The Importance of Business Ethics

1. The Importance of Business Ethics Ned C. Hill, Dean W. Steve Albrecht, Associate Dean Marriott School of Management Brigham Young University 2006

2. Outline • What is ethical behavior and why is it important to business? • The ethical value proposition • Laws, policies and ethics • Evidence that good ethics means good business • Is ethical behavior improving? • Teaching ethics—the Ethics Maturity Model

3. Ethical Behavior • Conducting one’s life in complete accord with a firmly held set of values and principles • These principles may be derived from religious beliefs, philosophical understanding, etc. • Application should be in all areas of one’s life: personal, family, business, social, etc. • “Integrity” is the consistent application of ethical behavior.

4. Foundations of Ethical Behavior • Treat others as you would be treated • Respect • Honesty • Trust

5. Is There a Universal Ethical Standard? Yes—In Principle Are you comfortable with a world with your standards? Christian principle: The Golden Rule “Do unto others as you would have them do unto you.” Luke 6:29-38 “Thou shalt love thy neighbor as thyself.” Luke 10:27

6. Taught in All Cultures Judaism: What you hate, do not do to anyone. Islam: No one of you is a believer until he loves for his brother what he loves for himself. Hinduism: Do nothing to thy neighbor which thou wouldst not have him do to thee. Sikhism: Treat others as you would be treated yourself. Buddhism: Hurt not others with that which pains thyself. Confucius: What you do not want done to yourself, do not do to others. Aristotle: We should behave to our friends as we wish our friends to behave to us. Plato: May I do to others as I would that they should do unto me. TREAT PEOPLE THE WAY YOU WANT THEM TO TREAT YOU

7. Security Regulators Lawyers Delays Testing Interest Etc, etc! Duplication Bad Ethics Increases Transaction Costs Party A Party B Trade

8. Societal Costs of Unethical Behavior • Law enforcement and other security personnel • Physical protection (locks, electronic security, fences, vaults, etc.) • A substantial portion of attorney and court system costs • Some welfare costs • Costs of collecting taxes • Wasted/misused investment funds • A substantial portion of accounting/auditing costs • A large fraction of costs for regulators and examiners • Some marketing/advertising costs • Costs for institutions like better business bureaus, consumer protection agencies • Some costs of bankruptcy • Lack of investment from outside investors, tourists

9. Business Costs of Unethical Behavior • Loss of physical assets • Increased costs of security • Loss of customers—especially those who value ethics • Loss of employees—especially the more ethical • Loss of reputation • Increased legal costs • Higher costs of debt • Loss of investor confidence (lower stock price, difficulty in raising funds, problems with lenders) • Regulatory intrusion • Costs of bankruptcy

10. What is the Cost of Lack of Integrity in the US? • Employee fraud $400 B • Time theft $230 B • Industrial espionage $200 B • Counterfeiting $200 B • Employee dishonesty $120 B • Identity theft $ 50 B (Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)

11. Ethical Behavior Tied to Set of Values Professional Standards Levels of Constraints on Behavior Legal Requirements

12. Ethical Issues Relating to Business • Honesty—communication and behavior consistent with facts • Disclosure of information • Promises/commitments • Laws and professional standards • Representation of others like shareholders (applies to board members) • Unfair competition • Refrain from bribes and excessive gifts (that sway judgment) • Avoid quid pro quo transaction • Comply with “anti-trust” laws (these relate to pricing, monopolistic practices) • Just compensation • Respect intellectual property (product piracy) • Treat employees fairly • Respecting rights of others • Treat others with fairness and respect regardless of age, religion, ethnic group, sex, economic status, etc., especially children, women, and subordinates • Respect the community you operate in by paying fair share of economic costs you create • Respect others and future generations by treating the environmentwell

13. Why Ethical Behavior Adds Value • Better information • Trust from investors • Lower costs for audits, controls, investigations • Better allocation of resources • Customers will be more loyal (RC Willey example) • Lower costs from suppliers (automotive company example) • Attracting and retaining better employees • Fair competition • Lowers cost of business in economy • Leads to better decision-making (do what’s best for firm, not one individual) • Improves competitive nature of a country’s economy

14. Why Ethical Behavior Adds Value • Just compensation • Creates a more vibrant, entrepreneurial economy • Attracts and retains better employees • Rights of others • Draws upon talents of wider set of individuals • Develops long-term respect from the community (Godfrey study) • Maintains the environment for long-term value to all (Costa Rica) • It’s the right thing to do!

15. Is There Evidence that Ethical Behavior Yields Increased Value? • Study of 2,100 firms with very strong, well-governed boards of directors outperformed overall market 15% vs. 12.5% in 2005 • Firms with high level of “democracy” outperformed “dictatorial” firms by 8% per year in the decade of the 1990’s. • Philanthropy: Firms that contribute a higher portion of their assets to the communities in which they reside fare better in an economic downturn.

