Define Business Ethics

At Applied Corporate Governance™ we have spent many years considering and debating how to define business ethics. One of our favourite – and one of the shortest – definitions is, to quote Lord Moulton, “obedience to the unenforceable”. Think about that for a while!

We believe a short and simple definition does not do the issue justice, but one is necessary to crystallise what is otherwise an ambiguous, intangible subject. So we would define business ethics as:

The application of a moral code of conduct to the strategic and operational management of a business.

Business ethics and therefore business morality generally result from an individual’s own moral standards in the context of the political and cultural environment in which the organisation is operating. There is a whole separate debate, of course, on which macro-economic system works best to deliver good corporate ethics and governance – especially currently after what some would argue as a failure in the capitalist model (regardless of your views it is clearly undergoing the most significant trauma for nearly a century). That is beyond the scope of this page, though, where we focus on the above definition, extrapolating on the various elements implied therein and opening up the debate to you, the visitor.

Related: the importance of business ethics.

Three levels of business ethics

In our mission to define business ethics, Johnson and Scholes provide a useful way of classifying the diverse elements therein:

• the macro level: the role of business in the national and international orgnisation of society the relative virtues of different political/social systems, such as free enterprise, centrally planned economies, etc., international relationships and the role of business on an international scale
• the corporate level: corporate social responsibility
  ethical issues facing individual corporate entities (private and public sector) when formulating and implementing strategies
• the individual level: the behaviour and actions of individuals within organisations

At the highest (macro) level, we ask the fundamental question of the role of business in society and what governance model works best to deliver the most benefits in a moral and responsible way. Morality itself is, of course a widely interpretable concept but for this purpose we will assume a broad understanding: that of “proper behaviour” and “knowing the difference between right and wrong”, without specifying what constitutes right and wrong. (This is a whole debate unto itself and subject to cultural and individual relativism). Suffice it to say here that morality sets the stage for ethics, and therefore the code of conduct by which business activity is carried out and allowed to be carried out by national and international rules and standards.

At the corporate level, the interpretation of those rules and standards is often what defines business ethics, affected by the specific circumstances and socio-cultural context in which the business or public sector organisation is operating. While all corporate entities in theory are directly influenced by personal morality and ethics, in practice there is often a gap between the behaviour of individuals within the working environment and outside it. This, we would argue, is one of the major factors leading to mistrust of big business, where the separation of ownership and management is greatest, and so open to abuse. Even if directors/senior managers are not acting unethically, it is likely they would act differently if the money and the company about which they are making decisions were their own. (There are obvious exceptions as with any generalisation.)

At the individual level, this separation creates a distinct ethical model – business ethics – which, depending on factors like personality, peer pressure and the socio-political environment, can be closer or further away from the individuals own moral/ethical code of conduct. With limited liability meaning individuals are protected this can affect smaller businesses too as the consequences of one’s actions has a greatly reduced impact on personal circumstances. Clearly, every corporate entity is directly affected by the individual’s moral and ethical stance – and any difference between business and personal ethics is itself arguably an indictment of that individual stance as it implies some level of double standards.

Business ethics should permeate the whole organisation

The above points to the need for ethics to in the very bloodstream of the organisation. The trouble with much of the debate about corporate governance is that it looks on it as a separate discipline, a series of boxes to be ticked, including ensuring that the business is perceived to be ethical. Often this results in grandiose statements or whole reports in the annual accounts about all the initiatives the company funds, participates in or supports in other ways. Worthy as these initiatives may be, in our view, in most cases this is at least as much (or more) about the perception than a real commitment to running the business ethically. To do this requires business ethics to permeate the whole organisation – including/especially the recruitment process – and have measures in place to catch questionable practices.

In this way it is much less likely that people with malicious intent or susceptible natures will survive in the organisation, because such behaviour will be picked up and fed back – crucially, independently – to senior management and the board, ideally via the Senior Independent Director and other non-executives. As the famous saying goes, the fish rots from the head, so this requires complete commitment from the board not only to the principles of business ethics but to the measurement and benchmarking of ethical performance.

Measuring business ethics

So we would define business ethics not only as subscribing to the principles of responsible business, but actually having effective controls – including collecting primary research data – on how each stakeholder group perceives the company’s performance on a range of issues which constitute business ethics. As we have said, this presents a challenge for business if people define business ethics differently. The way round this is to use proxies – observations and opinions on manifestations of good ethical performance.

We will cover this in depth in the corporate governance implementation section of this website, providing detailed examples of how to use proxies to define business ethics in the context of stakeholders who may be unfamiliar with the subject and/or the way the company operates.