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What Is Business Ethics and Why It Makes a Difference for Your Organisation

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Read Time: 10 mins

What is the purpose of your business? 

business ethicsbusiness ethicsbusiness ethics
Learn about business ethics in this tutorial. Image source: Envato Elements

Even if you’re the most hard-nosed, profit-oriented person around, the answer will probably involve the question of business ethics.

For example, let’s say that you answer: 

“My only purpose is to make as much money as possible.” 

It’s still true, however, that you can only make that money by serving customers, and that your company must exist within a broader social framework. You’ll need to decide how you treat those customers, how you treat your employees, and what contribution your company will make to the society in which it exists. All of those are ethical questions.

In this article, we’ll start with a simple business ethics definition. Then we’ll look at the importance of business ethics and show how thinking about issues like corporate social responsibility can help you run a better business. Finally, we’ll put it all into practice with some ideas on how you can incorporate ethical practices into your business.

What Is Business Ethics?

Let’s start by examining what we mean by business ethics. Cambridge Dictionary defines business ethics as:

“rules, principles, and standards for deciding what is morally right or wrong when doing business”

Some ethical principles enjoy widespread acceptance. For example, once-common business practices like slavery and child labour are now universally seen as unethical. These widely accepted ethical norms are usually also enshrined in law. So the most basic form of business ethics involves simply following the law.

However, business ethics can also involve much more than this. Remember that the business ethics definition above also mentioned “deciding what's morally right or wrong when doing business.” It’s an active process, then, in which company owners and employees grapple with ethical dilemmas in business and decide which business practices they will and won’t engage in.

For example, if you could get legal permission to dump toxic chemicals in a pristine lake, would you do it? If you could make extra profit by treating your employees badly, would you do it?

Or let’s say that you run a store. Would you sell any or all of the following?

  • products that were tested on animals 
  • clothes made in factories with poor working conditions
  • products with a very high carbon footprint 
  • food made with palm oil from cleared rainforests 
  • alcohol, tobacco, or gambling products
  • products made in zones of conflict or under regimes that violate human rights

Some people will answer “Yes, of course” to all of these, some will give a resounding “No”, and others will answer “Yes” to some and “No” to others. I could extend the list to include dozens of ethical issues in business, and your list of responses would probably be different from mine and from those of other readers.

The point is that where the law is silent, business owners have to come up with their own business ethics definition of what's right and wrong. Look at your personal values and those of your business and then, in collaboration with your staff, decide what you believe in and how you want to act out those beliefs in your business practices.

For more help on doing that, read the following tutorials:

The Importance of Business Ethics

So why should you care about business ethics? Here are four good reasons.

1. Trust and Reputation

As billionaire investor Warren Buffett once said:

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”

Some of the biggest tech firms in the world have been discovering that recently, as privacy and data-handling revelations have hit customers’ levels of trust.

For example, a 2018 HarrisX survey conducted just after Facebook CEO Mark Zuckerberg’s Congressional testimony found that only 33% of people agreed that Facebook cared about privacy, while 44% of people disagreed.

Chart showing trust in tech firms for privacyChart showing trust in tech firms for privacyChart showing trust in tech firms for privacy
Source: HarrisX survey

The survey also revealed serious concerns about the tech sector’s role in disseminating fake news, spying on people, discrimination, threats to personal freedom, and more. And a majority of people support heavier regulation of social media firms.

This illustrates the importance of business ethics. Essentially, the survey reveals that large numbers of people are questioning the ethics of large tech firms. That affects those companies’ reputations and damages trust, which is at the core of good business relationships.

2. The Power of Ethical Consumption

But do ethical considerations really hit the bottom line? A Morgan Stanley survey suggests that they do:

“When choosing among apparel retailers, 51% of respondents said that ethical credentials were somewhat or very important, compared to just 13% who said they were somewhat unimportant or not at all important.”

Overall, the survey found, 62% of consumers used good ethics as “part of their shopping criteria” in 2016, up from 53% in 2010. And ethics were more important to younger respondents, suggesting the trend is likely to continue. 

In other words, the majority of customers will spend more money with you if they perceive that you've got good ethics, and that effect is getting stronger all the time. That’s a pretty clear bottom-line impact.

3. Financial Outperformance

Some studies have also found that ethical firms outperform their competitors. For example, a study by Ethisphere analysed the performance of companies on its list of “the World’s Most Ethical Companies.” The results: 

“Year after year, we’ve found that publicly traded companies on that list consistently outperform the markets, with firms in last year’s edition outperforming the S&P 500 by 3.3 percent.”

Some other long-term studies of Socially Responsible Investment funds have also found that they outperform, although others have found the difference wasn't statistically significant. 

4. Employee Satisfaction

People want to work for a company that does the right thing. Numerous studies have found that employee engagement is higher at firms that prioritise corporate social responsibility (CSR). With surveys showing that only around one in ten employees are engaged at work, that’s an important benefit.

