3.1: Business Ethics

3.1.1: A Brief Definition of Business Ethics

Business ethics is the written and unwritten principles and values that govern decisions and actions within companies.

Learning Objective

Recall the three disciplines of business ethics

Key Points

Ethics, broadly, is concerned with the meaning of all aspects of human behavior. Theoretical/normative ethics aims to differentiate right from wrong.
An organization’s culture sets standards for determining the difference between good and bad decision making. Ethics in business is about knowing the difference between right and wrong and choosing to do what is right.
There are three intricately related parts to the discipline of business ethics: personal, professional, and corporate.

Key Terms

ethical behavior: Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.
normative ethics: A branch of ethics concerned with classifying actions as right and wrong, attempting to develop a set of rules governing human conduct, or a set of norms for action.
ethics: The study of principles relating to right and wrong conduct.

Example

Corporate social responsibility (CSR) is a form of ethical behavior that requires that organizations understand, identify, and eliminate unethical economic, environmental, and social behaviors.

Ethics: A Brief Definition

Ethics is the branch of philosophy concerned with the meaning of all aspects of human behavior. Theoretical ethics, sometimes called normative ethics, is about delineating right from wrong. It is supremely intellectual and, as a branch of philosophy, rational in nature. It is the reflection on and definition of what is right, what is wrong, what is just, what is unjust, what is good, and what is bad in terms of human behavior. It helps us develop the rules and principles (norms) by which we judge and guide meaningful decision-making.

Business Ethics

Business ethics, also called corporate ethics, is a form of applied ethics or professional ethics that examines the ethical and moral principles and problems that arise in a business environment. It can also be defined as the written and unwritten codes of principles and values, determined by an organization’s culture, that govern decisions and actions within that organization. It applies to all aspects of business conduct on behalf of both individuals and the entire company. In the most basic terms, a definition for business ethics boils down to knowing the difference between right and wrong and choosing to do what is right.

There are three parts to the discipline of business ethics: personal (on a micro scale), professional (on an intermediate scale), and corporate (on a macro scale). All three are intricately related. It is helpful to distinguish among them because each rests on a slightly different set of assumptions and requires a slightly different focus in order to be understood.

Pierre Omidyar and Richard Branson

CEOs must adhere to ethical standards.

3.1.2: Ethical Issues Within a Business

Ethics are of critical importance to organizations, as they can potentially have enormous impacts on their communities.

Learning Objective

Outline the various ethical philosophies over time, and integrate them into a meaningful understanding of ethical behavior

Key Points

Organizational leaders must be aware of the consequences of certain decisions and organizational trajectories, and ensure alignment with societal interests and ethical behavior.
Utilitarianism is the ethical philosophy that pursues the greatest outcome for the largest number of people. This is a consequence-oriented point of view.
Deontological ethics focus on the position that the morality of an action is based on its adherence to rules or obligations set by society or held intrinsically (as opposed to the consequences of that act).
Virtuousness is the pursuit of a given behavior for the simple sake of that behavior (i.e. the means, not the ends), and the desire for perfect execution of that behavior.
Finally, communitarian ethics focus on the expectations and needs of a preferred community. This means identifying the duties assigned by the group, and carrying out tasks for their benefit.

Key Terms

deontological: Relating to the the normative ethical position that judges the morality of an action based on the action’s adherence to rules or obligations rather than either the inherent goodness or the consequences of those actions.
communitarian: Pertaining to the idea that a given group is of central importance.
utilitarian: Relating to the ethical point of view that the greatest good for the greatest number of people is ideal.

Ethics are a central concern for businesses, organizations, and individuals alike. Behaving in a way that adds value without inappropriate conduct or negative consequences for any other group or individual, organizational leaders in particular must be completely aware of the consequences of certain decisions and organizational trajectories, and ensure alignment with societal interests.

There are many examples of ethical mistakes in which organizational decision makers pursued interests that benefited them at the cost of society. The 2008 economic collapse saw a great deal of poor decision-making on behalf of the banks. The Enron scandal is another example of individuals choosing personal rewards at the cost of society at large. These types of situations are extremes, but they highlight just how serious the consequences can be when ethics are ignored.

How to Frame Issues Ethically

One complexity of building a strong ethical foundation into an organization is the simple fact that there are many schools of thought. Ethics are in some ways a branch of philosophy, in which the idealized perspective is both malleable and uncertain. However, some powerful examples of ethical frames are available to us from many different time periods. There are four schools of thought that are useful for framing future strategic decisions to ensure ethical behavior. These perspectives are utilitarian, deontological, virtuous, and communitarian approaches.

Utilitarian Approach

Perhaps the cleanest and simplest perspective on ethical behavior, a utilitarian will always ask one question: what is the ideal outcome for the highest number of people? This approach simply considers the impact of ones actions on others, and tries to ensure that the best outcome for the most people is what ultimately occurs.

While this outcome-based reasoning is quite useful, it has one fatal flaw. The definition of ‘best’ when discussing what’s best for the most people can become quite subjective. As a result, when utilizing this ethical reasoning to make decisions, it is important to set terms and create definitions that enable the reasoning to have applicable and measurable logic. Simply put, one must ensure they define their terms, and what they mean by good, when pursuing this ethical line of reasoning.

Deontological Approach

Popularized by Emmanual Kant, the central term in this point of view is duty. Kant disliked the concept of utilitarianism for one simple reason: the ends should not justify the means. Indeed, Kant’s ethical argument is that moral maxims of respect for one another and appropriate behavior serve as a groundwork for all ethical reasoning. It is these core concepts which can never be sacrificed for the greater good.

