Ethics and Business

Chapter 1 opens with four learning outcomes. After reading, you should be able to do the following.

1. Examine the function of business ethics in a global business environment.
2. Summarize the modern history of organizational ethics that has shaped business practices.
3. Analyze the roles of customers, employees, and managers in business ethics.
4. Outline organizational best practices that foster an ethical business culture.

Wendel Torres, cofounder and CEO of Torix General Contractors, LLC, grew his Colorado Springs construction company from $200,000 in sales (1987) to $108 million by 2007, largely through military installation contracts. In 2007, a friend named Bill — the construction chief at the local military base, a government official Torix did business with — asked Wendel to source $3,500 of railroad ties for a home landscaping project. Knowing Bill was struggling financially after his wife's cancer diagnosis, Wendel told him, “Don't worry about it.”

Under government purchasing ethics rules, giving a gift to a person in a position of authority to grant business is a crime, regardless of intent — because Bill and Wendel were in a government–contractor relationship, the free materials could look like returning a favor for future business. Wendel pleaded guilty in 2010 to providing illegal gratuities to a public official: he lost the right to vote, serve on a jury, and possess firearms; Torix suffered reputational damage; and he was permanently barred from future government contracts.

Wendel traces the root cause to a training gap: Torix had no business ethics training that would have given employees the parameters for gift giving, so staff ordered and delivered the material without anyone flagging the missing invoice. He now speaks to business associations about the ethical risks facing small businesses.

Ignoring ethics can jeopardize a company's existence. Infosys Ltd. settled for a record $34 million for visa fraud (Preston, 2013); Alcoa Inc. paid $384 million after a consultant bribed Bahraini officials (ElBoghdady, 2014); Hathaway Dinwiddie Construction paid $725,000 after an EEOC racial-harassment lawsuit (Berardi, 2021); and SAP settled for $200 million for bribery across seven countries over seven years (Vanderford, 2024). The point: individual behaviors matter. Employees can deviate from acceptable practice, but each ethical employee also has a spillover effect encouraging others to act ethically (Mittendorf, 2008), even though organizations still struggle with resistance to speaking up.

Figure 1.1 — What the Data Tells Us About Employees Speaking Up

Global surveys show 10%–50% of employees feel pressure to act unethically, and up to 85% observe misconduct — most often corruption, bullying, or favoritism. Of observers, up to 90% report it (manager, then HR, then manager's manager); of reporters, up to two-thirds face retaliation, mostly termination (Ethics Resource Center, 2023; Ethisphere Institute, 2023). Ethisphere's (2023) study of 2 million employees found reporting fell to 48.2% in 2022 (from 50.1% pre-pandemic); employees under 25 report far less (nearly 40% cite fear of retaliation) than employees over 41 (74%). The Ethics Resource Center's (2023) 42-country survey found 72% of observers reported globally, versus 62% in North America. Both studies agree that a strong ethical culture increases reporting.

The textbook groups its chapters into four perspectives: Chapters 1–2 give a macro view of business ethics and social responsibility (terminology, history, frameworks); Chapters 3–4 examine ethics within a business (common ethical issues, forces promoting compliance); Chapters 5–6 cover individual ethical decision making (decision traps, ethical leadership); Chapters 7–10 take an organizational perspective (implementing an ethics program, responsible-conduct approaches).

Four themes run throughout: (1) ethics are a normal, integral part of business, not a separate add-on; (2) business ethics can require different approaches than personal ethics; (3) ethics affect multiple stakeholders — customers, employees, shareholders, suppliers, the community; (4) global business requires an international view of ethics. Chapter 1 itself follows its own four sections: fundamental concepts (1.1), historical context (1.2), individual roles (1.3), and organizational best practices (1.4).

Ethics refers to the moral values and principles that help determine whether a decision, choice, or action is right or wrong. Applying personal ethics directly to business decisions is not always appropriate, since each employee's ethical assumptions may not match the company's position. Trustworthiness and ethics are the top two qualities U.S. and U.K. business leaders seek in new hires (Association of International Certified Professional Accountants, 2023), and the World Economic Forum's (2023a) Future of Jobs report ranks trust-building and ethical leadership among the top three attitudes employers will need in five years.

