Business Ethics

CONTENTS

IMPORTANCE AND CONCEPTS OF BUSINESS ETHICS
THE RESPONSIBLE BUSINESS ENTERPRISE
THE BUSINESS ETHICS PROGRAM AND STRUCTURE
PUTTING BUSINESS ETHICS INTO PRACTICE






































IMPORTANCE AND CONCEPTS OF BUSINESS ETHICS

Everyone agrees that business managers must understand finance and marketing. But is it necessary for them to study ethics?

Managers who answer in the negative generally base their thinking on one of three rationales. They may simply say that they have no reason to be ethical. They see why they should make a profit, and most agree they should do so legally. But why should they be concerned about ethics, as long as they are making money and staying out of jail?

Other managers recognize that they should be ethical but identify their ethical duty with making a legal profit for the firm. They see no need to be ethical in any further sense, and therefore no need for any background beyond business and law.

A third group of managers grant that ethical duty goes further than what is required by law. But they still insist that there is no point in studying ethics. Character is formed in childhood, not while reading a college text or sitting in class.

These arguments are confused and mistaken on several levels. To see why, it is best to start with the question raised by the first one: why should business people be ethical?

There is already something odd about this question. It is like asking, “Why are bachelors unmarried?” They are unmarried by definition. If they were married, they would not be bachelors. It is the same with ethics. To say that one should do something is another way of saying it is ethical. If it is not ethical, then one should not do it.

Perhaps when business people ask why they should be ethical, they have a different question in mind: what is the motivation for being good? Is their something in it for them?

It is perfectly all right to ask if there is a reward for being good, but this has nothing to do with whether one should be good. It makes no sense to try convince people that they should be good by pointing to the rewards that may follow. One should be good because “good” is, by definition, that which one should be.

As for motivation, good behavior often brings a reward, but not every time. Think about it. If it were always in one’s interest to be good, there would be no need for ethics. We could simply act selfishly and forget about obligation. People invented ethics precisely because it does not always coincide with self interest.

Although ethics is not the same as self interest, business executives often want to be assured that it is the same. They want to make certain that “one can do well by doing good,” meaning that one can succeed in business by being ethical.

There is no denying that one can often do well by doing good. An ethical company is more likely to build a good reputation, which is more likely to bring financial rewards over the long term. But good behavior cannot be grounded in tangible reward alone. People who are interested only in reward will behave ethically when it suits their purpose, but they will go astray whenever the incentives change.

There is a deeper confusion here, too. To look to ethics for motivation is to misunderstand what ethics is all about. It is like studying finance to find a reason to make money. Finance does not teach one to want to be rich. It teaches one how to be rich, assuming one wants to be rich. So it is with ethics. Ethics teaches one how to be good, assuming one wants to be good.

Authors Ferrell, Fraedrich and Ferrell indicate that “The term ethics has many nuances.Ethics has been defined as “inquiry into the nature and grounds or morality where the term morality is taken to mean moral judgments, standards and rules of conduct.” It has also been called the study and philosophy of human conduct, with an emphasis on the determination of the right and wrong. The American Heritage dictionary offers these definitions of ethics: “The study of the general nature of morals and specific moral choices; moral philosophy; and the rules or standards governing the conduct of the members of the profession”.

It is important to know that one can normally do well by doing good. Otherwise ethical people could go into business only with a high risk of failure. Business ethics, however, addresses the opposite question: how can one do good by doing well? It begins with the premise that managers want to do something good with their lives and investigates how to accomplish this through business. In other words, it treats profit and business success as means to a greater end: making the world a little better.

Granting that a business person’s ultimate objective is to make the world better, how is this best achieved? A common view is that it is achieved by making as much money as possible. The best thing business people can do for society is to be good business people, which is to say, to maximize the company’s profit. They should therefore stick to finance, marketing and operations management rather than waste time with ethics.

Economist Milton Friedman articulates this view in an essay that is quite popular with business students, “The Social Responsibility of Business Is to Increase its Profits.”1 According to Friedman, corporate officers have no obligation to support such social causes as hiring the hard-core unemployed to reduce poverty, or reducing pollution beyond that mandated by law. Their sole task is to maximize profit for the company, subject to the limits of law and “rules of the game” that ensure “open and free competition without deception or fraud.”

Friedman advances two main arguments for this position. First, corporate executives and directors are not qualified to do anything other than maximize profit. Business people are expert at making money, not at making social policy. They lack the perspective and training to address complex social problems, which should be left to governments and social service agencies.

Second, and more fundamentally, corporate officers have no right to do anything other than maximize profit. If they invest company funds to train the chronically unemployed or reduce emissions below legal limits, they in effect levy a “tax” on the company’s owners, employees and customers in order to accomplish a social purpose. But they have no right to spend other people’s money on social welfare projects. At best, only elected representatives of the people have such authority. Sole proprietors can spend the company’s money any way they want, since it is their money, but fiduciaries and hired managers have no such privilege. If they contribute corporate money to arts or community development, it must be with an eye to increasing profit, perhaps by attracting better employees or improving the company’s image. If they want to contribute to other social causes, they are free to join civic organizations and donate as much of their own money as they please.

It would be nice if the world were so simple. What happens, for example, when laws permit anti-social behavior? Should businesses not restrain themselves voluntarily, even if it imposes a cost on company stakeholders? Friedman’s reply is that they must not, again on the libertarian principles just described. But suppose a hurricane hits a town and cuts off routes to the outside world. There is a desperate need for portable electric generators, and the only local seller takes the opportunity to charge an exorbitant price. (Something like this happened when Hurricane Andrew hit southern Florida.) Since this sort of price gouging is legal, the store manager has no right, on Friedman’s view, to “tax” the owners by charging less than the market will bear. He does, however, have a right to ask the buyer to pay more, since the purchase decision is voluntary in a free market.