Virtue Ethics

Popularized by Greek philosophers such as Aristotle, this point of view assumes that virtue is a central benchmark for all ethical behavior. What is meant by virtue in this context is a desire to perform a certain act as a result of deep contemplation on the value of that act. To make this act virtuous is to perform it with excellence. As a result, we have a deep contemplation of the value of a certain behavior or decisions, which we apply great practice and consideration. Following this, we can approach the perfect execution of that act or behavior through our rational minds.

In this school of ethical thought, it is similarly important to discard the justification of a means by the ends of that means. Which is to say this an act should be performed because it is desirable in and of itself, and not for the sake of something else. Each behavior is therefore considered carefully, rationally and virtuously to ensure it is valid, beneficial, and valuable.

Communitarian Ethics

Finally we have communitarian ethics. In this perspective, the individual decision-maker should ask about the duties owed to the communities in which they participate. This is a relatively simple frame of reference, where the individual decision maker will recognize the expectations and consequences of a given decision relative to the needs, demands and impacts of a certain preferred community.

Ethical behavior requires careful consideration of all frames, and a thorough understanding of the impacts of a given decision.

3.1.3: Ethical Issues at an Individual Level

A critical function of organizational management is empowering a positive sense of values and ethos at the individual level.

Learning Objective

Understand the interaction between individual ethics and organizational management

Key Points

An important aspect of organizational strategy and management is empowering a strong sense of ethics at the individual level.
Organizations should internally develop a code of conduct and/or ethics statement, provide ethics training, appoint ethics officers, and ensure there is an anonymous way to report ethical problems.
Providing intrinsic and extrinsic sources of motivation for individual employees to behave ethically reinforces positive ethical behavior.
Hiring and developing employees who have a strong sense of individual professionalism will ensure best practices are achieved from an ethical point of view.

Key Terms

Intrinsic: An aspect possessed by character; internal.
extrinsic: Outside of; not belong to the thing itself.

The Importance of Ethics

Ethical behavior, be it at the organizational, professional or individual level, is a direct representation of the principles and values that govern the individual and the organization they represent. Organizations create an internal culture, which is reflected externally as organizational values. These values impact the relationships within the organization, productivity, reputation, employee morale and retention, legalities, and the broader community in which they operate.

As a result, most organizations generate a statement of organizational values and codes of conduct for all employees to understand and adhere to. Motivating and reinforcing positive behavior while creating an environment that avoids unethical behavior is a critical responsibility of both managers and employees.

How To Empower Ethics

Structure

At the individual level, organizations must focus on developing and empowering each employee to understand and adhere to ethical standards. There are four basic elements organizations can build to empower individual ethics:

A written code of ethical standards (ethical code)
Training for management and employees (ethical training)
Advice and consulting on a situation to situation basis (ethics officers)
A confidential and easily accessible system of reporting (ethical reporting)

Equipping organizations with these four components can alleviate much of the burden on the individual, and enable each employee to learn what is appropriate (and what isn’t).

Motivation

As with most facets of management, there is also a critical motivational component to individual ethics. Intrinsic and extrinsic motivations can reinforce positive behavior and/or eliminate negative behavior in the workplace.

Whistleblowing, for example, is a practice that gets quite a bit of both positive and negative media attention. Whistleblowers are individuals who identify unethical practices in organizations and report the behavior to management or the authorities. A whistleblower who behaves honestly, reporting a problem accurately, should be rewarded for their bravery and honesty, as opposed to punished and ostracized. If an employee is blowing the whistle, it is likely that the organization itself has failed to empower and positively reinforce honest and ethical discussions internally.

Another example is rewarding employees for admitting mistakes. An employee who makes a mistake on the assembly line, and accidentally produces a batch of defective goods, could react in a number of ways. If the organization punishes employees for mistakes, the employee is quite likely to be motivated to keep quiet and not mention it to avoid punishment. However, if the organizational is ethical and clever, they will empower employees to take responsibility for their mistakes and even reward them for coming forward, apologizing, and ensuring that no consumer receives a defective product. It seems at first counter-intuitive to reward an employee for a mistake, but ultimately it provides the best outcome for everyone.

Professionalism

Finally, some aspects of individual ethics are rooted in the individual. Attaining a strong sense of professionalism, and recognizing the ethical implications of certain professional decisions, is a key component of education, individual reflection, and experience. For some professions it is even more critical and relevant than others.

Journalists, for example, could easily attain higher notoriety for making up false stories about celebrities to gain traffic to their news website. But an ethical journalist recognizes the repercussions of slander for the individual being discussed, and maintains an honest ethical code of reporting only what they know to be true (and not what they speculate). Psychologists will maintain patient privacy, understanding the repercussions of leaking personal information about their patients.

There are many potential examples, but the primary point is that professionals understand the their field deeply, including the repercussions of making ethical mistakes.

Triple Bottom Line

Balancing ethics with proper business practices at the individual and organizational level can result in a triple bottom line: economic, social, and environmental value.

Balancing ethics with proper business practices at the individual and organizational level can result in a triple bottom line: economic, social and environmental value.

3.1.4: Ethical Issues at an Organizational Level

Organizational ethics express the values of an organization to its employees and affect all functional areas in a business.

