Explain the need for ethical behavior by a firm.
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Business ethics can be defined as "the study of the standards of business behavior which promote human welfare and the good." Businesses that buy and sell products or services impact providers, consumers, stockholders, and many other interest groups directly. Indirectly, they affect all of society through the economic activity involved in paying wages and taxes, investing in infrastructure and resources, and in a multitude of other ways.
While business firms need to be conscious of expenses and need to make decisions that support the goals of the company, those decisions also need to take into account the social ramifications of their actions. Companies that purchase raw materials without concern about taking care of the environment may exhaust the supplies of those materials. Companies that mistreat their laborers may be faced with strikes, boycotts by consumers, or legal action by governments when labor laws are being violated.
Lehman Brothers, a financial services firm, operated using leveraging in the housing market (primarily low-rated mortgage markets) to obtain funds to support its investments. When the housing markets began to contract in 2008, Lehman Brothers did not have the assets to support their investments. Clearly, the ethics of their investment philosophy was highly questionable. The firm's filing for Chapter 11 bankruptcy protection on September 11, 2008 is considered to have played a major role in causing the international global financial crisis of recent years.
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