Moral Muteness

Bird and Waters (1989) identify moral muteness — managers' reluctance to frame a decision in ethical terms rather than economic terms, “even when they are acting for moral reasons” (p. 73). The chapter's first practical step is to learn the language of ethics rather than avoid it.

Business Ethics Defined

A simple definition: ethics is the “study of what is good and evil, right and wrong, and just and unjust” (Steiner & Steiner, 2012, p. 72). Business ethics specifically means rules, principles, and standards for deciding right and wrong when doing business (Ferrell et al., 2013). Ethical issues arise in any function — accounting, marketing, HR, supply chain — whenever a choice could harm others (Jones, 1991); Gentile (2010a) urges employees to expect the “gray areas” where law is silent and the right answer is unclear (Bruhn, 2009).

Beyond Legal Compliance: Friedman vs. Wells Fargo

A common assumption treats legal behavior as automatically ethical. This traces to Milton Friedman's (1962/2009) Capitalism and Freedom, which argues business's responsibility is simply to profit “so long as it stays within the rules of the game” (p. 133) — a compliance approach focused on preventing, detecting, and punishing legal violations. The chapter's counterexample is Wells Fargo: aggressive sales goals pressured employees into opening fake accounts for 15 years (Lilly et al., 2021), a $3 billion DOJ settlement (2020), followed by a second violation mismanaging 16 million consumer accounts (CFPB, 2022). Suh et al. (2020) found fraud-convicted executives typically rationalized misreporting as necessary to protect shareholder value — knowing the law is not the same as applying it under pressure (Gentile, 2010b).

Business Ethics in a Global Context: Relativism vs. Universalism

As business crosses borders, acceptable-behavior norms vary by culture. A relativistic approach treats each culture's ethics as equally valid — “When in Rome…” (Donaldson, 1996, p. 48) — rooted in moral relativism, tying ethical judgments to class, race, gender, age, and religion; this can permit practices like bribery abroad that would be illegal at home, raising legal risk. Universalism holds that certain absolutes apply regardless of circumstance (Trompenaars, 1996); enforcing one standard everywhere is ethical imperialism, as with PepsiCo, FedEx, and Kraft Heinz's global codes of conduct — though ignoring genuine local context can breed hidden noncompliance.

Values describe what is important to a person or organization — enduring beliefs shaped by family, education, and religion (Ferrell et al., 2013), such as honesty, integrity, and fairness. Ethical principles are universal, absolute statements setting specific boundaries on behavior (Ferrell et al., 2013) — values are the beliefs, principles operationalize them. United Launch Alliance ties its values directly to goals like mission success and employee involvement, on the premise that a values-based culture prevents misconduct better than compliance alone (Lager, 2010).

Value Congruence and Hypernorms

Value congruence is the similarity between individual and organizational values; executives show greater agreement with their organizations than middle managers do (Posner, 2010), and this can be especially strained in multinationals. Donaldson and Dunfee (1999) define hypernorms as “principles so fundamental that… they [reach] the root of what is ethical for humanity” (p. 46); Rushworth Kidder's cross-cultural surveys found five shared values: honesty, respect, responsibility, fairness, and compassion (as cited in Gentile, 2010a).

Equity, Liberty, and Distributive Justice

Business ethics principles cluster into three families: equity (fair treatment, fair competition), liberty (individuals' rights, safeguarded through anti-collusion and transparency; Pichler, 1983), and distributive justice (fair allocation of resources among stakeholders; Ferrell & Ferrell, 2008) — where a stakeholder is “any group or individual who can affect or is affected by the achievement of the organization's objectives” (Freeman, 1984, p. 25).

Business Best: The UN Global Compact's Ten Principles

Established in 2000, the UN Global Compact promotes a principles-based approach to business ethics across over 20,000 companies in 160 countries (Coulmont & Berthelot, 2015). Its Ten Principles derive from the Universal Declaration of Human Rights, the ILO's core labor declaration, the Rio Declaration, and the UN Convention Against Corruption.

