Topic

The Nature of Ethics in Modern Business

LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. Explain some of the ethical problems in management; Elaborate on the five characteristics of ethical problems in management; Explain the three methods for analysing ethical problems in management; and Discuss ethics from the Islamic perspective.

INTRODUCTION

In this topic, we shall examine the various ways through which organisations attempt to strike a balance between economic and social performance when faced with an ethical dilemma.

3.1

ETHICAL PROBLEMS AS MANAGERIAL PROBLEMS

Ethical problems are managerial problems because they represent a conflict between an organisations economic performance and its social performance. There should be a right or proper balance between economic performance and social performance. Thus, the managements dilemma is to strike a balance between economic and social performances. Let us examine the factors that enter

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into that balance and consider various theoretical structures that may be of assistance to management in finding solutions.

3.2

CHARACTERISTICS OF ETHICAL PROBLEMS IN MANAGEMENT

According to Hosmer (1991), there are five characteristics of ethical problems in management as presented in Figure 3.1.

Figure 3.1: Five characteristics of ethical problems in management

Sections 3.2.1- 3.2.5 are taken from the book, The Ethics of Management by LaRue Tone Hosmer (1991). Let us look at each characteristic in the following sections.

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3.2.1

Most Ethical Decisions Have Extended Consequences

Do you realise that the results of managerial decisions and actions do not stop with first-level consequences? Rather, they extend throughout the society, and that extension constitutes the essence of the ethical argument. The argument states that the decisions of managers have an impact on those within the organisation and outside the organisation: the society. Since the impact is beyond their control, managers need to seriously consider their decisions. For example: (a) (b) (c) Bribes change governmental processes. Pollution affects environmental health. Unsafe products destroy lives.

There is little disagreement here, most people recognise the extended consequences of managerial actions. Disagreements, if any, usually arise from the existence of multiple alternatives, mixed outcomes, uncertain occurrences and personal implications that complicate the decision-making process leading to those actions. So, let us look at the remaining four characteristics of ethical problems which play a significant role in the management of an organisation.

3.2.2

Most Ethical Decisions Have Multiple Alternatives

It is commonly thought that ethical issues in management are primarily dichotomous, a yes or a no choice, with no other alternatives. For example, some would assume that these would be the questions dealt in an organisation: (a) (b) (c) Should a manager pay bribes or not? Should a factory pollute the air or not? Should a company manufacture unsafe products or not?

However, the above questions do not reveal the real situation faced in a business organisation. Although a dichotomous framework presents the ethical issues in sharp contrast, it does not accurately reflect the managerial dilemma. Therefore, multiple alternatives have to be considered in making ethical choices.

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3.2.3

Most Ethical Decisions Have Mixed Outcomes

It is commonly thought that ethical issues in management are largely antithetical, with directly opposed financial returns and social costs. For example: (a) (b) (c) Pay an indirect bribe, but maintain the sales volume of imported goods through prompt delivery. Cause air or water pollution, but avoid the costs of installing and operating pollution-control equipment. Design a slightly unsafe product, but reduce the material and labour costs of manufacture.

Like the dichotomous framework, the antithetical model for outcome evaluation presents ethical issues in sharp focus but it does not accurately portray the managerial dilemma. Social benefits and costs as well as financial revenues and expenses are associated with almost all of the alternatives in ethical choices.

ACTIVITY 3.1
You are the owner of an organisation. You intend to develop a sophisticated product to cater for the societys needs. In order to be able to produce the product, your organisation needs to conduct several experiments which will pollute the air quality. How do you deal with this situation using the ethical choice of multiple alternatives?

3.2.4

Most Ethical Decisions Have Uncertain Consequences

It is commonly thought that ethical issues in management are free of risk and doubt, with a known outcome for each alternative. For example: (a) (b) (c) Pay the bribe, and receive the imported goods promptly. Invest in pollution-control equipment, and emissions will be reduced. Produce an absolutely safe product at an additional cost of Z dollars per unit.