This little example reveals two fallacies of Friedman’s position. One is the idea that company officers somehow usurp authority when they act ethically at the expense of owners. To refute this idea, let us agree that it is wrong for an individual to exploit hurricane victims by demanding a high price. (If we cannot agree on this, we can change the example.) Friedman admits that it is perfectly all right for a sole proprietor to sacrifice potential profit in order to be a decent human being. But suppose the owner has turned the business over to professional managers. Does ethical obligation to victims suddenly vanish? Is it permissible for the owner to exploit victims of disaster through agents, when it would be wrong to do it personally? Of course not. The owner cannot escape obligations simply by hiring someone to run the business. One might as well argue that an organized crime boss can avoid responsibility for murder by hiring a hit man to do the deed. Agents who act ethically at company expense therefore do not usurp the authority of owners. On the contrary, they carry out duties that the owners are bound to observe, whether they run the business themselves or through agents.

This is not to say that managers should use company funds to support any cause that strikes the owners’ fancy, such as the Irish Republican Army or the Sierra Club. The reason is that the owners have no obligation as business people to support these causes. They may have such an obligation as human beings, but it is not part of business ethics. Since owners hire managers specifically to run a business, they transfer only their business-related obligations, such as the obligation not to exploit disaster victims by price gouging. Managers must of course know how to recognize what sorts of obligations are imposed specifically by business ethics. This is precisely why they should study business ethics as well as finance, marketing and operations!

The second major fallacy in Friedman’s position is his misapplication of libertarian principles. He states that spending the owners’ money in the service of ethics is coercion and therefore wrong, while operating in a free market to increase their wealth compromises no one’s freedom and is therefore permissible. The electric generators provide a clear counterexample. Although no one compels hurricane victims to purchase generators, price gouging is coercive. It

forces the victims to choose between paying ridiculous prices and letting a warehouse full of food spoil. It takes money from them no less surely than lower prices take money from the owners. The point is even sharper when a company decimates a community by moving a plant abroad. No one forced these people to work for the company in the first place. Yet the company limits their choices by putting them out of work, particularly the older ones, more than it limits stockholders’ choices by reducing their dividends. To limit choices is to reduce freedom.

It is clear that maximizing profit can “tax” the broader community no less than ethical choices can “tax” the owners. The business executive has a special obligation to owners, but it is not grounded in libertarian principles. It is based simply on the fact that the executive acts on behalf of the owners.

The inadequacy of Friedman’s philosophy is particularly evident in international business, where there are fewer legal restrictions. A famous case study describes how the Nestlé Corporation marketed its infant formula in parts of Africa by hiring nurses in local clinics to recommend formula over breast feeding. The nurses convinced mothers that using formula was sophisticated and Western, while breast feeding was primitive and third-worldish. Unfortunately clean water was often unavailable to mix with the powdered formula, and babies often became ill. The company continued its marketing efforts despite worldwide protests and relented only after years of massive consumer boycotts of its products. On Friedman’s theory, the company’s intransigence was perfectly justified. Its directors had no right to withdraw a profitable and legal product, even though it caused innocent babies to suffer, until boycotts changed the financial equation. Similar examples abound, such as pollution in Nigerian oil fields, worker exploitation in Southeast Asia sweat shops, and bribery around the world.

There is clearly an important element of truth in Friedman’s position. Business people are not only at their best when making a profit, but in doing so they make an enormous positive contribution. Although Friedman says little about this in his essay, businesses provide a vast array of products and services that make life far better for millions worldwide. They can accomplish this largely through the expertise of managers who can run an efficient operation in a competitive environment. The primary ethical duty of managers is to apply their business skills and keep up the good work. At the same time, however, they must pay attention to whether their business in fact has this kind of positive effect. They are not experts in social policy, and it is often unobvious how far their social obligations extend. But this is one reason we have business ethics.

The Rules: The task of business ethics, then, is to identify the duties that business people have as business people. What are these duties? One can begin with the most basic ones mentioned by Friedman: the duty to obey the law and the “rules of the game,” which provide for “open and free competition without deception or fraud.”

Yet even these basic obligations are disputed. Albert Carr’s very popular essay, “Is Business Bluffing Ethical?” argues that deception, for example, is a legitimate part of business. Business, he says, is like a poker game. There are rules, but within the rules it is permissible to bluff in order to mislead others. In fact one must do so or lose the game. The ethical rules of everyday life therefore do not apply to business.

Using examples from the 1960s era in which he wrote the paper, Carr defends:
ﾷ “food processors” that use “deceptive packaging of numerous products”;
ﾷ “automobile companies” that “for years have neglected the safety of car-owning families,” as described in Ralph Nader’s famous book Unsafe at Any Speed;
ﾷ “utility companies” that “elude regulating government bodies to extract unduly large payments from users of electricity.”

“As long as they comply with the letter of the law,” he says, “they are within their rights to operate their businesses as they see fit.”

Carr tells of a sales executive who made a political contribution he did not believe in, to keep an important client happy. When the executive told his wife about it, she was disappointed with her husband and insisted he should have stood up for his principles. The executive explained to her how he must humor clients to keep his job. She understood the dilemma but concluded that “something is wrong with business.” Carr analyzes the incident as follows:

This wife saw the problem in terms of moral obligation as conceived in private life; her husband saw it as a matter of game strategy. As a player in a weak position, he felt that he could not afford to indulge an ethical sentiment that might have cost his seat at the [poker] table. Carr not only expects the executive to make such choices but cautions him not to agonize over them. “If an executive allows himself to be torn between a decision based on business considerations and one based on his private ethical code, he exposes himself to a grave psychological strain.”