Ethics and Decision Making

People tend to overestimate their own honesty and believe they are more ethical than others (Bazerman & Tenbrunsel, 2011a); 40%–58% lie in games of chance for money (Gerlach et al., 2019), and unethical behavior rises under competition or sales incentives. Personal ethics alone are often insufficient for business decisions — when employees focus purely on task completion, ethical fading can occur: “a process by which a person does not realize that the decision she is making has ethical implications” (Tenbrunsel et al., 2010, p. 159). The chapter's worked example is child labor in the hand-knotted carpet industry, where perceived moral intensity makes buyers feel less urgency about conditions in a distant country than they would working alongside affected children directly; Chilean managers showed less concern about child labor than managers from Australia, Ecuador, and the U.S. (Robertson et al., 2002) — evidence that relying on individual moral judgment alone produces inconsistent organizational decisions.

The early-2000s scandals — Enron, Arthur Andersen, WorldCom, Tyco International — show what ethical failure costs: Enron and WorldCom went bankrupt, Arthur Andersen ceased to exist. Wells Fargo's unauthorized-account scandal (2002–2016) further damaged trust in financial services. Notably, each company already had an ethics and compliance program — having one is not the same as having an effective ethical culture.

Ethical Lapses and Reputation

An ethical lapse implies a short-term deviance, but its organizational impact can be long-lasting. Figure 1.2 (Thomas, Schermerhorn, & Dienhart, 2004) maps escalating costs: regulatory fines, then audit/legal expense once regulators pay attention, then — the largest cost — reputational loss affecting customer loyalty and employee satisfaction (Fombrun, 1996).

Trust: The Edelman Trust Barometer

Since 2001, the Edelman Trust Barometer has tracked global trust in institutions. The 2024 report finds business the most trusted institution since 2021 (63%), ahead of NGOs (59%), government (51%), and media (50%); trust is highest in India (82%) and lowest in the U.K. (48%) and South Korea (45%). Globally, 79% trust their own employer, yet 61% believe business leaders are purposely misleading the public (Edelman, 2024). Trust rose across most industries in 2024 — social media is now least trusted (49%), displacing financial services, which climbed from 43% (2012) to 61% (2024) via greater transparency. Public attention has shifted since 2008 from operational performance toward engagement and integrity; in 2024 business was rated 32 points more ethical than government.

Reputational damage from executive misconduct isn't limited to Western economies: when GOME Electrical Appliances founder Huang Guangyu was convicted of bribery, insider trading, and stock manipulation in 2010, the company's share price fell 17% amid declining sales (Trieu, 2012).

Shift From Compliance to Ethics

Compliance means not doing the wrong things — adherence to law (Priest, 2008). Ethics means doing the right thing, emphasizing values like integrity (Treviño et al., 1999). Corporate social responsibility is the broader obligation to meet or exceed stakeholder expectations (Maignan & Ferrell, 2004); all three are interrelated. The ethics and compliance function is young compared to accounting or HR — a founder's personal ethics permeate a start-up informally, which rarely suffices alone, so formal regulation emerged to close the gap (Matten & Moon, 2008).

The chapter frames its timeline through social issue life cycle theory (Ackerman, 1975): an issue moves from unthinkable, to rising public pressure, to becoming ingrained in normal company practice (Zyglidopoulos, 2003) — regulation follows once the public feels strongly enough.

1900s–1950s: New Legislation and the Movement Toward Ethics

After WWI and the 1929 crash, Roosevelt's New Deal encouraged recovery through regulation: the Social Security Act (1935) and Fair Labor Standards Act of 1938 (minimum wage, maximum hours, abolishing child labor in interstate commerce). In 1943 Robert Wood Johnson crafted Johnson & Johnson's Our Credo well before formal ethics programs were standard.

1960s: A Decade of Social Unrest Advances Social Responsibility

Antibusiness sentiment grew alongside the civil rights movement, culminating in the Civil Rights Act of 1964. Kennedy's 1962 Consumer Bill of Rights established the rights to safety, information, choice, and to be heard; Rachel Carson's Silent Spring and Ralph Nader's Unsafe at Any Speed drove the Clean Air Act (1963) and Motor Vehicle Safety Act (1966). Friedman's Capitalism and Freedom, published in this era, argued business's responsibility is simply to profit within “open and free competition, without deception or fraud” (Friedman, 1962/2009, p. 133).