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A deterministic model that is, one without probabilities simplifies the process of analysis, but it does not accurately describe the managerial dilemma. It is not clear what consequences would follow from the alternatives considered to avoid paying indirect bribes to customs officials. Neither is it clear what consequences will follow from most ethical choices.

3.2.5

Most Ethical Decisions Have Personal Implications

Most ethical decisions have personal implications. It is commonly thought that ethical issues in management are largely impersonal, divorced from the lives and careers of the managers. Many people believe that prima facie ethical decisions in a given operation may reduce the profits of the company but not the executives salaries or their opportunities for promotion. Managerial controls, however, are designed to record financial results of the operations, not the ethical quality of the decisions that led to those results. Most incentive systems are based upon these controls. For example: (a) Maintain the dollar sales of imported goods at expected levels, and despite slightly increased expenses for indirect bribes, the quarterly review will be pleasant and remunerative. Delay the installation of pollution-control equipment, and the return on invested capital will be close to the planned percentage.

(b)

An impersonal model certainly simplifies the process of decision on ethical issues, but it does not accurately describe the managerial dilemma. Individual benefits and costs, as well as financial and social benefits and costs, are associated with most of the alternatives in ethical decisions. You have just read the characteristics of Ethical Problems in Management. Before we proceed to the next section, attempt the exercises below in order to enhance your understanding.

EXERCISE 3.1
1. 2. How do ethical problems arise in management? Using your own example, how would you overcome an ethical problem? Elaborate on some features of ethical problems in management.

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3.3

EXAMPLES OF ETHICAL PROBLEMS IN MANAGEMENT

What are some examples of ethical problems? Let us look at a few. Bear in mind that the moral content of each problem differs, and that each of us will differ in our view of the moral severity of that content. Moral standards differ between individuals because the ethical systems of belief, the values or priorities, the convictions that people believe are truly important, and upon which their moral standards are based also differ. These beliefs depend upon each persons family background, cultural heritage, educational experience and other factors. Difference in ethical beliefs are not important at this stage of discussion. What is more important at this stage is to recognise that they can affect people adversely. They may even hurt or harm others in ways beyond the control of those holding the ethical beliefs. The condition of hurt or harm to others in ways beyond their control is the essential element in the ethical dilemma of management. That condition is present in all the examples outlined below. (a) Pricing Level Price, it would seem, should be a purely economic decision based upon cost and demand. Yet the pricing level selected can have harmful effects on some customers. In banking, for example, under the combined impact of deregulation by the government and competition from other financialservice firms, it has become common to pay fairly high rates of interest on customer deposits. However, the benefits of those rates go primarily to the customers with large bank balances. To offset the increased interest that must be paid to attract larger deposits and to reflect the actual costs of service, most banks have raised the fees they charge to smaller customers. Advertising Messages Truth in advertising is a complex issue. (i) A rigidly truthful television or magazine advertisement, every statement of which is supported by a reference to a scientific study, would be incredibly dull and probably ineffective. A totally untruthful television or magazine advertisement, with wildly exaggerated claims, would be illegal and probably equally ineffective.

(b)

(ii)

Varying degrees of truthfulness and deception lie between these two extremes. The problem is drawing a line along that spectrum.

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(c)

Product Promotions Promotion is one form of advertising; another is the use of free gifts and price rebates to attract customers. Under the impact of deregulation, airlines have developed product promotion in the form of additional flights and vacation lodgings for frequent flyer passengers who exceed a given mileage on a particular airline each year. Most frequent flyers travel on business, yet the benefits are given to the traveller who decides which airline to use, not to the company that generates the volume of traffic and pays for the tickets. The cost of these benefits is borne by the non-business traveller, who generally flies much less often.