Learning Objective

Evaluate ethical issues that face organizations in the fields finance, human resource management, sales and marketing, and production

Key Points

An organization’s ethical behavior is an extension of its organizational culture.
The four elements necessary to quantify an organization’s ethics are a written code of ethics and standards; ethics training for executives, managers, and employees; availability for advice on ethical situations (i.e, advice lines or offices); and systems for confidential reporting.
Ethical practices need to be established at both the organizational level and the functional level (i.e., sales, marketing, production, etc. ) to be effective.
Ethical practices need to be established at both the organizational level and the functional level (i.e. sales marketing, production, etc. ) to be effective

Key Term

ethics: A branch of philosophy that involves systematizing, defending, and recommending concepts of right and wrong conduct; also called moral philosophy.

Examples

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron’s unethical practices led to their employees and shareholders losing billions of dollars.
Notable cases of intellectual property copyright infringement cases include Napster, Eldred v. Ashcroft and Air Pirates.
When organizations go above and beyond mandated behaviors they can be thought of acting ethically. Examples include a plan for its employees by offering “wellness programs” along with general health coverage, and/or a viable stable retirement plan. Further, an organization will allow for paid maternity leave, or even paid time off for new parents after an adoption. Other perks may include, “on-site” childcare, flextime for work hours, employee education reimbursement, and even telecommuting for various days during a week.

Organizational Ethics is how an organization ethically responds to an internal or external stimulus. Organizational ethics express the values of an organization to its employees and other entities, irrespective of governmental and/or regulatory laws. There are at least four elements that make ethical behavior conducive within an organization:

A written code of ethics and standards
Ethics training to executives, managers, and employees
Availability for advice on ethical situations (i.e, advice lines or offices)
Systems for confidential reporting.

Ethical Issues in Finance

The 2008 financial crisis caused critics to challenge the ethics of the executives in charge of U.S. and European financial institutions and regulatory bodies. Previously, finance ethics was somewhat overlooked because issues in finance are often addressed as matters of law rather than ethics. Fairness in trading practices, trading conditions, financial contracting, sales practices, consultancy services, tax payments, internal audits, external audits, and executive compensation also fall under the umbrella of finance and accounting. Specific corporate ethical/legal abuses include creative accounting, earnings management, misleading financial analysis, insider trading, securities fraud, bribery/kickbacks, and facilitation payments.

Ethical Issues in Human Resource Management

Human resource (HR) management involves recruitment selection, orientation, performance appraisal, training and development, industrial relations and health and safety issues. Discrimination by age (preferring the young or the old), gender, sexual orientation, race, religion, disability, weight, and attractiveness are all ethical issues that the HR manager must deal with.

Ethical Issues in Sales and Marketing

Ethics in marketing deals with the principles, values, and/or ideals by which marketers and marketing institutions ought to act. Ethical marketing issues include marketing redundant or dangerous products/services; transparency about environmental risks, product ingredients (genetically modified organisms), possible health risks, or financial risks; respect for consumer privacy and autonomy; advertising truthfulness; and fairness in pricing and distribution. Some argue that marketing can influence individuals’ perceptions of and interactions with other people, implying an ethical responsibility to avoid distorting those perceptions and interactions.

Marketing ethics involves pricing practices, including illegal actions such as price fixing and legal actions including price discrimination and price skimming. Certain promotional activities have drawn fire, including greenwashing, bait-and-switch, shilling, viral marketing, spam (electronic), pyramid schemes, and multi-level marketing. Advertising has raised objections about attack ads, subliminal messages, sex in advertising, and marketing in schools.

Ethical Issues in Production

Business ethics usually deals with the duties of a company to ensure that products and production processes do not needlessly cause harm. Few goods and services can be produced and consumed with zero risk, so determining the ethical course can be problematic. In some cases, consumers demand products that harm them, such as tobacco products. Production may have environmental impacts, including pollution, habitat destruction, and urban sprawl. The downstream effects of technologies such as nuclear power, genetically modified food, and mobile phones may not be well understood. While the precautionary principle may prohibit introducing new technology whose consequences are not fully understood, that principle would have prohibited most of the new technology introduced since the industrial revolution. Product testing protocols have been attacked for violating the rights of both humans and animals.

Enron Stocks During the 2001 Scandal

Enron’s unethical practices led to their employees and shareholders losing billions of dollars as their stocks became worthless by November of 2001.

3.1.5: Fairness

Treating employees equitably enables substantial organizational benefits while avoiding unethical operations and the corresponding consequences.

Learning Objective

Understand the importance of an employee’s perception of an organization’s decisions, and the impact this can have on performance.

Key Points

From a common sense perspective, you tend to get what you give. Treating employees in a way that empowers a sense of fairness and equity is a critical component to motivating positive employee behaviors.
There are three useful frames of reference when considering organizational fairness: distributive justice, procedural justice, and interactional justice.
Distributive justice is simply the process of making sure an employee’s production output aligns with his or her compensation.
Procedural justice focuses on allowing all participating employees to have input and accountability when designing operational processes.
Interactional justice comes in two parts. The first is ensuring that employees are treated in a socially positive and constructive manner. The second is ensuring nobody is left in the dark when important decisions are made.
Building the above concepts successfully into an organizational norm avoids productivity problems and empowers motivation, citizenship, and commitment.

Key Terms

Distributive: Concerned with the way in which things are shared between people.
Procedural: Concerned with the way in which something is done, or the process which enables it.
Interactional: Concerned with the way in which one individual socially encounters another.

Why Fairness Adds Value

Equitable treatment of all employees and stakeholders is critical to organizational success and the proper execution of business ethics. Awareness of potential fairness pitfalls, and ensuring that all employees feel valued and equitably treated, can avoid a wide variety of ethical and operational problems, while maximizing employee performance through providing a healthy environment for people to flourish and grow.

