Basics of Business Ethics | How to Establish Ethical Standards

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 02, 2023

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What Are Ethical Standards

Every business has ethical standards, even if they are not written down. These are the basic guidelines that govern how people in the company are expected to behave.

Some businesses have very strict ethical standards that their employees must follow. Others are more relaxed and allow their staff some leeway in how they conduct themselves.

Either way, it is important for businesses to have some kind of ethical guidelines in place.

It can help a business avoid legal problems and bad publicity, build employee morale, and attract customers and business partners.

The Functions and Responsibilities of a Manager

When it comes to ethical standards, managers play a key role in setting the tone for their department or company. It is their responsibility to ensure that employees understand what is expected of them and that they are following the guidelines.

Managers should also be on the lookout for any possible ethical breaches and take action if they occur. Here are the main functions and responsibilities of a manager:

Functions and Responsibilities of a Manager

    • Planning: Strategic, tactical, and operational are three types of planning.

      a. Strategic—generally, a 3-5 year-long strategy for the company

      b. Tactical – implementation plans that reach important objectives (usually less than one year or short-term).

      c. Operational- entails several short-term strategies for attaining tactical objectives.
    • Organizing: from hiring to creating an organizational chart, etc.
    • Leading: the style in which you manage your firm. Theory X, Y, or Z is an example of this.
    • Directing: manage employees, lead and inspire them to achieve objectives.
    • Staffing: getting the appropriate individuals in the correct jobs.
    • Controlling: improving business performance through measurement and control.
    • Coordinating: bringing all management activities together into a coherent system.
    • Representing: representing the company to employees and to the outside world.
    • Innovating: creating the most excellent methods to achieve strategic, tactical, and operational objectives. Solve problems in an inventive way.
    • Motivating: positively managing employee morale and motivation.

    Ethical Leadership and Organizations

    Ethics – a system of principles and standards of judgment that informs whether something is right or wrong.

    These are the fundamental moral ideas and behavioral norms that underlie the decisions made by individuals in an organization as they interact with stakeholders.

    The Three levels of Ethical Standards

    Three Levels of Ethical Standards

    • The Law—This document tells everyone in society what actions are acceptable and which are not. The law simply establishes a minimum level of conduct. Legal behavior may not always be considered ethical.
    • Organizational policies and procedures—help employees make daily decisions. An organization can develop ethical frameworks and even a Code of Conduct to help guide employees.
    • The Moral Stance – when employees come across a pickle that does not fit into the levels one or two systems, they take this stance.

      People usually learn their morals from early life experiences, church, synagogue, etc. These are key standards that help in these situations.

    Creating an Ethical Framework

    An ethical framework is a system of values, guidelines, and principles that helps individuals within an organization make decisions. It provides guidance on how to deal with difficult situations and make choices that are in line with the organization's values.

    Steps in Creating an Ethical Framework

    Step 1 – Recognize the ethical issues involved in a problem or decision.

    • Acknowledge that there is an ethical dilemma present.
    • Define the ethical concerns involved.
    • Consider the moral principles: honesty, fairness, respect for the community, environmental awareness, trust, and others.

    Step 2—Determine how the decision will affect key stakeholders and who they are.

    • Every company decision has a variety of stakeholders to consider.
    • Some stakeholders' demands may conflict with those of other stakeholders.
    • To determine which interests are most important, sort out the conflicting ones.
    • Determine what is socially responsible when it comes to decision-making.

    Step 3 – Develop various possible responses and identify which ones are ethical or unethical.

    • Use the questions in the Code of Conduct to assist you in making your decision.
    • Make sure that everyone involved is aware of the potential ethical implications of the situation.

    Step 4 – Determine the "best" ethical response and put it into action.

    • You should be able to make several ethical decisions.
    • Weigh these choices against the “ideal” ethical outcome.
    • Make a decision that is consistent with the company's goals, culture, and value system.

    Specific Ethical Behaviors of High Integrity Leaders

    Leaders with high integrity possess many ethical values and principles that they use as guidelines in their decision-making process. Some of these behaviors are:

    • Possess humility – Do not be arrogant or boastful of your accomplishments and success
    • Maintain a commitment to the greater good—Make decisions for the company's benefit, not personal interests.
    • Be truthful – Always be honest in your claims and actions.
    • Fulfill commitments – Always try to fulfill all obligations in an exemplary manner and never violate an agreement.
    • Strive for fairness - Make equitable judgments for everyone, avoid being biased in your decisions, and obtain all the information necessary before making a decision.
    • Take responsibility - For one's actions rather than blaming others or falsely accusing them.
    • Failing to value others and not showing respect and appreciation for individuals.
    • Celebrate others’ success – Share the joy of others' success and not be envious.
    • Develop others – Support employee development, and help and coach others to improve themselves.
    • Reproach unjust acts – Refuse to do any act that would be unjust and defend their principles.
    • Be forgiving – Let go of past negative actions, and get rid of any ill feelings or grudges.
    • Extend self to others – Assist others in times of need, and be generous with rewards when warranted.