(d)

Working Conditions The working conditions for many manual and clerical employees are less than ideal. Temperature, humidity or noise levels may be too high; ventilation and lighting may be inadequate, and fumes and dust are still found in some workplaces. The most harmful of these conditions along with the obvious safety hazards, have been outlawed by state and federal laws, but there are still many opportunities to improve working conditions for hourly employees. Customer Service Declining product quality has been a problem in many industries for a number of years. Declining product quality in the automobile industry results in lemons. It means new cars with major defects that can create substantial hardships for buyers who cannot depend upon these cars for transportation to and from work or medical appointments, shopping trips, family gatherings, and so on. Workforce Reductions It has become common for many large companies to reduce their size and overhead costs in order to create a lean and mean management. These downsizing operations are generally a response to an increase in competitive pressures, but there is an obvious human cost to the people forced to leave. Environmental Pollution Improper disposal of toxic wastes is clearly illegal, yet some companies continue to dump chemicals. This, despite possible harm to the environment and probable conflict with the law, still widely occurs.

(e)

(f)

(g)

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(h)

Community Relations The major employer within a local community has substantial economic power, particularly if the employer has plants in other locations and can move work and employment between them. This economic power is often used in pressing for tax reductions, which can have an obvious impact on residents of the community by increasing their taxes or decreasing their services. Supplier Relations Larger manufacturing firms have economic power within the communities in which they operate, and against small suppliers from which they purchase materials, parts and supplies. Economic power is a difficult concept to define but easy to recognise.

(i)

3.4

ANALYSIS OF ETHICAL PROBLEMS IN MANAGEMENT

How do we decide on these and other ethical problems? You may regard some of the examples cited in the previous section as simple instances of practical management. Meanwhile, you may regard some other examples as outrageous abuse of power and position. Ethical decisions are much more difficult to make when a person is directly involved in the situation. Ethical decisions are not simple choices between right and wrong. They are complex judgements on the balance between the economic and social performances of an organisation. There has to be a balance between economic and social performances. How do we reach this balance? We can create the balance through these three relevant methods of analysis which resolve ethical dilemmas in management (Figure 3.2).

Figure 3.2: Analysis methods of ethical problems

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By using the example of work force reductions and plant closures, let us see how the three methods are applied to create a balance between economic and social performances as shown in Table 3.1.
Table 3.1: Analysis Methods of Ethical Problems Methods Economic Analysis Explanation We can look at many of the ethical problems from the view point of microeconomic approach; relying on impersonal market forces to make the decision between economic and social performances. It is utterly unpleasant for workers to lose their jobs when work force reductions and plant closures happen. Yet, there is a labour market, and these workers will be employed again, provided they are willing to adjust their wage demands to market conditions. The underlying belief is that a market economy has a limited number of resources. When consumers are supplied with highest-quality goods at lowest possible costs, these resources are being used as efficiently and effectively as possible. Legal Analysis We can also look at the ethical problems through the framework of legal approach; relying on impersonal social forces to decide between right and wrong. Work force reductions and plant closures are unpleasant, but society has never felt they are so harmful to the people involved that a law prohibiting them is necessary. Should they become a major problem, a law can be passed to deal with the situation. The underlying belief here is that a democratic society can establish its own rules. If people and organisations follow these rules, members of that society will be treated as justly as possible. Ethical Analysis Lastly, it is possible for us to look at ethical problems using the structure of normative philosophy; relying on basic principles to decide between right and wrong. We can compute the greatest good for the greatest number and decide on that basis when work force reductions and plant closures happen. The underlying belief here is that if all the rational men and women in a society acted on the same principles of either beneficiency or consistency, members of that society would be treated as fairly as possible.

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SELF-CHECK 3.2 What are the three methods used for analysing ethical problems in management? Explain briefly on each method of analysing.

The above three methods of analysis have been proposed to resolve ethical dilemmas in management. Now, let us try to apply what you have learnt in this section by answering the following questions.

EXERCISE 3.2
1. 2. What are the available mechanisms for analysing ethical problems in management? List some of the ethical problems in management.

3.5

ETHICS IN ISLAM

It is essential to not look at ethics in one single perspective but also view it from another different perspective. So, let us look at what Islam has to say about ethics. In attempting to expound the major aspects of ethical thought in Islam, two possible methods are used: A historical or horizontal method which simply follows the chronological line of development, or An analytical or schematic method which deals with major ethical themes vertically

People sometimes question whether there is such a thing as Islamic ethics. They are obviously puzzled by the legalism and ritualism of the religious and institutional life of Muslims. They also wonder why the contribution of the Muslim authors to the issue is insufficient when compared to their contributions in literary, linguistic, philosophical, historical, theological and scientific subjects. Actually, there is a modest attempt to exhibit the ethical material in Islamic thought as objectively as possible.