Organizational Justice

To ensure an organization is fair, one must consider the concept of justice as a central pillar of what creates a fair environment (and what does not). The question is simple: how do employees perceive the behavior of the organization, and how does this impact both employee and organizational outcomes?

In answering these questions, there are three useful perspectives one can adopt in considering fairness in the organization:

Distributive – Simply put, the distribution of resources should align with the value of an individual’s inputs. Of course, this is more complex than salary. As a manager, ensure that credit, bonuses, and benefits are also distributed fairly.
Procedural – Employees don’t only want compensation. They also need input into the process, and shared accountability in the decisions being made. When designing the procedure of a given work group, inclusion of everyone’s perspectives can lead to substantially higher satisfaction, efficiency, and fairness.
Interactional – All members of an organization must both be treated appropriately (from a social frame) and informed respectfully (from an informational frame). In short, employees should be treated with propriety in discussions and shouldn’t be left in the dark when important decisions are made.

Implications of Fairness

There are many overt and subtle outcomes of treating employees equitably. The simplest examples of positive results due to a strong sense of ethical fairness in an organization include:

Higher Performance and Efficiency – People feel their input is aligned with their compensation
Commitment – Happy employees tend to stick around.
Citizenship – If there is inequity in how people are treated, it tends to divide them. This is incredibly dangerous, and can quickly erode the positive benefits of looking out for one another.
Avoiding Counterproductive Behavior – In short, dissatisfied employees are more prone to working against the established goals of the organization. Behaviors such as not doing certain tasks or helping certain work-groups can quickly become a source of inefficiency.
Absenteeism – Sick days, skipping meetings, and generally unplugging from the organization is often an outcome of inequitable organizations.
Emotional Exhaustion – Unsatisfied employees wrestle with insecurity and dissatisfaction, both of which are emotionally draining.

While there are many more examples of consequences avoided and benefits achieved from an ethical operational approach, this paints a clear picture of why it is important and how to frame manager’s perspectives to ensure equitable behavior.

Work Motivation

This model aligns well with Maslow’s hierarchy of needs, but applied to workplace motivation. Through the five M’s identified (in order of chronological achievement being Money; Myself; Member; Mastery; Mission), one can see in this pyramid chart how organizational justice will enable higher levels of individual motivation.

This model aligns well with Maslow’s hierarchy of needs, but applied to workplace motivation. Through the five M’s identified (in order of chronological achievement being Money; Myself; Member; Mastery; Mission), one can see how organizational justice will enable higher levels of individual motivation.

3.1.6: Open Communication of Decisions

Transparency consists of operating in such a way that it is easy for others to see what actions are being performed.

Learning Objective

Explain how a company uses transparency to open communication and why this is crucial to building connections and a sense of community

Key Points

Transparency implies openness, communication, and accountability.
Radical transparency is a management method where nearly all decision making is carried out publicly.
Corporate transparency is the concept of removing all barriers to, and the facilitation of, free and easy public access to corporate information.

Key Term

transparency: Open, public; having the property that theories and practices are publicly visible, thereby reducing the chance of corruption.

Example

Two examples of organizations utilizing this style are the GNU/Linux community and Indymedia.

Transparency, as used in science, engineering, business, the humanities and in a social context more generally, implies openness, communication, and accountability. Transparency means operating in such a way that it is easy for others to see what actions are performed. For example, a cashier making change at a point of sale by segregating a customer’s large bills, counting up from the sale amount, and placing the change on the counter in such a way as to invite the customer to verify the amount of change demonstrates transparency. Radical transparency is a management method where nearly all decision making is carried out publicly. All draft documents, all arguments for and against a proposal, all final decisions, and the decision making process itself are made public and remain publicly archived.

Corporate transparency, a form of radical transparency, is the concept of removing all barriers to—and the facilitation of—free and easy public access to corporate information. This includes the laws, rules, and processes that facilitate and protect those individuals and corporations that freely join, develop, and improve the process .

Talk to me

Keeping the lines of communication open is important.

A conference room with people talking.

Companies should make a commitment to open communication because communication is crucial to building connections and a sense of community. If we cannot communicate our thoughts, opinions and ideas, we remain isolated and cut off from each other. Open communication also allows for the possibility of self correction and group problem solving. Open communication leads to better decision-making and faster error correction. The transparency that occurs as a result of open communication protects against potential abuses of power and makes for a safer environment overall.

3.1.7: Conflicts of Interest

A situation in which someone in a position of trust has competing professional or personal interests is known as a conflict of interest.

Learning Objective

Outline how self-dealing, outside employment, family interests, pump and dumps, and gifts exemplify conflicts of interest, and differentiate that from an impropriety

Key Points

A conflict of interest can exist even if there are no improper acts that result from it. One way to understand this is to use the term “conflict of roles”.
The presence of a conflict of interest is independent from the execution of impropriety.
A conflict of interest becomes a legal matter when an individual either tries and/or succeeds in influencing the outcome of a decision for personal benefit.
Common types of conflicts of interest include: self-dealing, family interests or nepotism, and the giving of gifts.
Conflict of interest can be mitigated by several actions including: removal, disclosure, recusal, third-party evaluations, and establishing codes of conduct.

Key Terms

pump and dump: A form of financial fraud where the fraudster buys stocks cheaply, generates artificial excitement about them to create a temporary price increase, then sells the stocks before the price goes back down.
recusal: An act of recusing. To remove oneself from a decision/judgment because of a conflict of interest.
disclosure: The act of revealing something.