Carr, like Friedman, has a point. Bluffing is expected in many business contexts, no less than in poker. No one expects negotiators to put all their cards on the table, or advertisers to tell the whole truth about their product. What the poker analogy actually tells us, however, is that “deception” is not really deception when everyone expects it as part of the game. Nobody is deceived when advertisers say their product is the best on the market; everyone says that. So Carr does not actually defend deception. Hiding a card up one’s sleeve, on the other hand, is truly deception because it breaks the rules of poker and no one is expecting it. Carr agrees that this sort of behavior, which he calls “malicious deception,” is wrong.

One problem with Carr’s poker analogy is that he overextends it. In a poker game everyone knows the rules, but business situations can be very ambiguous. If a food processor places false labels on packaging, it is highly unclear that consumers are “in on the game” and expect this sort of thing. If Mom and Dad take the kids to school in the family car, it is hard to argue that they “expect” the car to be unsafe, as was the Ford Pinto with its famous exploding gas tank. Such practices are now illegal precisely because they genuinely deceived customers, sometimes with deadly results.

The example of the political contribution, as well as several others in his article, suggest that Carr is making an even stronger claim. He seems to argue that the business game justifies a whole range of activities beyond bluffing, such as perversion of the political process. The

difficulty with this argument is that it proves too much. It implies that executives can do anything they want if it is part of a business game in which people play by the rules. But suppose the game is a shakedown racket, and everyone in town understands the rules: one must pay protection money or get roughed up by company thugs. This does not make it all right to participate in the racket, even if it is legal, which it is not. In fact, it is illegal precisely because it is the wrong kind of game to play.

The unavoidable fact is that some business games are good and some are bad. The right kind of competition, for example, can allow everyone to come out ahead, while the wrong kind can be destructive. When one plays the wrong game, then indeed “something is wrong with business.” How does one know which game to play? There is a field that deals with this issue, and it is called ethics.

Carr compounds his error when he advises executives not to agonize over business decisions. He is right to say that they must not let personal sentiment cloud their judgment, particularly when it comes to such unpleasant duties as laying off employees or shutting down a plant. They certainly should not be paralyzed by indecision and doubt. But they must nonetheless struggle with the alternatives. Hard decisions are part of life. Sometimes the game of business requires one to compromise oneself in order to make a larger contribution. Perhaps the sales executive can promote an exciting new product only by putting up with little indignities like kowtowing to his clients. But he should never compromise his values without soul searching, which is to say, without carefully reviewing the ethical situation. Carr’s assertion to the contrary is profoundly unwise.

Even granting that business ethics is important, many seem to believe that there is no point in studying the subject. Ethics is something you feel, not something you think. Finance, marketing, operations, and even business law lend themselves to intellectual treatment, but ethics does not.

The idea that ethics has no intellectual content is odd indeed, considering that some of the most famous intellectuals in world history have given it a central place in their thought. Ethics is in fact a highly developed field that demands close reasoning. The Western tradition in particular has given rise to sophisticated deontological, teleological and consequentialist theories of right and wrong. No one theory explains everything satisfactorily, but the same is true, after all, in the natural sciences.

Even when they grant that ethics has intellectual content, people often say that studying the field will not change behavior. Character is formed in early childhood, not during a professor’s lecture.

If the suggestion here is that college-level study does not change behavior, we should shut down the entire business school, not only the ethics course. Presumably the claim, then, is that studying finance and marketing can influence one’s conduct, but studying ethics cannot. This is again a curious view, since ethics is the one field that deals explicitly with conduct. Where is the evidence for this view? The early origins of character do not prevent finance and marketing courses from influencing behavior. Why cannot ethics courses also have an effect?

Ethics courses have number of features that seem likely to influence behavior. They provide a language and conceptual framework with which one can talk and think about ethical issues. Their emphasis on case studies helps to make one aware of the potential consequences of one’s actions. They present ethical that theories help define what a valid ethical argument looks like. They teach one to make distinctions and avoid fallacies that are so common when people make decisions. They give one an opportunity to think through, at one’s leisure, complex ethical issues that are likely to arise later, when there is no time to think. They introduce one to such specialized areas as product liability, employment, intellectual property, environmental protection, and cross-cultural management. They give one practice at articulating an ethical position, which can help resist pressure to compromise.

None of this convinces one to be good, but it is useful to those who want to be good. It may also improve business conduct in general. How many of the recent business scandals would have occurred if subordinates had possessed the skills, vocabulary and conceptual equipment to raise an ethical issue with their coworkers?

Ethics not only should be studied alongside management, but the two fields are closely related. Business management is all about making the right decisions. Ethics is all about making the right decisions. So what is the difference between the two? Management is concerned with how decisions affect the company, while ethics is concerned about how decisions affect everything. Management operates in the specialized context of the firm, while ethics operates in the general context of the world. Management is therefore part of ethics. A business manager cannot make the right decisions without understanding management in particular as well as ethics in general. Business ethics is management carried out in the real world. This is why business managers should study ethics.


THE RESPONSIBLE BUSINESS ENTERPRISE

Owners and managers must temper the competitive aspects of capitalism with concerned citizenship. They must take individual responsibility for the decisions and activities of their enterprises and their impact on the culture of their enterprise and its stakeholders. A business needs committed, productive employees, agents, and suppliers to create goods and services. It needs loyal, satisfied customers and consumers to make a profit. It needs people who believe in it and in its prospects enough to invest. It needs to take the long view and to respect the physical environment and the prospects of future generations.

Over the past few decades, governments, international institutions, transnational organizations, organized labor, and civil society have been engaged in an ongoing dialogue into the role of business as responsible stewards. Standards, procedures, and expectations for business are emerging worldwide. Enterprises and markets that are unaware of them, or fail to plan their futures with them in mind, will be unable to participate in the global dialogue and will risk being left behind as the global market economy expands.