1970s: Scandals and Social Issues Lead to New Agencies and Guidelines

The Watergate investigation revealed U.S. companies bribing foreign officials — Lockheed alone disclosed $22 million in such payments (1976) — leading Congress to pass the Foreign Corrupt Practices Act of 1977 (FCPA), the precursor to formal corporate compliance functions. The EPA and OSHA were both created in 1970 amid environmental and workplace-safety crises, and Reverend Leon Sullivan established the first Sullivan's Principles encouraging disinvestment from apartheid South Africa.

1980s: Industries Take Action for Ethical Compliance

Rising regulation and cable-news scrutiny pushed companies like General Dynamics to build formal ethics programs. The Defense Industry Initiative on Business Ethics and Conduct (DII), formed in 1986 by 18 defense contractors, established six core principles still used today.

1. A requirement and adherence to a written code of conduct.
2. Employee training on applying the code of conduct.
3. An atmosphere encouraging violation reporting without fear of retribution.
4. Self-governance through compliance monitoring and voluntary disclosure.
5. Learning from peers through shared best practices.
6. Member companies accepting accountability for their actions.

1990s: Ethics and Compliance Profession Gains Recognition

Globalization, the USSR's collapse, and the internet's emergence brought new ethical risks (bribery, offshoring-driven unemployment). Transparency International launched in 1993 to expose corrupt governments, and the Federal Sentencing Guidelines for Organizations (FSGO), approved by Congress in 1991, offered reduced penalties for companies that could demonstrate genuine misconduct-prevention processes.

The 21st Century: New Ethical Issues Drive Responsible Business Practices

Congress passed the Sarbanes-Oxley Act of 2002 (criminalizing securities fraud) and the Dodd-Frank Act of 2010 (executive compensation, governance, lending practices); FSGO amendments in 2004 and 2010 strengthened requirements for regular risk assessments and board reporting. Societal pressure has grown alongside regulation — consumer boycotts, ESG reporting requirements, and more recently the #MeToo movement and George Floyd protests have forced businesses to directly address diversity, equity, and inclusion (DEI). A responsible business today requires sustainability, stakeholder responsibility, and ethics together (Laasch & Conaway, 2015).

Given the cost of fines and reputational loss, companies increasingly invest in preventing misconduct; 87% of leaders report that ethics and compliance considerations shaped their organization's response to major challenges (LRN, 2023, p. 16). Four measurable benefits follow.

Improves Investor Confidence

Growing ethical-investment criteria among shareholders and pension managers reflect rising demand for good corporate citizenship (Henderson, 2000); stock prices react positively to new governance transparency announcements (Picou & Rubach, 2006), and shareholder resolutions increasingly drive corporate change on social issues (Graves et al., 2001) — though rising scrutiny of ESG/DEI costs has also generated resolutions to cut such programs (Kennedy, 2023).

Increases Employee Recruitment and Retention

A majority of future U.S. and U.K. workers consider ethics more important now than five years ago (Association of International Certified Professional Accountants, 2023). Ethical leadership is desirable to job seekers regardless of salary (Ogunfowora et al., 2023), and ethical company culture drives commitment, satisfaction, and well-being across cultures (Parboteeah et al., 2024).

Improves Customer Relations and Loyalty

Perceived fairness strongly predicts customer satisfaction (Ingram et al., 2005), and younger customers readily boycott brands seen as unethical (Tuan et al., 2023). A Wall Street Journal experiment found consumers would pay slightly more for ethically produced goods (fair labor practices, environmental technology, no child labor) but would only buy unethically made products “at a steep discount” (Trudel & Cotte, 2008, para. 5) — a finding confirmed by later research on CSR-aligned brand trust and loyalty (Narayanan & Singh, 2023).

Increases Profits

Responsible business practices correlate with greater financial performance (Orlitzky et al., 2003): firms on the World's Most Ethical Companies list have outperformed peers by 7%–8% annually (Areal & Carvalho, 2012), and Ethisphere's 2024 Five-Year Ethics Premium stands at 12.3% (Ethisphere, 2024). Firms like Charles Schwab and U.S. Bancorp use honesty and transparency to avoid the short-term pressure toward deceptive products that could erode long-term solvency (Wadhwa, 2009).