Examples

A person with two roles, such as an individual who owns stock and is also a government official, may experience situations where those two roles conflict. The conflict can be mitigated but it still exists.
An example of using a third-party to establish an ‘arm’s length’ or fair transaction would be where a corporation that leases an office building that is owned by the CEO might get an independent evaluation showing what the market rate is for such leases in the locale, to address the conflict of interest that exists between the fiduciary duty of the CEO (to the stockholders, by getting the lowest rent possible) and the personal interest of that CEO (to maximize the income that the CEO gets from owning that office building by getting the highest rent possible).

A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.

Conflict of Interest

A situation in which someone in a position of trust — e.g., a doctor — has competing professional or personal interests.

The presence of a conflict of interest is independent from the execution of impropriety. Therefore, it can be discovered and voluntarily defused before any corruption occurs. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. It can, however, become a legal matter for example when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit. A director or executive of a corporation will be subject to legal liability if a conflict of interest breaches his/her Duty of Loyalty.

Conflict of Interest vs. Impropriety

There often is confusion over these two situations. Someone accused of a conflict of interest may deny that a conflict exists because he/she did not act improperly. In fact, a conflict of interest can exist even if there are no improper acts as a result of it. One way to understand this is to use the term “conflict of roles”.

As an example, in the sphere of business and control, according to the Institute of Internal Auditors:

“conflict of interest is a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual’s ability to perform his or her duties and responsibilities objectively. “

An organizational conflict of interest (OCI) may exist in the same way (as described above) in the realm of the private sector providing services to the government, where a corporation provides two types of services to the government that have conflicting interest or appear objectionable (i.e.: manufacturing parts, and then participating on a selection committee for parts manufacturers).

Corporations may develop simple or complex systems to mitigate the risk, or perceived risk, of a conflict of interest. These are typically evaluated by a governmental office (e.g., in a US Government RFP) to determine whether the risks pose a substantial advantage to the private organization over the competition or will decrease the overall competitiveness in the bidding process.

Types of Conflicts of Interests

These are some of the most common forms:

Self-dealing, in which an official who controls an organization causes it to enter into a transaction with the official, or with another organization that benefits the official, i.e., the official is on both sides of the “deal”.
Outside employment, in which the interests of one job contradict another.
Family interests, in which a spouse, child, or other close relative is employed (or applies for employment) or where goods or services are purchased from such a relative or a firm controlled by a relative. For this reason, many employment applications ask if one is related to a current employee. In this event, the relative may be recused from any hiring decisions. Abuse of this type of conflict of interest is called nepotism.
Gifts from friends who also do business with the person receiving the gifts (may include non-tangible things of value such as transportation and lodging).
Pump and dump, in which a stockbroker who owns a security artificially inflates its price by “upgrading” it or spreading rumors, sells the security and adds short position, then “downgrades” it or spreads negative rumors to push its price down.

Other improper acts that are sometimes classified as conflicts of interests may be better classified elsewhere: e.g., accepting bribes is corruption; the use of government or corporate property or assets for personal use is fraud; not conflict of interest.

Codes of Ethics

These help to minimize problems with conflicts of interest because they spell out the extent to which such conflicts should be avoided, and what the parties should do where such conflicts are permitted (disclosure, recusal, etc.). Thus, professionals cannot claim that they were unaware that their improper behavior was unethical. As importantly, the threat of disciplinary action (for example, a lawyer being disbarred) helps to minimize unacceptable conflicts or improper acts when a conflict is unavoidable.

As codes of ethics cannot cover all situations, some governments have established an office of the ethics commissioner, who should both be appointed by and report to the legislature.

3.2: Promoting Ethical Behavior

3.2.1: Government Regulation

Governments use laws and regulations to point business behavior in what governments perceive to be beneficial directions.

Learning Objective

Summarize the purpose and justify the existence of government regulation

Key Points

Government regulation attempts to produce outcomes which might not otherwise occur, prevent outcomes that might otherwise occur, or produce or prevent outcomes in different timescales than would otherwise occur.
Common examples of regulation include controls on: market entries, prices, wages, development approvals, pollution effects, employment for certain people in certain industries, standards of production for certain goods, military forces, and services.
Regulation can be justified by the presence of market failures, collective desires, diverse experiences, social subordination, endogenous preferences, irreversibility, professional conduct, or interest group transfers.

Key Term

promulgation: The act of promulgating or announcing something, especially a proclamation announcing a new law.

Example

the US Environmental Protection Agency’s Audit Policy is an example of government regulation. It “safeguards human health and the environment by providing several major incentives for regulated entities to voluntarily come into compliance with federal environmental Laws & Regulations. ” Affected entities must voluntarily discover and act to correct any violations that occur.

Regulation is the promulgation, monitoring, and enforcement of rules. Regulation creates or constrains a right, creates or limits a duty, or allocates a responsibility. Regulation can take many forms: legal restrictions promulgated by a government authority, contractual obligations that bind many parties (e.g., “insurance regulations” that arise out of contracts between insurers and their insureds), self-regulation by an industry such as through a trade association, social regulation, co-regulation, third-party regulation, certification, accreditation, or market regulation. In its legal sense, regulation can and should be distinguished from primary legislation or judiciary law.

Governments use laws and regulations to point business behavior in what governments perceive to be beneficial directions. Government regulation attempts to produce outcomes which might not otherwise occur, prevent outcomes that might otherwise occur, or produce or prevent outcomes in different timescales than would otherwise occur. In this way, regulations can be seen as implementation artifacts of policy statements. Common examples of regulation include controls on market entries, prices, wages, development approvals, pollution effects, employment for certain people in certain industries, standards of production for certain goods, military forces, and services.