Businesses around the world are designing and implementing business ethics programs to address the legal, ethical, social responsibility, and environmental issues they face. By addressing these issues in a systematic way, enterprises can improve their own business performance, expand opportunities for growth, and contribute to the development of social capital in their markets. They can realize specific business benefits, such as:

• Enhanced reputations and good will

• Reduced risks and costs

• Protection from their own employees and agents

• Stronger competitive positions

• Expanded access to capital, credit, and foreign investment

• Increased profits

• Sustained long-term growth

• International respect for enterprises and emerging markets

Enterprises that excel in these areas create a climate of excellence for their employees, shareholders, and communities, and contribute to the economic wellbeing of their countries.

What it means to be a responsible business enterprise (RBE) in an emerging market economy. It describes the role of responsible business conduct as owners and managers strive to improve business performance, make profits, and contribute to economic progress in their communities.

It lays a foundation that follow by examining the legacies of a command economy and the challenges those legacies present to businesses. A responsible business can contribute to a successful evolution to a market economy by improving its business performance; by helping build social capital in its economy; and by working with leaders in business, government, and civil society to develop essential market-oriented institutions.

Whereas the market economy has proved to be an essential condition for meeting the needs of the most people, valuable lessons have been learned along the way, often at great social cost. Societies and individual business enterprises have learned that it matters how profits are made, how wealth is distributed, and whether business can be sustained. Improved business performance, profits, and economic progress come to those who effectively and efficiently foster and meet the reasonable expectations of their primary stakeholders—customers, employees, suppliers, investors, and the environment, as well as the owners and managers themselves. Success for any business is ultimately measured in profits and losses, and the socially responsible business generates the capital and revenues required to operate and stay in business over the long haul. The socially responsible business must generate enough revenue to cover the real cost of capital, the risks and uncertainties of future economic activity, and the needs of its workers and pensioners. The socially irresponsible enterprise, Stakeholders are all those involved in, affected by, or able to influence the business enterprise, including: Customers and consumers Owners, shareholders, and creditors Employees and agents – Suppliers – Competitors Media and advocacy groups – Government – Families Communities – Society – Environment

however, fails to cover these costs because it is unable to meet the reasonable expectations of its stakeholders. behind specific goals, measures, and actions. “With this understanding,” one thing, “comes a greater acceptance of and, if they are consistent with the person’s values, commitment to the individual goals. An RBE is characterized by responsible business conduct at all four levels of its identity as an enterprise:

1. Compliance with the law

2. Risk management

3. Reputation enhancement

4. Value added to the community

Responsible business conduct includes the choices and actions of owners, managers, employees, and agents that are (a) within their authority, (b) well informed, (c) intended to pursue the enterprise purpose and meet reasonable stakeholder expectations, and (d) sustainable over time. Responsible business conduct allows an enterprise to improve its business performance, make profits, and contribute to the economic progress of its community. Among the lessons learned by both business and government is that responsible business conduct can be encouraged by the structures and systems, procedures, and practices of responsible business conduct, often called triple Bottom line which are values of employees “nice, warm, fuzzy”. Many businesses now account for the impact they have on all their stakeholders, including their social impact—how they deal with employees, suppliers, and the community—and their environmental impact—how they treat the environment.

A management tool owners and managers use to encourage responsible business conduct is commonly called a business ethics program. A business ethics program also helps owners and managers address the triple bottom line: the financial, social, and environmental results or impacts of the business’s operations.

Business owners and managers have learned that a business ethics program helps owners and managers improve their business performance, make profits, and contribute to economic progress by better

• Recognizing political, economic, social, and technological pressures
• Understanding organizational culture: core beliefs, participation, responsibility, knowledge sharing, and methods of dealing with conflict

• Fostering reasonable stakeholder expectations
• Developing responsible management practices to meet stakeholder expectations

• Learning from enterprise decisions and activities

Across the globe, businesses are expected to be responsible—to improve their performance, to make profits, and to contribute to the economic progress of their communities by learning how to meet the reasonable expectations of their stakeholders: their customers, employees, suppliers, investors, and the environment, among others. Moreover, an enterprise does not cease being a member of its community simply by virtue of entering into business. It is still responsible for meeting community norms, values, and standards.

An RBE in an emerging market economy has many legacies of a command economy to overcome while the state develops a legal framework and institutions that are market-oriented. An RBE can participate in the transition to a market economy by improving its business performance; by helping build social capital in its economy; and by working with leaders in business, government, and civil society to develop the essential market-oriented legal framework and reliable judicial institutions.

THE BUSINESS ETHICS PROGRAM AND STRUCTURE

Reputation is now more important than ever as a result of an increasing number of laws that regulate our business, higher expectations from our customers and the general public about the way we do business, and a business environment characterized by global expansion, technological advances, and increased competition. But it has always been, and continues to be, our policy to conduct business in compliance with all applicable laws and regulations and in accordance with the highest ethical standards.We expect—as we always have—that UPSers, and the people acting on our behalf, will adhere to these principles.

An enterprise’s reputation for integrity is important for securing the loyalty of customers, for recruiting and retaining the most professional and honest employees, for becoming the business partner of choice, for winning local community acceptance, and for increasing access to capital and credit.

A business ethics program contributes to the enterprise’s reputation for integrity. By giving adequate guidance to employees and agents, it ensures that they know what is responsible business conduct. By helping form reasonable expectations among its stakeholders, it minimizes disputes with customers and other stakeholders and increases stakeholder satisfaction

Every business, even if it strives to comply strictly with the law, is subject to risks such as these:
• Being exposed to criminal prosecution for bribing a government contracting officer
• Being debarred from government contracting or a strategic partnership for an inappropriate gift or gratuity
• Having to recall products for failure to follow quality standards and procedures
It is not pleasant to contemplate, but the enterprise itself is often abused by its employees and agents. Embezzlement of enterprise funds is a major example. Cheating on time cards or carrying off supplies and tools, while relatively minor, add up to significant losses sustained every year by businesses—both large and small. It has been estimated that enterprises in the United States lose some 6 percent of their revenues annually to employee misconduct. A business ethics program is designed to establish standards and procedures to prevent and detect violations of the trust put in employees. Among these standards and procedures are processes to protect enterprise assets. These specific processes may include establishing standards and procedures, monitoring and auditing systems, and reporting mechanisms.

