Ethics in SMEs’, a Briefing produced by the Institute of Business Ethics and available to download from their website (http://www.ibe.org.uk/publications/Briefing_6.pdf). The briefing paper provides a useful overview of the topic, best practice and points to an array of other useful resources.