Regulations can be justified for a variety of reasons, including:

Market failures – regulation due to inefficiency. Intervention due to a classical economics arguments about market failure. Market failures can present themselves due to events such as: risk of monopoly, inadequate information, and unseen externalities.
Collective desires – regulation about collective desires or considered judgments on the part of a significant segment of society.
Diverse experiences – regulation with a view of eliminating or enhancing opportunities for the formation of diverse preferences and beliefs.
Social subordination – regulation aimed to increase or reduce social subordination of various social groups.
Endogenous preferences – regulation aimed at affecting the development of certain preferences on an aggregate level.
Irreversibility – regulation that deals with the problem of how certain types of conduct from current generations result in outcomes that future generations may not be able to recover from.
Professional conduct – the regulation of members of professional bodies, either acting under statutory or contractual powers.
Interest group transfers – regulation that results from efforts by self-interest groups to redistribute wealth in their favor, which may be disguised as one or more of the justifications above.

Beginning in the late 19^th and 20^th century, much of regulation in the United States was administered and enforced by regulatory agencies which produced their own administrative law and procedures under the authority of statutes. Legislators created these agencies to allow experts in the industry to focus their attention on the issue. At the federal level, one the earliest institutions was the Interstate Commerce Commission which had its roots in earlier state-based regulatory commissions and agencies. Later agencies include the Federal Trade Commission, Securities and Exchange Commission, Civil Aeronautics Board, and various other institutions. These institutions vary from industry to industry and at the federal and state level.

Regulatory Agencies

The Securities and Exchange Commission is an example of a government regulatory agency.

Seal of the U.S. Securities and Exchange Commission.

3.2.2: Trade Associations

A trade association is an organization founded and funded by businesses that operate in a specific industry.

Learning Objective

Summarize the methods utilized by trade associations in an attempt to influence public policy in a direction favorable to the group’s members

Key Points

An industry trade association participates in public relations activities such as advertising, education, political donations, lobbying and publishing, but its main focus is collaboration between companies, or standardization.
Associations may offer other services, such as organizing conferences, networking or charitable events or offering classes or educational materials.
One of the primary purposes of trade groups, particularly in the United States, is to attempt to influence public policy in a direction favorable to the group’s members.
The opportunity to be promoted in trade association media (whether by editorial or advertising) is often an important reason why companies join a trade association in the first place.
Industry trade groups sometimes produce advertisements targeted to promote the views of an entire industry.

Key Term

stakeholder: A person or organization with a legitimate interest in a given situation, action, or enterprise.

Example

The American Medical Association sets rules in the medical industry regarding ethics, disciplinary action, and accreditation.

A trade association, also known as an industry trade group, business association, or sector association, is an organization founded and funded by businesses that operate in a specific industry . An industry trade association participates in public relations activities such as advertising, education, political donations, lobbying, and publishing, but its main focus is collaboration between companies, or standardization. Associations may offer other services, such as organizing conferences, networking or charitable events or offering classes or educational materials. Many associations are non-profit organizations governed by bylaws and directed by officers who are also members.

Trade Associations

The Association of Master Upholsterers is an example of a trade association.

One of the primary purposes of trade groups, particularly in the United States, is to attempt to influence public policy in a direction favorable to the group’s members. This can take the form of contributions to the campaigns of political candidates and parties, contributions to “issue” campaigns not tied to a candidate or party, and lobbying legislators to support or oppose particular legislation. In addition, trade groups attempt to influence the activities of regulatory bodies.

Almost all trade associations are heavily involved in publishing activities, whether in print or online. The main media published by trade associations are as follows:

Association website – The association’s website typically explains its aims and objectives, promotes the association’s products and services, explains the benefits of membership to prospective members, and promotes members’ businesses.
Members newsletters or magazines – Whether produced in print or online, association newsletters and magazines contain news about the activities of the association, industry news and editorial features on topical issues. Some are exclusively distributed to members, while others are used to lobby lawmakers and regulators, and some are used to promote members’ businesses to potential new customers.
Printed membership directories and yearbooks – Larger trade associations publish membership directories and yearbooks to promote their association to opinion formers, lawmakers, regulators and other stakeholders. Such publications also help to promote members’ businesses both to each other and to a wider audience. A typical membership directory contains profiles of each association member, a products and services guide, advertising from members, and editorial articles about the aims, objectives, and activities of the association. The emphasis of association yearbooks on the other hand is on editorial features about the association itself and the association’s industry.

The opportunity to be promoted in such media (whether by editorial or advertising) is often an important reason why companies join a trade association in the first place.

Industry trade groups sometimes produce advertisements, just as normal corporations do. However, whereas typical advertisements are for a specific product, industry trade groups advertisements generally are targeted to promote the views of an entire industry.

3.2.3: Corporate Policies

Companies often have corporate ethics statements or codes that identify ethical expectations and offer guidance.

Learning Objective

Examine how corporate policies may lead to greater ethical awareness, consistency in application, and the avoidance of ethical disasters in an organization

Key Points

A corporate ethics statement is usually broad and more general than a corporate ethics code, which tends to be more detailed and identifies more specific situations that may arise.
Ethics training also takes place, in the form of seminars, discussion groups, and case studies. Often, a company will require an employee to sign an agreement stating that they will adhere to an ethical code of conduct.
There are critics of ethical requirements. Some claim that employees should be free to use their judgement to deal with ethical problems. Others feel that these requirements or codes of conduct are borne less out of a need to be ethical, and more to limit legal liability.