However, at the heart of a business ethics program is the desire of owners and managers to foster the commitment of their employees to the welfare of the enterprise as a whole. Fostering this sense of loyalty and commitment among employees and agents may be the most effective way in which a business ethics program protects the enterprise from disloyal employees.

An RBE increases effectiveness and efficiency by enabling all stakeholders to work together closely on the basis of respect, shared values, and mutual trust. Such efforts lead to what one author calls “invisible savings” by reducing employee conduct that is harmful to the enterprise but difficult to detect.

After a business ethics program becomes a part of operations, many of the costs of monitoring and supervision can be reduced. Product quality may improve and transaction costs, such as contracting, may decline. For example, many large, complex enterprises (LCEs), most of which have business ethics programs, are developing preferred supplier lists to reduce the number of suppliers that they deal with. To ensure that there is no interruption in supplies and services, these LCEs require that their supply chains adopt the same good management practices that they follow, including a business ethics program. which gives in part Gap Inc.’s code of vendor conduct.

Since, in the minds of most employees, ethics are essentially a matter of fairness,6 a business ethics program often increases employee morale.

SAMPLE VENDOR CODE

This Code of Vendor Conduct applies to all factories that produce goods for Gap Inc. or any of its subsidiaries, divisions, affiliates or agents (“Gap Inc.”). While Gap Inc. recognizes that there are different legal and cultural environments in which factories operate throughout the world, this Code sets forth the basic requirements that all factories must meet in order to do business with Gap Inc. The Code also provides the foundation for Gap Inc.’s ongoing evaluation of a factory’s employment practices and environmental compliance. Factories must comply with all applicable environmental laws and regulations. Where such requirements are less stringent than Gap Inc.’s own, factories are encouraged to meet the standards outlined in Gap Inc.’s statement of environmental principles.
A. The factory has an environmental management system or plan.
B. The factory has procedures for notifying local community authorities in case of accidental discharge or release or any other environmental emergency. Morale leads to increased productivity and innovation. It strengthens the enterprise’s competitive position in its industry.

EXPANDED ACCESS TO CAPITAL, CREDIT, AND FOREIGN INVESTMENT
INCREASED PROFITS AND SUSTAINED LONG-TERM GROWTH
INCREASED INTERNATIONAL RESPECT

A new business strategy in which companies conduct business responsibly by contributing to the economic health and sustainable development of the communities in which they operate, offer employees healthy, safe, and rewarding work conditions, offer quality, safe products, and service...are accountable to stakeholders... and provide a fair return to shareholders whilst fulfilling the above principles.

As a participant in markets and a member of its community, the socially responsible business expresses its needs and concerns to government when appropriate. It avoids using its economic power to gain competitive advantage through political means.

Although the essential purpose of an RBE is to improve its business performance, to return a profit to its owners and investors, and to increase the prosperity of its community by meeting the reasonable expectations of its stakeholders, the RBE is nevertheless concerned about the quality of life in its communities, as the Komatsu code provisions, Its employees and agents also care about the communities in which they and their families live.

Businesses often support literacy programs, local schools and colleges, and local infrastructure, such as water facilities, roads, or parks

CONCERN FOR THE COMMUNITY

(1) Contribution to the Community
Through its operations as a good corporate citizen, Komatsu Ltd., responds to the commitment of its stakeholders. Also as a corporate citizen it is expected to contribute to the community.

B. Basic Principles
1. Consistency
2. Public interest
3. Voluntary

In an effort to harmonize further with the community, Komatsu Ltd., on its 70th anniversary in 1991, declared its intention to use one percent (1%) of its pre-tax earnings for social contribution. Komatsu will continue to actively work for the community. Komatsu’s purpose and five (5) basic principles concerning social contribution are as follows.

A. Purpose: “Komatsu and its employees, as local community members, will contribute to society”
4. Acceptable by employees
5. Not aimed at advertisement.
(2) Employees' Volunteer Activities
Komatsu will respect employees’ self-motivated participation in voluntary charitable activities, and will never require employees to join such activities. Komatsu will prepare various systems to support their participation.

Enterprises of all sizes develop strategies to bring their resources together to achieve their goals and objectives. A business ethics program helps owners and managers improve their business performance, make profits, and contribute to the economic progress of their communities by meeting the reasonable expectations of their stakeholders. A business ethics program also aims to achieve specific expected program outcomes, such as increasing awareness of ethics issues, improving decision-making, and reducing misconduct.

To be effective over time, a business ethics program must be a formal plan, because it touches on all aspects of the enterprise—operations, human resources, communications, and marketing to name but a few. Formally planning a business

• Planning, Strategy, and the Business Ethics Program
• Establishing the Nature of the Program
• Building a Responsible Business Enterprise
• Knowing the Structural Components of the Program
• Planning the Business Ethics Program
• Engaging the Enterprise’s Stakeholders
• Adopting a Design, Review, and Approval Process

Busy managers need not fear that formal planning for a business ethics program will overwhelm daily operations because, as discussed below, they already have many elements in place. The planning process requires targeted stakeholder participation more than a large staff. However, once an enterprise announces its intention to design and implement a business ethics program, it needs to plan well and to base its plan on its core beliefs. A lack of program consistency will hurt employee morale and generate stakeholder cynicism.

