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Topic

X" "

Nature of
Ethics in
Modern
Business

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1."

Explain some ethical problems in management;

2."

Elaborate on the five characteristics of ethical problems in


management;

3."

Explain three methods


management; and

4."

Discuss ethics from the Islamic perspective.

for

analysing

ethical

problems

in

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

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3.1

ETHICAL PROBLEMS AS MANAGERIAL


PROBLEMS

Ethical problems are managerial problems because they represent a conflict


between an organisations economic performance and 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 into that

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balance and consider various theoretical structures that may assist 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.

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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)"

Bribes change governmental processes.

(b)" Pollution affects environmental health.


(c)"

Unsafe products destroy lives.

There is little disagreement here, as most people recognise the extended


consequences of managerial actions. Disagreements, if any, usually arise from the
existence of multiple alternatives, mixed outcomes, uncertain consequences 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)"

Should a manager pay bribes or not?

(b)" Should a factory pollute the air or not?


(c)"

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)"

Pay an indirect bribe but maintain the sales volume of imported goods
through prompt delivery.

(b)" Cause air or water pollution but avoid the costs of installing and operating
pollution-control equipment.
(c)"

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 the alternatives in ethical choices.

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ACTIVITY 3.1"
You are the owner of an organisation. You intend to develop a
sophisticated product to cater to 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)"

Pay the bribe, and receive the imported goods promptly.

(b)" Invest in pollution-control equipment, and emissions will be reduced.


(c)"

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 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.

(b)" Delay the installation of pollution-control equipment, and the return on


invested capital will be close to the planned percentage.
An impersonal model simplifies the process of decision making 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 to enhance your
understanding.

EXERCISE 3.1
1."

How do ethical problems arise in management? Using your own


example, how would you overcome an ethical problem?

2."

List some features or characteristics of ethical problems in


management.

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3.3

TOPIC 3 NATURE OF ETHICS IN MODERN BUSINESS

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.

(b)" Advertising Messages


Truth in advertising is a complex issue. There are two situations which
minimise the effectiveness of advertising:
(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.

(ii)" A totally untruthful television or magazine advertisement, with


wildly exaggerated claims, would be illegal and probably equally
ineffective.
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 gifts and price
rebates to attract customers. For example, 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.
(e)"

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.

(f)"

Workforce Reductions
It has become common for many large companies to reduce their size and
overhead costs 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.

(g)" 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.

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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.
(i)"

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.

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: Methods to analyse ethical problems in management

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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: Analytical Methods of Reasoning on Ethical Problems
Methods

Explanation

Economic
Analysis

We can look at many ethical problems from the viewpoint of the


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. Workforce 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 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 workforce reductions and plant
closures happen.
The underlying belief is that if all the rational men and women in a
society acted on the same principles of beneficiency or consistency,
members of that society would be treated as fairly as possible.

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

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EXERCISE 3.2
1."

What are the available mechanisms for analysing ethical


problems in management? Briefly explain each of method of
analysing.

2."

List some ethical problems in management.

"

3.5

ETHICS IN ISLAM

It is essential to not look at ethics from a single perspective but also view it from
different perspectives. 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:
x" A historical or horizontal method which simply follows the chronological line
of development, or
x" 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 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

Universal Message

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

Figure 3.3: 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" Syariah
Before we move on to discuss 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)"

Christian rule Golden Rule of the New Testament:

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


(b)" Islamic rule:

None of you is a believer until he desires for his brother that which he
desires for himself.
(c)"

Buddhism rule:

Hurt not others in ways that you yourself would find hurtful.
(d)" 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 Islamic ethical


tradition. Islamic teachings 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,
shipbuilding, astronomy and scientific measuring devices that Arab and Muslim
trade and commerce developed and spread across the world.

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Furthermore, the Muslim world, during its first few centuries, was at the
crossroads of 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 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 said 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 a part of the activities of Muslims,
provided the profits are obtained in a permissible way. However, profits cannot
overshadow the 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.
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.

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3.5.5

TOPIC 3 NATURE OF ETHICS IN MODERN BUSINESS

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 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 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 went on to say the following:

The truthfullest, honest merchant is with the prophet and the


truthful ones and the martyrs.
Thus, the fulfilment 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. Fulfilment of obligations also includes the notion of
rectitude, which includes not taking undue advantage of other people. Fairness is
deemed both a means and an end, irrespective of practical realities. Honesty is
not only a virtue but an expected trait for every Muslim.

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3.5.6

Conclusion

Those qualities and characteristics mentioned above are particularly significant


because Prophet Muhammad was a merchant whose life is an example to follow.
Fifteen centuries ago, Islam brought about 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 which requires evolution in its
application. 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.

2."

Ethical problems in management are complex because of the


extended consequences, multiple alternatives, mixed outcomes,
uncertain consequences and personal implications. Discuss.

"
x" Most ethical decisions have extended consequences, multiple alternatives,
mixed outcomes, uncertain consequences and personal implications.
x" 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.
x" 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);

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Legal (based upon impersonal social forces); and

Ethical (based upon personal principles and values).

x" The main guiding principles in Islamic ethical issues are found in the syariah.
x" 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

Mixed outcomes

Ethical analysis

Multiple alternatives

Ethical problems

Personal implications

Extended consequences

Syariah

Legal analysis

Uncertain consequences

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