Key Terms

corporate philanthropy: charitable monetary donations (not political contributions or commercial sponsorships) by companies
utilitarianism: The theory that action should be directed toward achieving the “greatest happiness for the greatest number of people”; hedonistic universalism.

Example

There is often a disconnect between a company’s ethics policies and its actual practices. For example, in financial trading environments, lying is often expected, even though it goes against any code of ethics. The 2012 Barclays LIBOR price fixing scandal is an example of grossly unethical behavior that occurred after Barclays admitted that its traders sought to intentionally manipulate LIBOR rates for financial gain.

Due to the increase in comprehensive compliance and ethics programs, many companies have formulated internal policies pertaining to the ethical conduct of employees. These policies can be simple exhortations in broad, highly generalized language (typically called a corporate ethics statement), or they can be more detailed policies, containing specific behavioral requirements (typically called corporate ethics codes). They are generally meant to identify the company’s expectations of workers and to offer guidance on handling some of the more common ethical problems that might arise in the course of doing business. It is hoped that having such a policy will lead to greater ethical awareness, consistency in application, and the avoidance of ethical disasters. An increasing number of companies also require employees to attend seminars regarding business conduct, which often include discussion of the company’s policies, specific case studies, and legal requirements. Some companies even require their employees to sign agreements stating that they will abide by the company’s rules of conduct.

Many companies are assessing the environmental factors that can lead employees to engage in unethical conduct. A competitive business environment may call for unethical behavior. Lying has become expected in fields such as trading. An example of this is the issues surrounding the unethical actions of the Saloman Brothers .

Employee competition

Competition can lead to unethical behavior by employees.

Not everyone supports corporate policies that govern ethical conduct. Some claim that ethical problems are better dealt with by employees using their own judgment.

Others believe that corporate ethics policies are primarily rooted in utilitarianism concerns, and that they are mainly to limit the company’s legal liability, or to curry public favor by giving the appearance of being a good corporate citizen. Ideally, the company will avoid a lawsuit because its employees will follow the rules. Should a lawsuit occur, the company can claim that the problem would not have arisen if the employee had only followed the code properly.

Sometimes there is a disconnection between the company’s code of ethics and actual practices. At worst, whether or not such conduct is explicitly sanctioned by management, the policy is duplicitous; and, at best, the code is merely a marketing tool.

Jones and Parker write, “Most of what we read under the name business ethics is either sentimental common sense, or a set of excuses for being unpleasant. ” Many manuals are procedural form filling exercises unconcerned about the real ethical dilemmas. For instance, the US Department of Commerce ethics program treats business ethics as a set of instructions and procedures to be followed by ‘ethics officers’. Some others claim being ethical just for the sake of it. Business ethicists may trivialize the subject, offering standard answers that do not reflect a situation’s complexity.

3.3: Social Responsibility

3.3.1: A Brief Definition of Corporate Social Responsibility

Social responsibility is the duty of organizations and individuals to act in ways that benefit society and/or the environment.

Learning Objective

Examine how social responsibility helps to sustain the equilibrium between economic development and the welfare of society and the environment

Key Points

Corporate social responsibility is the expectation that a firm maintain a balance between making a profit and contributing to society.
Socially responsible entities are conscious of the tradeoff between economic development and the welfare of society and the environment. They therefore refrain from socially harmful practices and contribute to activities that are socially beneficial.
Companies can demonstrate social responsibility in a variety of ways, such as donating funds to education, arts, culture, and underprivileged children.

Key Terms

social responsibility: A voluntarily assumed obligation toward the good of society at large as opposed to the self alone.
not-for-profit: A company or organization that is not meant to make a profit.

Examples

Companies that donate proceeds to charitable organizations are socially responsible. For example, many large corporations are major patrons of the arts and education.
Companies that seek to make their products or their production process more environmentally friendly are socially responsible. This also makes the company’s consumers feel like they are behaving responsibly by supporting that brand.

A tradeoff always exists between material economic development and the welfare of society and the environment. Social responsibility is the idea that an organization or individual is obligated to act to benefit society at large—i.e., to maintain equilibrium between the economy and the ecosystem.

Social responsibility in business is also known as corporate social responsibility (CSR), corporate responsibility, corporate citizenship, responsible business, sustainable responsible business, or corporate social performance. This term refers to a form of self-regulation that is integrated into different disciplines, such as business, politics, economy, media, and communications studies.

The Conference Board of Canada, a not-for-profit organization that specializes in economic trends, organizational performance, and public policy, wrote a National Corporate Social Responsibility Report. In it they explain that corporate social responsibility is a way of conducting business through balancing the long-term objectives, decision making, and behavior of a company with the values, norms, and expectations of society.

Companies can demonstrate social responsibility in a myriad of ways. They can donate funds to education, arts and culture, underprivileged children, or animal welfare, or they can make commitments to reduce their environmental footprint, implement fair hiring practices, sponsor events, and work only with suppliers with similar values. CSR can be practiced passively, through refraining from committing socially harmful acts, or actively, through performing activities that directly advance social goals. The below diagram shows the various ways that a company can invest in being socially responsible and the value those actions can bring to the company.

The Value of CSR

This diagram shows the various ways that a company can invest in being socially responsible and the value those actions can bring to the company.