Owners and managers should define and communicate the purpose of the business ethics program as early as possible. Responsible management recognizes that an effective business ethics program touches every decision and activity of the enterprise. It guides patterns of thought, choice, and action that subtly shape the organizational culture of the enterprise. The business ethics program should be based on the core beliefs of the enterprise and should reflect an approach or orientation that will resonate with employees and other stakeholders.

Recent research suggests that “specific characteristics of the formal ethics and legal compliance program matter less than the broader perceptions of the program’s orientation toward values and ethical aspirations.” This research found that two factors are most important: (1) that ethics is perceived to be important to leadership—from executive through supervisor—and (2) that employees believe they are treated fairly. It is particularly important that enterprise policies and management actions be consistent and that reward systems support ethical behavior.

According to the research, familiarity with a code of conduct is relatively unimportant. Moreover, a program perceived as designed primarily to protect senior managers is clearly harmful and is associated with increased violations of its established standards and procedures.6 Research and experience over the past 15 years suggest that a primary best practice is to design a business ethics program that goes beyond mere compliance.

Program effectiveness is closely related to employees’ perceptions of the orientation of a business ethics program. A business ethics program usually has one of four primary orientations. The orientation reflects owner and manager motivations in designing and implementing the program and is an important condition of program effectiveness.

The primary orientations are:

1. A compliance-based approach, which “focuses primarily on preventing, detecting, and punishing violations of law”
2. A values-based approach, which “aims to define organizational values and encourage employee commitment to ethical aspirations”
3. A satisfying external stakeholders approach through which enterprises
“hope to maintain or improve their public image and relationships with external stakeholders”
4. A protecting senior management approach, which “is introduced in part to protect owners and senior management from blame for ethical failures or legal problems”

Businesses must comply with these types of laws:
• Principal and agent relations
• Business organization and formation
• Real property law
• Personal property law
• Intellectual property law
• Fair competition law
• Environmental law
• Employment law
• Labor–management law
• Tax law
• Alternative dispute resolution provisions
• Political campaign financing law
• Anti–money laundering law
• Anticorruption law
• Judicial procedure, especially judicial privilege
• International law

Five principles should drive the planning process and be honored in implementation of the program itself.
1- DIFFERENTIATE BETWEEN GOVERNANCE AND MANAGEMENT
2- BUILD ON STRENGTHS
3- MOBILIZE THE ENTIRE ENTERPRISE AROUND CORE BELIEFS
4- DELEGATE AUTHORITY ACROSS ALL LEVELS
5- BUILD IN CONTINUOUS IMPROVEMENT

The RBE needs to take a number of practical steps before establishing a business ethics program. Owners and managers must determine the approach and orientation of its business ethics program. They must identify and engage all of an enterprise’s stakeholders, foster their reasonable expectations, and order the enterprise’s business affairs so that it improves its business performance and increases the prosperity of its community by meeting those expectations.

The responsible business enterprise operates at all four levels of identity: compliance, risk management, reputation enhancement, and value added. It meets all legal requirements through an effective program to prevent and detect misconduct. It works to ensure that its organizational culture does not encourage or tolerate misconduct. It also works to identify and reduce the risks it faces in its markets. In addition, an RBE goes beyond these two lower levels to enhance its reputation and add value to its community.

A business ethics program has nine structural components that reflect global standards and best practices of responsible business conduct:

1. Standards and procedures to guide member behavior and foster reasonable stakeholder expectations
2. Adequate structures and systems that provide for authority, responsibility, accountability, and sustainability
3. Communication of standards, procedures, and expectations to the enterprise’s members
4. Programs that monitor and audit member conduct
5. Encouragement of members to seek advice and report concerns
6. Due diligence in hiring, especially for sensitive positions in, for example, management, finance, and contracting
7. Encouragement of members to follow standards and procedures
8. Appropriate responses when standards and procedures are violated
9. Regular evaluations of program effectiveness

Many enterprises have published standards of responsible business behavior. Over the past two decades, in particular, they have developed a body of best practices that enterprises in emerging market economies can consider and adapt for their circumstances.

There are at least eight practical reasons why owners and managers should embrace a business ethics program as part of its management practice:

• Enhanced reputation and goodwill

• Reduced risks

• Reduced costs

• Protection from unethical employees and agents

• Enhanced performance, productivity, and competitive position

• Expanded access to capital, credit, and foreign investment

• Increased profits and sustained long-term growth

• Increased international respect

An RBE also contributes to the social capital of its community by basing its business conduct on a solid foundation of responsible business conduct. It works with leaders in government, civil society, and other businesses to develop a market framework and the supporting legal institutions.

Over the past two decades, emerging global standards from a number of business associations, stakeholder groups, and international institutions have been addressing the issues of responsible business conduct: ethics, compliance, and social responsibility.

Before going forward in the design and implementation process, owners and managers need to decide what they are trying to accomplish through their business ethics program. An effective program will have specific, action-oriented, relevant, and timely performance measures of organizational culture and expected program outcomes.

A program logic model helps planners organize their thinking and encourage stakeholder engagement. A program logic model is a particularly effective means of graphically describing the elements of a business ethics program to the owners (or their representatives), senior management, employees and agents, and other stakeholders. Using RBE Worksheet 1, one may capture the essential elements of an entire business ethics program on one page.

With these processes in mind, owners and managers must establish enterprise standards of conduct and foster reasonable stakeholder expectations.

Basic Principle: To ensure the harmonious coexistence of people with nature and to achieve sustainable growth, we will do our utmost to protect the global environment in all our corporate activities. Basic Policies

1. Compliance with laws and regulations and fulfillment of social responsibilities
To observe all laws and regulations regarding environmental protection issues and to carry out our responsibilities as global corporate citizens.