Ethics in business is everyone's responsibility. As citizens, people can press for regulation; as consumers, they choose what and from whom to buy; as employees and managers, they hold each other accountable — but a business is not a person, it is a collection of individuals, so holding businesses to an ethical standard while behaving unethically ourselves is a contradiction. The chapter examines three groups: customers, employees, and managers.

Customers

Consumer ethics are “the moral rules, principles and standards that guide the behavior of an individual or groups in the selection, purchase, use, or sale of a good or service” (Muncy & Vitell, 1992, p. 298). Customers can pressure employees into unauthorized discounts, called sweethearting (Brady et al., 2012) — a frequent customer asking for an ineligible discount “just this once,” or employees accepting returns more readily from friends than strangers. AI-mediated interactions raise new risk: consumers show more unethical intent toward AI than humans (Li et al., 2024) and are less likely to report a billing error to a machine than a person (Giroux et al., 2022). On the positive side, ethical consumerism — buying products aligned with moral beliefs — has grown large enough to have its own acronym, LOHAS (Lifestyles of Health and Sustainability).

Employees

Ethical self-efficacy is an individual's belief that they can make correct ethical decisions (building on Bandura, 1977); employees with higher self-efficacy are less influenced by peer pressure and less likely to act unethically (Treviño, 1986). It builds through direct experience, training, and observing ethical role models — the more confident employees become, the more likely they are to speak up about misconduct. Because ethical compliance matters, companies increasingly screen for moral character alongside technical skill via background checks and behavioral interview questions.

Managers

Kotter (1990) distinguishes managerial skills (planning, staffing, budgeting) from leadership (inspiring people through change). Ethical leaders champion responsible management aligned with the organization's purpose and values (Freeman & Steward, 2006), reducing employee stress and building confidence to do the right thing — as one long-tenured Ecolab employee put it, “I am thankful that I am at a company that I don't have to 'go there'… I'm fortunate enough that I don't have to make those decisions” (Gonzalez-Padron, 2011, p. 41).

Organizations must guide customers, employees, and managers through a formal ethics and compliance program. The U.S. Federal Sentencing Guidelines require companies to “exercise due diligence to prevent and detect criminal conduct… and promote an organizational culture that encourages ethical conduct” (United States Sentencing Commission, 2013), specifying eight program requirements.

1. Standards and procedures.
2. Program oversight and management.
3. Delegation of substantial authority.
4. Training and communication.
5. Checking evaluation and reporting.
6. Consistent disciplinary procedures and incentives.
7. Response to critical issues.
8. Periodic risk assessment.

An effective program requires four dimensions (Figure 1.5; Gonzalez-Padron, 2013): top management commitment, ethical culture, stakeholder engagement, and functional integration.

Top Management Commitment

Top management's commitment is the single most important component. The U.K. Bribery Act of 2010 names it directly as necessary for effective anti-bribery processes: leadership must foster “a culture within the organisation in which bribery is never acceptable” (Ministry of Justice, 2011, p. 23). COSO calls this tone at the top — leadership's concern for ethics shaping accurate financial reporting (King, 2013).

Ethical Culture

Ethical culture describes an organization's degree of commitment to ethical responsibilities, with expectations for employees and suppliers alike. As SEC associate director Stephen Cohen put it, “A strong ethical culture flows from good governance and requires leaders to promote integrity and ethical values in decision-making across the organization” (U.S. Securities and Exchange Commission, 2013c). A strong culture depends on how genuinely leadership encourages ethical practice and how well employees actually execute the code of ethics — not just whether one exists on paper.

Stakeholder Engagement

Stakeholder engagement lets a company communicate how it incorporates ethics into practice, building the trust that makes a company appear less risky to future business. Engagement includes information gathering, information giving, and dialogue — ranging from informal (staying in touch with customers) to formal (surveys, board representation).

Functional Integration

Perceptions of a company's ethical culture vary by level — senior managers are typically more confident than line employees, and the gap widens the longer employees stay (Ardichvili, Jondle, & Kowske, 2012). This happens when employees observe inconsistent code enforcement, as an informal culture forms through employee stories that may contradict stated values (Bazerman & Tenbrunsel, 2011a). Functional integration means driving ethics consistently across every department rather than announcing it once at headquarters (Vad Baunsgaard & Clegg, 2013) — a case study of a European construction company found this integration critical to overcoming an ethical crisis (Siltaloppi et al., 2021).