    The Characteristics of an Ethical Leader

    Leaders who act ethically display traits that establish them as credible and trustworthy to those they manage.

    These ethical leaders effectively communicate their message and provide support, shaping the attitude, beliefs, and behaviors of those they work with through either a transformational or transactional leadership style.

    The Characteristics of a Transformational Leader

    Transformational leaders are those who inspire change in others by raising their level of consciousness and awareness.

    These types of leaders possess the ability to see the potential in others and help them reach it through mentorship, coaching, and modeling desired behaviors.

    In order to be an effective transformational leader, one must have a clear vision of what they want to achieve and be able to articulate it in a way that engages and motivates others. Here are the characteristics of a transformational leader:

    • We are focused on developing a long-term vision for the company.
    • Based on motivation from inspiration and influence from role models, individualized consideration, and intellectual stimulation.
    • Transformational leader has a profound, positive ethical effect on their organization. Their personal beliefs, values, and attitudes shape the organization's ethical culture.
    • Employees are free to develop ideas and make decisions in an independent setting.
    • The principles of ethical power are as follows::
    1. Purpose – the purpose of a leader is to establish a long-term vision for their team or organization.
    1. Perspective – making wise and fair decisions based on accurate and unbiased information.
    1. Patience – Roadblocks are an inevitable part of any journey, but remain patient
    1. Persistence – To keep going despite any difficulties or setbacks.

    Transaction-Focused Leadership

    • The interaction between the leader and others should result in a mutually beneficial transaction.
    • Focus on the operational and routine activities that keep the firm running.
    • A leader focuses on distributing resources, keeping track of employee progress, and showing employees how to achieve the company's goals.
    • This style does not support an ethical commitment because its negative impact on employees causes a lack of communication.
    • Employees are rewarded based on the results they achieve.
    • Transactional leaders focus on achieving specific goals and expect employees to produce tangible results.

    The Roles and Responsibilities of Key Stakeholders

    The fact that, in some ethical dilemmas, there are no right or wrong answers creates difficulties for businesses. The issue arises from the conflict of interests between different groups and individuals involved with a company (stakeholders).

    As an entrepreneur, you will have to deal with various conflicts. To do so effectively, you need to identify your stakeholders and figure out how best to accommodate them.

    For example, if you produce food products, you must consider how your decisions will affect numerous groups of people, including workers, farmers, raw material suppliers, unions, government agencies, banks, stockholders & investors who land the customers who purchase your products.

    Below is a list of potential key stakeholders for any business.

    The Following Are Some Questions That Can Help Identify Ethical Issues

    • Does this action meet my standards of how people should act?
    • How will I feel about myself if I do this?
    • Do we have a rule or policy for cases like this?
    • What are my motives for making this decision?
    • Would this action deceive others in any way?
    • How would I feel if this action was against me?
    • Who will benefit from this decision?
    • Who will be hurt by this decision?
    • What if my action became public knowledge?
    • Is what I am doing right or wrong?
    • Have I explored all potential options?
    • Can I articulate my reasoning to others effectively?

    Code of Conduct

    An organization's Code of Conduct is a formal statement of its values on ethical and social issues. This provides specific guidance to managers and employees regarding expected standards of behavior in terms of ethics. A Sample Code of Conduct is provided below:

    Basic Sections of a Code of Conduct

    I. Provide excellent service to our customers.

    • Integrity
    • Usefulness
    • Privacy
    • Responsiveness
    • Take action

    II. Treat each other with respect.

    • Equal opportunity employment
    • Positive environment
    • Drug and alcohol standard
    • Safe workplace

    III. Keep your conflicts of interest in check.

    • Personal investments
    • Outside employment
    • Outside board membership
    • Friends and relatives: co-worker relationships
    • Gifts, entertainment, and payments
    • Reporting

    IV. Keep information private.

    • Confidential information
    • Customers or suppliers
    • Competitors; former employees
    • Outside communications and research

    V. Keep company property safe.

    • Intellectual property
    • Company equipment
    • Physical security
    • Use of Equipment and facilities
    • Employee data protection

    VI. Guarantee money is handled correctly and responsibly.

    • Spending money properly
    • Signing contracts
    • Recording transactions
    • Reporting financial or accounting irregularities
    • Hiring suppliers
    • Retaining records

    VII. Respect the law.

    • Import/export regulations
    • Competition laws
    • Insider trading laws
    • Anti-bribery laws

    VIII. Conclusions and summary of the code.

    Top Five Reasons Why You Should Run an Ethical Business

    • Safeguard your brand and company reputation
    • This is the right thing to do
    • Retaining customers’ trust and loyalty
    • Maintain investor confidence in your company
    • Gain public recognition and approval

    The Five Most Important Factors for Maintaining Business Ethics

    • Large-scale corporate scandals
    • The competition in the marketplace
    • Investors' demands
    • Customer pressure
    • Globalization

    The Seven Deadly Sins

    Seven deadly sins have been used to evaluate human behavior for centuries. They are:

    Seven Deadly Sins

    • Lust – When an individual has an excessive and continual sexual drive that consumes all of their thoughts.
    • Gluttony – When an individual overeats or consumes anything to the point of excess, it is called gluttony.
    • Greed – When an unhealthy obsession with acquiring wealth, regardless of the means.
    • Sloth – When individuals are experiencing sloth feel apathetic and sad, failing to find joy in their everyday lives. Sloths do not recognize or utilize their full potential and gifts.
    • Wrath – When an individual experiences wrath, they may feel uncontrolled anger or rage, leading to other emotions and actions such as impatience, revenge, or vigilantism.
    • Envy – When you covet what someone else has to such an extent that it consumes your thoughts and feelings.
    • Pride – Also called vanity or hubris – is when an individual considers themselves better than another person. This is often the source of the other six deadly sins listed above.

    Reasons Ethical Breaches Occur

    • Occasionally, an organization will employ somebody who does not adhere to the company's ethical code, and this person needs to be let go.
    • An unethical organizational culture – is one where the need for profit overrides ethical behavior. Pressure to make money can make employees act unethically. To correct this type of behavior, entrepreneurs should:
      • Set the tone by being an ethical leader
      • Establish and enforce policies and show zero tolerance for unethical behavior
      • Educate and recruit for strong ethics
      • Separate related job duties so the temptation to cheat is eliminated
      • Reward those who act ethically
      • Get rid of secrecy in the workplace by allowing employees to talk about any issue with anyone above or below them in the chain of command
    • Moral Blindness – is a term used to describe the employees' lack of acknowledgment of the ethical implications of their actions. Common rationalizations are:
      • “Many people do it.”
      • “If they were me, they would do the same.”
      • “I can not afford to be ethical right now.”
      • “I am not worried about the consequences of my decision.”
      • “My job is to produce results, not uphold ethical values.”
    • Competitive Pressures-Under immense competitive pressure, some managers view dangerous and unethical options as a way to keep their business afloat.

      And when employees' jobs compete with others, they may be pushed to do things that go against their ethics.
    • Opportunities pressures are when employees or managers feel the temptation to do something unethical to get ahead. Sometimes, company culture rewards these actions, leading people to underestimate the cost of doing wrong.
    • Globalization of business-business practices considered unethical in our country may be perfectly legal and acceptable in other countries.

      Because of this, international businesspeople often find themselves caught between conflicting cultural values and expectations.

    The Causes of Ethical Breaches and the Features of Ethical Cultures

    • The intense pressure of unrealistic goals or deadlines
    • Not receiving proper training or not knowing that an act is unethical
    • Exploitative labor practices, like forced labor and excessive working hours.
    • The health and safety of our working conditions.
    • Discrimination and harassment
    • Fraud or theft
    • Gift-giving and bribes

    Ethical Culture Characteristics

    • Leaders both support and exhibit ethical behavior.
    • All company leaders should communicate with their team regularly.
    • The organization’s goals and strategies include ethical considerations.
    • Ethics is an important part of performance management.
    • A company's ethics are considered during the initial selection criteria and throughout the selection process.

    Creating an Ethical Standard

    A study has shown that smaller companies are less likely to have ethics programs than large companies. Still, entrepreneurs can encourage employees and others to become familiar with the following ethical tests for judging behavior.

    Ethical Principles for Judging Behavior

    • The Utilitarian Principle - States that the best option is the one that provides the best for the most significant number of people.
    • Kant's Categorical Imperative – States that we should always act in such a way that our actions could be universal laws or rules of behavior.
    • The Professional Ethic – Only take actions that a panel of professional colleagues who are not interested in the outcome would view as proper.
    • The Golden Rule – Treat others how you want to be treated.
    • The Television Test—Would you feel comfortable justifying your actions to a national TV audience, along with your colleagues?
    • The Family Test—Would you be able to explain to your children, spouse, and parents why you comfortably took this action?

    Key Takeaways

    There is no one perfect way to run a business ethically. The best thing you can do is to be aware of the many different ethical considerations that come up in business and to make sure you have the plan to deal with them.

    Ethics are the moral principles that guide our behavior. They provide guidance on what is right and wrong, and help us to make decisions that are in line with our values.

    When it comes to business, there are a number of different ethical considerations that come into play. These can include things like how we treat our employees, the environment, and our customers.

    Some of the common causes of ethical breaches are intense pressure, unrealistic goals, and lack of training.

    Organizations can take steps to create an ethical culture by involving leaders, setting goals, and considering ethics during performance management.

    The Utilitarian Principle, Kant's Categorical Imperative, The Professional Ethic, The Golden Rule, and The Television Test are all ways that we can judge whether our actions are ethical.

    In conclusion, it is important to be aware of the many different ethical considerations that come up in business. By being mindful of these issues, we can make sure that we are making decisions that are in line with our values.

    Establishing Business Ethics FAQs

    About the Author

    True Tamplin, BSc, CEPF®

    True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

    True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

    To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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