2.Reducing environmental loads
To establish action plans for energy conservation (reduction of greenhouse gas emissions), resource conservation (conservation of materials such as paper), and waste reduction, and to strive to make continuous improvements.

3. Establishing and maintaining environmental management systems
To establish an environmental management system enabling each business unit to pursue voluntary environmental protection activities.

4. Developing environmental technologies
To contribute to the reduction of environmental load through various areas of research and development, including multimedia services.

5. Social contribution efforts
To promote daily environmental protection efforts in coordination with citizens and government agencies.
6. Disclosure of environmental information To enhance both internal and external communications through the disclosure of environmental information.


Effective business ethics programs are designed specifically for the day-to-day challenges of the individual enterprise, its management styles, and its organizational culture. For example, the comprehensive business ethics program of HCA Inc., a large U.S. health care company, has 20 ethics and compliance-specific policies and procedures and dozens more related policies and procedures from other departments.52 These policies include the following:

• Policy and procedure development

• Internal handling of ethics-line calls

• Self-reporting of violations of certain laws and regulations

• Business courtesies to potential referral sources

• Business entertainment

• Vendor-promotional training

• Approval of gifts in recognition of volunteer efforts

• Ethics and compliance officer

• Code of conduct distribution and training

• Records management

• Ethics and compliance program contracts

• Ethics and compliance office quarterly reports

• Training for senior management

• Reportable events

A business ethic program should cover these issues:

• Ethics and compliance structure and systems

• Responsibility of managers and supervisors

• Need to avoid even the appearance of impropriety

• Monitoring and auditing practices

• Employees’ duty to report violations

• Failure to comply

• Failure to detect misconduct

• Methods to seek advice and report misconduct

• Policy concerning false reports

• Enterprise response to reports

• Policy for customer, supplier, and contact agents

• Confidentiality and anonymity policy

• Nonretaliation policy

• Policy for employee misconduct

• Policy for rewarding ethical behavior

• Records retention

• Media contact

• Individual accountability

• Obligation to sign acknowledgment

Resources may include these:

• Ethical decision-making model

• Case studies and examples

• Telephone contact numbers
Owners and managers establish standards, procedures, and expectations to answer the fundamental question, “What norms, values, and standards should we set to guide our members and foster reasonable stakeholder expectations?” An effective business ethics program contains standards, procedures, and expectations that establish the following:

• Who has authority to do what within the enterprise

• Who is responsible for which decisions and activities
• How people will be held accountable for their individual choices and actions

• What stakeholders can reasonably expect from the enterprise

Standards, procedures, and expectations are set for all levels of the enterprise—from the owners to the independent agents. Core beliefs and reasonable stakeholder expectations set the fundamental aspirations of the enterprise. Standards, procedures, and expectations are liberating devices as well as control mechanisms. They set boundaries for employees and agents that limit what they can do in pursuit of the enterprise purpose. Provided employees and agents choose and act in pursuit of the enterprise’s purpose in good faith—and do not exceed these limits—they are free to use their good judgment in making decisions and acting.


PUTTING BUSINESS ETHICS INTO PRACTICE

Responsible managers consider the strengths and practices of the enterprise when designing business ethics infrastructure. Owners and managers of an RBE design and implement business ethics infrastructure by answering this question: “What style, structure, and systems of authority and responsibility at all levels should we exercise?”

To support employees and agents in their day-to-day conduct of responsible operations, owners and managers establish certain functions and positions, such as high-level oversight of the program; a business ethics staff to administer the program; representative councils of the enterprise and professionals; legal, human resources, and internal audit linkages; and individual responsibilities of staff members. Such infrastructure may be particularly valuable for an enterprise as it participates in the evolution of an emerging market economy

It is vital to the welfare of the enterprise and its ability to meet the reasonable expectations of its stakeholders that owners and managers know whether enterprise standards and procedures are being followed and whether reasonable stakeholder expectations are being met. The source of this information, in all cases, is the stakeholders of the enterprise: employees, agents, customers, suppliers, and regulators, to name but a few.

Owners and managers of an RBE should develop a plan to communicate with stakeholders the enterprise’s standards, procedures, and expectations. They can do so by answering two fundamental questions:

1. How can we most effectively communicate our standards and procedures and foster reasonable expectations among our stakeholders?
2. How can we know that our members follow our standards and reasonable stakeholder expectations are met?

To communicate enterprise standards, procedures, and expectations, owners and managers use all manner of vehicles: formal and informal communications; training, education, and development; and stakeholder engagement. To ensure that management knows what is going on in the enterprise, owners and managers establish various mechanisms, as appropriate to the relevant context and organizational culture: monitoring, auditing, reporting, and stakeholder surveys

Research and experience suggest that the most helpful aspect of a business ethics program may be that it supports management practices that align enterprise strategies and management practices with core beliefs, standards, procedures, infrastructure, and expectations.1 A business ethics program is a fundamental aspect of organizational development that provides the foundation for other important aspects of business planning such as a business plan, marketing strategy, investment prospectus, and proposal for a strategic

• Understanding the Importance of Alignment

• Getting the Right People in the Right Places
• Encouraging Employees to Follow Standards and Procedures
• Dealing with Mistakes, Misconduct, or Misunderstandings

In the case of a business plan, for example, all of the elements lead to an integrated approach to the four components of a business plan: (a) description of the business, (b) marketing plan, (c) financial management plan, and (d) management plan. A business plan not based on these elements would be necessarily incomplete.

Many management practices support responsible business conduct. These supportive management practices fall in three categories:

1. Recognizing employee contributions

2. Rewarding ethical behavior

3. Punishing unethical behavior

Recognition and reward are two means of encouraging employees and agents to follow standards and procedures. But what should owners and managers do when standards and procedures are violated? They need to take all necessary steps to get the violator’s attention and to prevent further violations, up to and including dismissal and reporting to law enforcement. They need to do this to protect the enterprise and its stakeholders from further harm.

