Ethical Responsibilities of Business
This article explores the ethical responsibilities of business. Business ethics have become a hot-button issue in the wake of the corporate scandals that were exposed in the late 1990s through the early 2000s. Businesses do not exist in a vacuum, but rather they play a vital role in sustaining economic growth, providing jobs, giving employees access to health care, and more — businesses can and do exist for the betterment of our society. However, people run businesses, and human nature sometimes manifests itself in unethical conduct. The way toward maintaining ethical business standards is by examining the moral character of business people, employees, and consumers and adhering to the basic moral codes of trustworthiness, respect, responsibility, fairness, caring, and citizenship. In short, the ethical responsibility of business is to be a "good corporate citizen," and aspiring to moral codes is a responsibility that we all share.
Keywords Accounts Receivable; Business Ethics; Business Model; Compliance; Compliance Procedures; Corporate Culture; Financial Services Agency; Inventory Accounts; Mission Statement; Moral Conduct; Predatory Lending; Regulatory Agencies; Sarbanes-Oxley Act (SOX); Social Responsibility
Law: Ethical Responsibilities of Business
Whether it was fraudulent accounting practices of publicly traded companies, front running of stocks and investments by mutual funds, the raiding of pension funds by businesses heading for bankruptcy, manipulative sales and lending practices by multinational banks, or the predatory lending practices of consumer finance companies, recent decades have seen an increase in corporate malfeasance. These episodes are not limited to a particular industry, and a similar strain runs through all of these events: a lack of business ethics. However, there is a growing business ethics movement that has been ushered in through increased regulatory scrutiny by state and federal government agencies, class action lawsuits, and the initiatives of consumer advocates and not-for-profit organizations dedicated to the social responsibility of business.
Business ethics may seem like an ambiguous or even counterintuitive term. After all, the primary objective and responsibility of any business is to make profits. There are times, however, when the means employed to make profits conflict with a society's moral codes. Essentially, business ethics are rules geared toward establishing and maintaining trustworthiness in a business or commercial setting. While it may be hard to identify, there is a growing business ethics movement in the wake of the aforementioned business scandals. Moreover, state and federal regulatory agencies have stepped up their monitoring activities across multiple lines of business.
For example, the accounting scandals that ultimately led to the much-publicized demise of Enron Corp. (and the loss of thousands of jobs as well as the retirement funds of many former employees), and the prosecution of Tyco's former chief executive eventually prompted the United States Congress to enact the 2002 Sarbanes-Oxley Act. In 2004, the Financial Services Agency of Japan ordered a multinational bank to close one of its foreign private banking divisions after an investigation revealed manipulative sales and lending practices. Later, a major New York–based commercial banking institution was heavily fined for laundering billions of dollars for criminal enterprises emanating from Russia, and this led to the bank's eventual acquisition by a larger banking entity. At the state level, following the subprime mortgage crisis of 2007–2008, a number of regulatory agencies responsible for overseeing consumer loans and mortgage lending were empowered by state legislatures to crack down on predatory lending practices, and quite a few consumer finance companies and multi-state mortgage banks were held accountable for charging excessive points and fees for unsecured consumer loans as well as loans collateralized by residential dwellings.
Not only have the actions by regulatory agencies impacted business practices, regulatory scrutiny has opened the door to class action lawsuits. Whether these were brought by firms representing shareholders who claim they were defrauded by accounting practices that did not truly represent the value of a company, or other actions on behalf of consumers who were harmed by so-called predatory lending practices of consumer finance companies, such lawsuits have resulted in multi-million dollar settlements and these, in turn, have had a significant impact on profits. In some cases, regulatory oversight and legal actions were prompted by the initiatives of consumer advocates and not-for-profit organizations. In short, concerned citizens at the grassroots level are paying close attention to how companies operate and holding them accountable for their actions.
While the Enron and Tyco scandals were front-page news, these prosecutions are not the norm. At times, the potential financial benefit from behavior that is short of ethical may seem to be worth the risk for some decision makers. However, in the long run, good ethics is good for business, as a company's professional reputation can have a positive impact on its relationships with customers and vendors, and enable it to develop strategic alliances with other similar businesses. Professional reputation is a matter of perception, and society's perceptions closely link business performance to a company's social, environmental, and ethical conduct. Consumers have become increasingly concerned that businesses should be responsible not only for ensuring that they provide quality products, but also for treating employees fairly. In light of the increased regulatory scrutiny, legal actions, and consumer advocacy, corporate social responsibility has become a growing concern for many business entities.
In order to enhance corporate social responsibility, companies are increasingly concerned that they have efficient compliance procedures in place to ensure that their business practices adhere to the regulatory guidelines of their particular business. Having a clearly defined compliance program enables a company to integrate compliance into its business model. By doing so, they have awareness of the potential regulatory issues that can arise in the event of an audit by a regulatory agency. This knowledge can empower an organization to take proactive corrective steps prior to the commencement of an adverse regulatory action. Moreover, having effective compliance systems in place will create positive working relationships with regulatory agencies.
The goal of regulatory agencies is not to be an impediment to business. After all, if their goal were merely to put companies out of business, there would be no business to regulate, and thus no need for regulatory agencies. Thus, companies and governmental agencies have a symbiotic relationship. By realizing this, business people will understand that there is no need for an adversarial posture with the agency that regulates its business and that establishing harmonious relationships with regulators will be good for business in the long run.
Enforcing an Ethical Culture
The challenge for many business enterprises goes beyond legal and compliance initiatives. Business owners and executives need to raise the bar and to consider whether their business decisions are ethical. This requires decision makers to develop and encourage a culture of ethics and compliance, and this is a daunting task. There are numerous pressures confronting business in addition to increasing sales, maintaining competitive advantage and market shares, and being profitable. Mergers and acquisitions, downsizing, and outsourcing have dramatically changed the shape of corporations. In many cases they do not have the luxury of time to develop a "corporate culture," as their personnel goes through greater turnover today than in previous eras.
Despite these pressures and considerations, there is still a need for companies to develop a code of ethics that is communicated to all their employees. While ethical behavior should start at the top, with owners, executives, and managers adhering to moral standards, developing an ethical culture also requires having ethical employees. As we have seen, in order to adhere to regulatory guidelines and maintain its professional reputation, a company needs to have effective compliance procedures and internal controls in place. The goal is to create a code of ethics. In many instances, a corporate code of conduct is a written policy, and is sometimes incorporated into a company's mission statement.
The Mission Statement
A mission statement defines the purpose of an organization, its reason for existing, as well as the goals of employees who work for the...
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