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3.5.1

A Universal Message

The holistic approach of Islam is evident in its three core tenets as illustrated in Figure 3.3 below.

Figure 3.3: The holistic approach of Islam

Due to these tenets, Islam is deemed as universal and timeless. As such, it applies to all people in all places. Islam is not a new religion but the continuation of divine revelations from Prophet Abraham to Prophet Muhammad s.a.w, who was the last prophet assigned to the human being. The Quran explicitly states that Islam is the continuation and conclusion of the Creators religion given to mankind.

3.5.2

The Syariah

Before we move on to discuss on the ethical aspects of Islam, let us look at what Syariah means.

Syariah is the law of Islam based on the Quran. Probably the most encompassing and most universal ethical prescription of the Syariah is contained in one of the verses of the Quran which requires a Muslim, at all times and in all circumstances, to act in what can be translated from Arabic as a decent and benevolent way, and to refrain from wrongdoing.
This overall guiding conception is similar to Aristotles admonishment as shown below. Do not harm others and deal with others as one would wish to have others deal with oneself.

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The basic message of the Creator is found in all His religious revelations to humankind as shown below: (a) The Christian rule; the well-known Golden Rule of the New Testament:

Do unto others as you would have them do unto you.

(b) The Islamic rule:

No one of you is a believer until he desires for his brother that which he desires for himself.
(c) The Buddhism rule:

Hurt not others in ways that you yourself would find hurtful.
(d) The Judaic rule:

What is hateful to you, do not do to your fellow man. That is the entire law; all the rest is commentary.
Beyond this fundamental teaching which is shared with other great ethical traditions, the Syariah regulates almost every aspect of relationships, ranging from that which is between the Creator and humankind, to intimate matters of interpersonal relations. As the Syariah is a comprehensive legal system, rules of interpretation achieve a prominent position, and techniques of legal interpretation based on the different schools of jurisprudence are outstanding. A variety of contrasting positions and schools of thought has developed among Muslims over the centuries.

3.5.3

Commerce and Business

Commerce and business have remained central subjects in the Islamic ethical tradition. For a time, Islam was spread by means of the sword. Otherwise, its spread has essentially been through individual proselytisation, more particularly as a result of trade and commerce. Renowned for their tradition of trade and commerce, Arabs who became Muslims continued that tradition. It was due to their superiority in navigation,

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shipbuilding, astronomy and scientific measuring devices that Arab and Muslim trade and commerce developed and spread across the world. Furthermore, the Muslim world, during its first few centuries, was at the crossroads of the ancient trade routes from the Mediterranean, the Arabian Gulf, East Africa, the Indian subcontinent and all the way to China. Due to this trading link, a significant number of Arab words relating to trade and commerce have found their way into the Western languages. However, Muslim traders could not have grown their faith and trade if it were not for their strong attachment to what we now know as business ethics.

3.5.4

Teachings about Economic Practices

In the absence of unified legislative and judicial authorities among Muslims, practices differ and enforcement is practically non-existent. This diversity among Muslims has generated different customs, behaviours and expectations in business relations. Generally, however, Islamic economic and business conceptions are very much the equivalent of a free-enterprise, private-sector market economy approach, though they do not exclude the right of society to impose limitations for the greater benefit of the community. The Syariah recognises the right to private property but retains the communitys right to what may be termed as eminent domain or collective interests. In fact, one of the important ethical considerations in property is that its use is permissible, but abuse and waste are forbidden. In a Hadith, the prophet says that nine-tenths of all Gods bounty, which includes income, is derived from commerce. To a large extent, this explains the drive of Muslims over the centuries to meet their economic needs through commerce and to consider profits as not only legitimate but a desirable way of engaging in any kind of industry. Making profits is very much part of the activities of Muslims, provided the profits are obtained in a permissible way. However, profits cannot overshadow duties of brotherhood, solidarity and charity. They are, of course, subject to zakat, which is a tax imposed upon Muslims. The Syariah divides rules of conduct between halal and haram, meaning essentially that which is permissible and that which is not. The distinction between halal and haram applies to legitimate and illegitimate. Illegitimate profits are exemplified by riba, which is to a large extent the equivalent of usury. However, it also has come to mean the collection of a predetermined fixed amount of interest.