For example, BMW places a high priority on corporate responsibility, working to reduce emissions, investing €350 million a year in further education and training, prioritising employee health and safety, and more. The company also has high employee satisfaction, with 77% of employees saying they would recommend working there to a friend.

How to Put Ethics Into Practice in Your Business

Here are six great ways to put business ethics into practice in your business.

1. Set Up Ethical Guidelines 

Start by getting clear on what you'll do and making a commitment to do it. For example, will you make commitments on environmental sustainability and set targets for reducing pollution or energy usage? How about examining your supply chain and ensuring workers are protected not only at your company, but also with your suppliers?

This may involve some consultation within the company to establish exactly what the company’s most important values are and how the firm should act in a way that’s consistent with those values. Then put it all together into a code of ethics, so that all employees are aware of what the company’s targets are.

2. Protect Whistleblowers

Setting policies from the top of the organisation is one thing, but it’s your employees who are on the front lines and see what happens on a day-to-day basis. So you should encourage them to speak up when they see something they believe is unethical.

It’s important to set up clear guidelines and processes for employees who come across ethical issues in business. Show your staff that you'll investigate ethical breaches, take them seriously, and protect the people who report them. Provide trusted contacts whom people can talk to confidentially about their concerns and explain how the issue can be escalated and dealt with if those concerns are substantiated.

3. Improve Corporate Governance

An essential element of ethical business practice is corporate governance, i.e. how the company is run. Here are some questions to ask:

  • Is the decision-making process fair and transparent? 
  • Does it allow all stakeholders to have their say? 
  • Is there a code of conduct for the leadership team, and are they held to the same or, hopefully, more stringent ethical standards than other employees?
  • How are leaders held accountable?
  • Is there a process for judging the performance of top managers and disciplining or replacing them if they behave unethically?

When you’ve answered those questions and consulted with managers and staff, revamp your corporate governance and make sure everyone understands it. That can go a long way towards creating ethical decision-making and leadership. For more, see:

4. Be Environmentally Responsible

From climate change to air pollution and from plastic-choked oceans to disappearing forests, the world’s environmental problems can seem overwhelming at times. What’s your company’s ethical stance on environmental issues? Are you going to be part of the solution or part of the problem?

For example, the auto industry has historically been a very environmentally damaging one, but carmaker Volvo announced in 2017 that every car it launches from 2019 would have an electric motor. It said:

“The announcement underlines Volvo Cars’ commitment to minimising its environmental impact and making the cities of the future cleaner ... It aims to have climate neutral manufacturing operations by 2025.”

The company then followed up in 2021 by announcing that all of its cars will be fully electric by 2030, with its Chief Technology Officer saying:

“There is no long-term future for cars with an internal combustion engine. We are firmly committed to becoming an electric-only car maker and the transition should happen by 2030. It will allow us to meet the expectations of our customers and be a part of the solution when it comes to fighting climate change.”

If having a liveable environment is important to you and your business, what commitments will you make to contribute to that? Learn more here:

5. Make Social Contributions

A company exists within a broader society, and it can have a positive impact. A small business can sponsor local charities, help to clean up local parks, invest in education or the arts, or get involved in other community projects.

Larger firms can have an impact across a broader area. Ice-cream maker Ben & Jerry’s, for example, set up a foundation with a mission to: 

“engage Ben & Jerry's employees in philanthropy and social change work; to give back to our Vermont communities; and to support grassroots activism and community organizing for social and environmental justice around the country.”
Ben  Jerrys Foundation website
Ben & Jerry's Foundation website

The foundation involves employees in its philanthropy by having them serve on committees that review grant applications, establishing a clear link between staff and the wider society.

Similarly, Envato launched a foundation focused on indigenous education and skills in Australia, providing grants totalling $630,000 across three to six years.

Recipients of scholarships from Yalari a charity supported by EnvatoRecipients of scholarships from Yalari a charity supported by EnvatoRecipients of scholarships from Yalari a charity supported by Envato
Recipients of scholarships from Yalari, a charity supported by Envato

6. Consider Alternative Structures

If you want to make your ethical commitments official, you could consider moving to a new legal structure for your business. 

Under most corporate structures, a company’s main duty is to its owners and shareholders, which can lead to a strong emphasis on profit. A benefit corporation, on the other hand, is a for-profit company that's dedicated to pursuing other goals as well. Instead of just being accountable to shareholders, the managers and directors have to consider the impact of their decisions on employees, customers and other stakeholders.

An alternative is to become a B Corp, a private certification that shows the company is committed to a social and environmental mission and meets certain ethical standards.

Consider the Importance Business Ethics 

In this tutorial, you’ve learned all about ethical issues in business. We started by answering the question “What is business ethics?” Then, we looked at the importance of business ethics, and we finished by examining what steps you can take to embed ethics in your own company. Along the way, we also looked at some practical business ethics examples.

What do you plan to do next? What does business ethics mean to you, and how will you incorporate ethical considerations into your business practices?

Editorial Note: This content was originally published in 2019. We're sharing it again because our editors have determined that this information is still accurate and relevant.

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