Business ethics relates to rules, principles, and standards for deciding what is morally right or wrong when doing business. Values (beliefs about what matters) and principles (fixed rules that operationalize them) are the cornerstone of ethical decisions. A responsible business meets or exceeds the behavior its stakeholders expect.

Companies operating internationally must weigh values rooted in different cultures — choosing between a relativistic approach (local variation) and an ethical imperialistic approach (headquarters' standards everywhere), while considering hypernorms shared across humanity. The institutionalization of business ethics and CSR grew from a century of social and political events; visible ethical lapses erode trust, while labor, consumer, and environmental movements have shaped society's expectations. Organizations with strong ethical programs are more likely to attract investors, strengthen employee commitment, and improve financial performance.

Ethics in business is everyone's responsibility — as consumers, employees, and managers, and each ethical employee encourages others simply by acting ethically. Companies implement ethics and compliance programs requiring top management commitment, an ethical culture, stakeholder consideration, and functional integration.

Juan, an associate at a global investment firm, receives a call through Telecommunications Relay Service (TRS) — used by people with hearing or speech disabilities — on behalf of "Mr. Smith," a deaf customer requesting a $20,000 withdrawal. Juan verifies name, Social Security number, address, birth date, and account balance; all match. The request raises no flags until Juan notices two prior withdrawals over $10,000 in the past two weeks. "Mr. Smith" explains the funds are for home renovation; Juan feels something is off but does not want to accuse the customer of dishonesty, and since the request meets all stated requirements, he processes the transfer.

About a week later, the real Mr. Smith calls demanding an explanation for $80,000 in withdrawals over four weeks. The investigation reveals identity theft — Mr. Smith's account details sat in an unsecured file on his personal computer, he is not deaf, and the TRS call was fabricated by the fraudster.

The chapter asks: What are the consequences for Juan, Mr. Smith, and the company? Did Juan act appropriately, and what would you have done? How did the organization's values and leadership influence his actions?

Chapter 1 closes with four critical thinking questions, each paired below with a concise model answer.

1. Identify your personal ethical values. How can you assess if a company shares your values?

The chapter lists candidate values — integrity, respect, honesty, accountability, among others. To assess a company's fit, look past its mission statement to observable evidence: its code of ethics, how consistently it is enforced (functional integration), its tone at the top, and its track record of fines or ethics-award recognition — since these reveal whether stated values match the organization's actual, informal culture.

2. If starting a company employing 150 people within five years, what core ethical values would you inspire, and how would you guide employees to apply them?

A strong answer picks a small number of values tied directly to concrete goals (as United Launch Alliance does) and explains the principles that operationalize them. Guidance should go beyond a poster on the wall: onboarding training covering gray-area scenarios (which Wendel Torres's company lacked), visible leadership modeling (tone at the top), and consistent disciplinary follow-through so employees see values enforced, not just stated.

3. Do large fines deter unethical behavior when culture pressures firms to profit at any cost? Why is a compliance approach lacking?

Fines alone often fail when underlying cultural pressure remains unchanged — Wells Fargo's fraud recurred in a second form even after its first multi-billion-dollar settlement. Balancing ethics and business is hard because financial incentives are immediate while the costs of lapses are diffuse and delayed. A compliance approach is lacking because it only asks “is this legal,” not “is this right” — it addresses the floor of acceptable behavior rather than building the values-based culture that prevents misconduct before it becomes a violation.

4. What drives a “do as the Romans do” approach internationally, and how can a firm account for cultural, religious, and political differences?

Relativism is often driven by competitive pressure — local practices that would be illegal at home can seem necessary to compete for local business. A global firm can manage this by anchoring its code of conduct in hypernorms (honesty, respect, responsibility, fairness, compassion) while engaging in genuine local stakeholder dialogue to distinguish real cultural difference from violations, like bribery or child labor, that should never flex by market.

The chapter's own Key Terms list, in order, each defined in one line.

A single table capturing the chapter's core definitions, its historical timeline, its three individual roles, and its four organizational dimensions.