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A Muslim is allowed to earn profit only from his work or, if his capital is involved, whenever he shares the risk of loss. Consequently, gambling is prohibited, as it is a sin to profit from the need or misery of others.

3.5.5

The Obligations of Piety

The fulfilment of obligations in good faith and in accordance with the principles of business ethics is not only required but inseparable from the general obligation of piety as can be seen in the following verse. In the Quran, Chapter 2, Verse 177, it says that:

It is not righteousness that you turn your faces towards East or West; but it is righteousness to believe in God and the last day, and the angels and the Book, and the messengers; to spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves; to be steadfast in prayer, and practise regular charity; to fulfil the contracts which you have made.
A contract is the most important bond that exists between Muslims, as well as between Muslims and non-Muslims as shown in the following prophets Hadith:

The buyer and the seller have the option (of cancelling the contract), as long as they have not separated; then, if they both speak the truth and make it manifest, their transaction shall be blessed, but if they conceal and tell lies, the blessing of their transaction shall be obliterated.
Translation: Any defect in the thing sold must be made obvious. In the case of defects being hidden, the contract or agreement made will be void. Source: http://aaiil.org/text/had/manhad/ch22had.shtml The prophet goes on to say:

The truthfullest, honest merchant is with the prophet and the truthful ones and the martyrs.
Thus, the fulfillment of obligations in good faith and in accordance with principles of business ethics is not only required but inseparable from the general obligation of piety. Fulfillment of obligations also includes the notion of rectitude, which includes not taking undue advantage of another. Fairness is

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deemed both a means and an end, irrespective of the practical realities. Honesty is not only virtue but an expected trait for every Muslim.

3.5.6

Conclusion

Those qualities and characteristics mentioned above are particularly significant because the Prophet Mohammad was a merchant whose life is an example to follow. Fifteen centuries ago, Islam was a spiritual, social and legal revolution. Its potential for effecting progress in a positive way remains unchanged. This is essentially the belief of enlightened liberal Muslims who do not have a regressive view of religion and history. Indeed, at the height of its civilisation, between the seventh and twelfth centuries, Islam was neither repressive nor regressive. On the contrary, it was a progressive, humanistic and legalistic force for reform and justice. Muslim scholars of all backgrounds do not consider Islam to be an evolving religion, but rather a religion and legal system whose application to all times necessarily requires evolution. Indeed, the provisions of the Quran are such that, by their disciplined interpretation, Islam can provide solutions to contemporary economic, ethical and social problems in Muslim societies.

EXERCISE 3.3
1. How would you find a balance between economic and social performance when faced with an ethical dilemma. Cite your own example and apply the analytical tools for analysis from the literature that you have studied. Ethical problems in management are complex because of the extended consequences, multiple alternatives, mixed outcomes, uncertain occurrence and personal implications. Discuss.

2.

Most ethical decisions have extended consequences, multiple alternatives, mixed outcomes, uncertain consequences and personal implications. Moral standards differ between individuals because the ethical systems of belief, the values or priorities, the convictions that people believe are truly important, and upon which their moral standards are based also differ.

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There are three forms of analysis that can assist us in reaching the proper balance between economic and social performances. They are: Economic (based upon impersonal market forces); Legal (based upon impersonal social forces); and Ethical (based upon personal principles and values).

The main guiding principles in Islamic ethical issues are found in the Syariah.

Syariah regulates almost every aspect of relationships, ranging from that

which is between the Creator and humankind, to intimate matters of interpersonal relations.

Economic analysis Ethical analysis Ethical problems Extended consequences Legal analysis

Mixed outcomes Multiple alternatives Personal implications

Syariah
Uncertain consequences