business-ethics

What Is Business Ethics And Why It Matters In Business

Business ethics is a form of professional or applied ethics that examines the moral and ethical problems that arise in a business environment. The concept of business ethics arose during the 1960s as corporations became aware of consumer concerns regarding the environment, social causes, and corporate responsibility. Business ethics is the study of how a business should act during ethical dilemmas or otherwise controversial situations.

Understanding business ethics

Business ethics determine how a business should behave in a difficult situation, defining the standards for morally right and morally wrong conduct. Some of these situations may be related to corporate governance, discrimination, insider trading, corporate social responsibility, and bribery. While existing legislation in these areas dictates acceptable conduct to some degree, business ethics enhance the law by outlining acceptable behaviors beyond government control.

Corporations establish business ethics for a few very important reasons. For one, they are used to promote integrity amongst employees which has subsequent implications for company culture. Business ethics also help the organization manage conflict and gain trust from key stakeholders such as investors and customers. 

Seven business ethics types

There are many business ethics types, depending on the nature of the organization and the industry it operates in. We have listed seven of the most common below:

Personal responsibility

Every employee in an organization holds certain beliefs around matters such as honesty, the avoidance of criminal acts, and a willingness to perform accepted duties.

Corporate responsibility

Businesses also have responsibilities to their employees, clients, customers, and in some cases, the board of directors. These responsibilities may be contractual or legal in nature, or they may involve the business promising to operate fairly and to treat its people with respect. 

Loyalty

The employee should be loyal to their colleagues, managers, and the organization as a whole by speaking positively in public and addressing contentious issues in private. Conversely, the organization should remain loyal to its customers to ensure a good public reputation.

Respect

Respect determines how the business treats its clients, customers, and employees. Respect also determines the way employees treat each other and is characterized by collaboration, mutual understanding, and appropriate conflict resolution.

Trustworthiness

Essentially, this means employees and businesses do what they say they will do. Trustworthiness is associated with honesty, transparency, and reliability. These traits are particularly important in businesses where money, data, contractual obligations, and other confidential information must be held in trust.

Community and environmental responsibility

These business ethics are top of mind for most modern businesses, who must look for ways to give back to local communities and develop strategies to minimize their environmental impact.

Fairness

A business that exemplifies fairness applies the same standards to all employees regardless of rank or seniority level. In other words, the CEO of a company and an entry-level janitor are held in the same esteem. The business must also treat its customers with similar fairness by making its goods and services available on fair and equal terms. 

Key takeaways:

  • Business ethics is the study of how a business should act during ethical dilemmas or otherwise controversial situations. The study arose during the 1960s in response to increasing discourse regarding environmental issues, social causes, and corporate responsibility.
  • Business ethics complement existing legislation by providing a framework for acceptable behavior that is beyond governmental influence. 
  • The specific business ethics an organization adopts will depend on its industry and culture to some degree. However, every company should adopt ethics related to personal responsibility, corporate responsibility, loyalty, respect, trustworthiness, fairness, community, and environmental responsibility. 

Connected Business Concepts

First-Principles Thinking

first-principles-thinking
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.

Ladder Of Inference

ladder-of-inference
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.

Six Thinking Hats Model

six-thinking-hats-model
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.

Second-Order Thinking

second-order-thinking
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

lateral-thinking
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

moonshot-thinking
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

biases
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Bounded Rationality

bounded-rationality
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Dunning-Kruger Effect

dunning-kruger-effect
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

occams-razor
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

mandela-effect
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

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