16. How Important is Integrity in a Leader? • In a survey of 54,000 people Integrity was by far the number one attribute desired in a leader (Quoted in Stephen R. Covey’s preface to Business with Integrity, p. xx)

17. Short-Term vs. Long-Term • One party may gain temporary advantage by unethical behavior • Enron • Livedoor • Ghana Airways • But in the long-term, individuals, companies and society are hurt

18. Questionable State of Our Integrity Did You Cheat to Get Into Graduate School? “Yes” • 43% Liberal Arts • 52% Education • 63% Law and Medicine • 75% Business Source: Rutgers University survey of students

19. Questionable State of Our Integrity MBAs • 76% were willing to understate expenses that cut into their companies’ profits • Nearly all believe shareholder value is more important than customer service • Convicts in 11 minimum security prisons had higher scores on an ethical dilemma exam than MBAs

20. Questionable Integrity at Work • 76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months • 49% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust” KPMG 2000 Organizational Integrity Survey

21. Survey of Employees • Most (65%) don’t report ethical problems they observe • 96% feared being accused of not being a team player • 81% feared corrective action would not be taken anyway • 68% feared retribution from their supervisors Source: Society of Human Resource Management

22. Deterioration in Honesty over Time YearYear College students who cheated in H.S. 1940 (20%) 2002 (75-98%) Self-reported cheating 1983 (11%) 1993 (49%) Believe cheating is common 1940 (20%) 1997 (88%) Used cheat sheets 1969 (34%) 1989 (68%) Let others copy work 1969 (58%) 1989 (98%) Willing to lie to get job 2000 (28%) 2002 (39%) Students who had stolen 2000 (35%) 2002 (38%) (Based on several different ethics studies)

23. Another Study of Student Honesty • Responses 50,000 college students at 69 schools • 26% of business majors admitted to serious cheating on exams • 54% admitted to cheating on written assignments • Journalism majors were worse with 27% admitting to cheating on exams. • The most honest—students in the sciences (19% reported cheating on tests) • Author observes “cheating has increased since he began doing surveys 15 years ago” • He partly blames technology—makes it easier to cheat “Biz Majors Get an F for Honesty” by Donald McCabe published on February 6, 2006, by the Center for Academic Integrity

24. Will Our Ethics Improve?Survey of High School Students 2002 2001 • 74% (71%) cheated on an exam in the last year; 45% (45%) said they did it at least twice in the last year • 93% (92%) lied to their parents in the past year; 79% (79%) say they lied twice • 78% (78%) have lied to their teachers • 37% (27%) said they would lie to get a job • 38% (35%) took something from a store in the last year Josephson (2002)(2001)

25. Why is Dishonesty Increasing? Modeling Labeling Honesty

26. Bad Modeling/Lack of Good Modeling Makes up our news— more explicit than ever Focus of TV/movies Dishonest “leaders” Sports, business, entertainment “heroes” Good models are rare Lack of Positive Labeling Home….average family spends 10 hours less time together a week than 20 years ago Vocabulary of kindergarten children Schools Churches Why Is Dishonesty Increasing?

27. Confession of Fraudulent Executive • Even when put in jail, I didn’t feel like a “criminal.” I somehow felt we were different and I started noticing every white collar guy I did talk to began every sentence with: “all I did was.” Once you’re in jail and you start feeling the animosity the other prisoners have toward white-collar guys, where they say to you, “you’re no different than us,” “you’re just a thief,” “you use other words.” Even the word “embezzlement” is a nice word…they said “you’re a thief, you lie to people and take their money, that’s what I do to” and that hit me like a ton of bricks. Mike Morze, ZZZZ Best

28. Can Ethical Values be Taught?Level 1: The Foundation Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

29. Personal Ethical Understanding • Concepts of right and wrong, fair play, respect for rights of others, honesty, personal integrity • Best learned in the home at an early age—and follow-up is needed throughout life • Institutions (churches, schools, etc.) can help • Difficult to “back fill” in adulthood

30. Level 2: Application to Business Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

31. Application of Ethics to Business Situations • Fraudulent practices, misleading advertising, unfairness • Can be taught in management education and organizations—provided students have a personal understanding of ethics • Taught by modeling (cases and personal example are helpful) • Can be reinforced by policies, codes of ethics, training

32. Application of Ethics to Business Situations • Businesses can teach through proper modeling: “Companies also have to further strengthen ethics management and social responsibility activities to improve their public image’’ Korean Commerce-Industry-Energy Minister Lee Hee-beom

33. Level 3: Ethical Courage Ethical Courage Willingness to Pay the Price for Ethics Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

34. Ethical Courage • It is not sufficient to simply understand ethical principles • One must have the courage to pay a price for being ethical • Examples can be helpful—case studies showing people willing to stand up for ethical principles • Again, it helps to have “practiced” ethical behavior over many years—especially in small things

35. Level 4: Ethical Leadership Ethical Leadership Helping Others to be Ethical Ethical Courage Willingness to Pay the Price for Ethics Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others

36. Ethical Leadership • The ability and willingness to encourage others to behave ethically • Can be taught through cases, problem solving, study of successful organizations • Includes • Developing an organizational climate that fosters ethical behavior • Structuring policies that encourages ethics • Behaving ethically while facing the pressures of leadership

37. The Importance of Ethical Leadership Swing Group Could Go Either Way Honest Employees Will be Honest Always Dishonest Employees Policies Won’t Help Much Ethical Leadership will significantly impact an organization since the vast majority, in this view, can be influenced to behave ethically.

38. Importance of Ethical Leadership Swing Group Could Go Either Way Honest Employees Will be Honest Always Dishonest Employees Policies Won’t Help Much Strong Ethical Leadership—induces the middle group to behave as if they were the honest employees.

39. Importance of Ethical Leadership Swing Group Could Go Either Way Honest Employees Will be Honest Always Dishonest Employees Policies Won’t Help Much Weak Ethical Leadership—permits the middle group to behave as if they were the dishonest employees.

40. Which Way Will Your Organization Swing?

41. “Good Ethics Means Good Business”

42. Questions?