Despite the best efforts of owners and managers, sometimes things go wrong. Even the most responsible business enterprises make mistakes. Standards and procedures will be violated, and reasonable stakeholder expectations will be dashed. Owners and managers deal with these challenges. In the words of one author, “they don’t kid themselves.”

Owners and managers need to plan for mistakes, actual misconduct, and stakeholder misunderstanding of the enterprise’s decisions and actions. At a minimum, they need to establish standards and procedures for dealing with such matters. Managers should be trained on how to exercise crisis management. And when something goes wrong, owners and managers need to determine what happened—and why. They need to determine what steps to take to mitigate further harm or exposure: corrective action, restitution, voluntary disclosure, or any number of other remedial actions to compensate harmed stakeholders or prevent further violations.
As a general principle, an RBE takes all appropriate steps to cure any harm it has caused stakeholders. These steps include compensating victims, stopping operations, recalling products, restoring the environment to its previous condition, and taking steps to prevent future harm. The enterprise may undertake community service to repair the harm caused by the misconduct.

Where further harm can be predicted, such as health problems that can take decades to manifest themselves, an RBE may set up a trust fund for stakeholders damaged by its misconduct.
Sometimes a crisis is not of the enterprise’s making. What does an RBE do when accused of shortcomings it did not commit? Responsible management works through such misunderstandings. The general principle is to learn how to pursue the enterprise’s purpose and meet reasonable stakeholder expectations by engaging stakeholders when appropriate.

For example, in a famous case in the United States in 1982 involving the pain remedy Tylenol, the manufacturer, Johnson & Johnson, was faced with seven deaths linked to adulterated Tylenol capsules. It chose to avoid risk to its customers, consumers, and reputation by removing millions of dollars of the product from the market.

Finally, where mistakes, misconduct, and misunderstandings occur, the responsible business constantly evaluates its performance. It uses such incidents as opportunities to learn how the business ethics program is performing. The essential question is, “Does this enterprise have an effective business ethics program?”

Responsible management practices are critical to the success of an RBE in improving its business performance, increasing the prosperity of its community, and contributing to the social capital in its markets by learning to meet the reasonable expectations of its shareholders. Owners and managers of an RBE develop responsible management practices by answering these three questions:

1. How can we ensure that we have the right people in the right places while we pursue our purpose as an enterprise?
2. How can we encourage our employees and agents to follow our standards and procedures?
3. What do we owe our stakeholders when mistakes, misconduct, or misunderstandings occur that involve our established standards and procedures or their reasonable expectations?

To have the right people in the right places in the enterprise involves using the enterprise’s core beliefs, standards and procedures, and reasonable stakeholder expectations to establish responsible criteria. An RBE uses these responsible criteria to recruit, hire, retain, assign, and dismiss employees and agents, especially managers and supervisors.

To encourage employees and agents to follow enterprise standards and procedures, pursue the enterprise’s purpose, and meet reasonable stakeholder expectations, responsible managers evaluate decisions and activities according to the responsible criteria, and they reward and discipline employees and agents as appropriate.

When things go wrong for an RBE, responsible managers address mistakes, misconduct, and misunderstandings. They learn from mistakes and failures made in good faith. They confront misconduct and respond appropriately. They discipline employees and agents, and they voluntarily disclose to, and cooperate with, government authorities, as appropriate.

Responsible owners and managers apply all the perspectives, practices, and principles to meet the challenges that their markets present. Five issues are particularly challenging for enterprises in emerging market economies, although they are present in all markets:

1. Relationships with government officials and entities
2. Role of the private sector in the regulatory process
3. Government contracting and procurement
4. Role of voluntary action
5. Relationships with foreign governments and businesses

Greater emphasis on morale, productivity, stability, efficiency, and growth
is placed by business executives than government executives. Government executives place more importance than business executives on such goals as quality, effectiveness, public service, and value to community. Goals like customer service, leadership, and innovativeness are rated similarly important by business and government executives.

Business leaders and government must work together to develop the institutions, laws, regulations, and practices that contribute to good public governance and independent markets. Particular attention should be given to reducing corruption in the forms of bribery and extortion. Government must reduce the opportunities and motivations for corruption. This objective can be achieved through both good corporate governance and good public governance.

An RBE is alert to opportunities to improve the business environment through its own responsible business conduct and through its association with other enterprises, civil society, and government. All enterprise decisions and activities aim to improve the RBE’s business performance; to help build social capital in its economy; and to work with leaders in business, government, and civil society to develop the essential market-oriented legal framework and reliable judicial institutions.

This text, titled “Basic Guidelines for Codes of Business Conduct,” was developed by the U.S. Department of Commerce in cooperation with the Russian Chamber of Commerce and Industry and the U.S.–Russia Business Development Committee.

The purpose of this set of guidelines is to articulate general principles and standards that have been accepted in international business transactions. Although these principles apply generally, they are not intended to be an all-encompassing set of business practices and corporate principles. They must be adopted and implemented on a sector-by-sector and enterprise-by-enterprise1 basis to take into account applicable laws, regulations, and other specific circumstances (such as the size of the enterprise).
No laws or contracts can anticipate the possible vicissitudes of life. Very often an entrepreneur must make a decision based on the prompting of common sense and conscience. The key is to embody ethical and moral principles into personal and professional relations, and remember to:

• always do business within one’s means;
• have respect for the partners and participants in a shared business venture;
• refrain from violence or the threat of violence as methods of achieving business success;
• resist crime and corruption, and do one’s part to see that crime and corruption become unprofitable for everyone; and
• live up to the trust placed in you; trust is the foundation of entrepreneurship and a key to success;
• endeavor to earn a reputation for integrity, competency, and excellence.












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