The Conference Board of Canada, a not-for-profit organization that specializes in economic trends, suggests that social responsibility is a way of conducting business through balancing the long-term objectives, decision-making, and behavior of a company with the values, norms, and expectations of society. Social responsibility can be a normative principle and a soft law principle engaged in promoting universal ethical standards in relationship to private and public corporations.

Companies can demonstrate social responsibility in a myriad of ways. They can donate funds to education, arts and culture, underprivileged children, animal welfare, or they can make commitments to reduce their environmental footprint, implement fair hiring practices, sponsor events, and work only with suppliers with similar values.

Social responsibility in business is also known as corporate social responsibility, corporate responsibility, corporate citizenship, responsible business, sustainable responsible business, or corporate social performance. This term refers to a form of self-regulation that is integrated into different disciplines, including business, politics, economy, media, and communications studies.

3.3.2: Early Efforts in Social Responsibility

Social responsibility is the idea that an entity needs to act in a way that balances its own gain with societal benefits.

Learning Objective

Recognize Andrew Carnegie’s business principles of charity and stewardship as the precursors to modern organizational social responsibility

Key Points

Social responsibility as an ethical principle was first drawn from the business philosophy of Andrew Carnegie, the 19th century steel magnate who believed in charity and social stewardship.
Economist Milton Friedman held that humans act in self-interest, to maximize profit, and social issues were the government’s issue.
After recent significant corporate scandals and disasters, the relationship between society and corporations has been severely tested.

Key Terms

social audit: reporting on the societal and environmental effects of organizations’ economic actions to particular interest groups
charity: An organization, the objective of which is to carry out a charitable purpose.
social responsibility: A voluntarily assumed obligation toward the good of society at large as opposed to the self alone.

Example

Carnegie’s philanthropic accomplishments included contributions to education by establishing many public libraries around the country.

Social responsibility is the idea that an entity needs to act in a way that balances its own gain with societal benefits. Entities include individuals as well as businesses. Companies do need to make a profit, but not at the expense of society or the environment. Businesses should use ethical decision-making practices to make responsible decisions and reduce the need for government involvement such as, for example, Environmental Protection Agency (EPA), which monitors business decisions and practices to prevent pollution.

The notion of social responsibility is far from new. Its roots are in economics and the writings of Andrew Carnegie (1835-1919), a Scottish-born businessman and founder of U.S. Steel. Carnegie’s business philosophy was based on two principles: charity (the more fortunate should assist those who are less fortunate) and stewardship (the rich hold their money “in trust” for the rest of society, using it for any purpose society deems appropriate).

Milton Friedman (1912-2006), an American economist and Nobel Laureate, later advocated that corporations exist only to maximize profit and behave in their own best self-interest. He argued that corporations’ attempts at social responsibility were “morally wrong,” as social issues and concerns were best dealt with by government. In the last half century, highly publicized corporate behavior like the handling of the Exxon Valdez oil spill, the financial scandal of Enron, and the more recent subprime mortgage crisis has undermined trust in corporations. Social responsibility has taken on heightened importance as a way of building trust in relationships .

Oil Spill

Oil spills and other environmental disasters show the need for social responsibility.

3.3.3: Modern Trends in Social Responsibility

Socially responsible trends include corporate citizenship policies, social investing, sustainable accounting & social entrepreneurship.

Learning Objective

Explain how the advent of socially responsible investing, sustainability accounting, and social entrepreneurship has contributed to the modernization of social responsibility

Key Points

Corporate social responsibility (CSR) guides individuals and companies to act in socially and environmentally responsible ways.
Businesses that seek to be socially responsible are described as having a double or triple bottom line; they judge their success not only by profit but also by their social and environmental impact.
Sustainable accounting is a method of financial disclosure that reveals a corporation’s activities and impact on the environment. This information is available to stakeholders, suppliers, and the government for the sake of transparency.
Social entrepreneurship is the use of entrepreneurial principles to organize a business venture that addresses a certain social problem. Profit and return may still be important to social entrepreneurs, but a positive impact on society is their key measure of success.
The adoption of CSR policy is sometimes perceived as “window dressing” to prevent future government oversight.

Key Term

corporate social responsibility: A form of corporate self-regulation integrated into a business model in which companies aim to embrace responsibility for their actions and encourage a positive impact through their activities on the environment, consumers, employees, communities and other stakeholders. Commonly abbreviated as CSR.

Example

A social entrepreneur can be the founder or co-founder or a chief functionary (president, secretary, treasurer, CEO, or chairman) of a social enterprise or non-profit. Examples of some of social entrepreneurs based in India are Ramji Raghavan, founder and Chairman of the Agastya International Foundation; Harish Hande, founder of Selco India; Rippan Kapur of Child Rights; and You and Jyotindra Nath of Youth United.

Corporate Social Responsibility

Corporate social responsibility (abbreviated CSR; also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business) is a form of self-regulation integrated into a business model. A socially responsible business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. The goal of CSR is for a company to take accountability for its actions and achieve and encourage a positive impact on the environment as well as its consumers, employees, communities, and other stakeholders.

CSR is designed to support an organization’s mission as well as to guide what the company stands for and will deliver to its consumers. ISO 26000 is the recognized international standard for CSR. Public sector organizations (e..g, the United Nations) adhere to the so-called triple bottom line (TBL): maximizing (1) profit, (2) social impact, and (3) environmental impact. The UN has developed the Principles for Responsible Investment as guidelines for investing entities. CSR adheres to similar principles but has no formal act of legislation.

The United Nations

The UN has developed the Principles for Responsible Investment as guidelines for investing entities.

Socially Responsible Investing

Socially responsible investing is the practice of investing funds only in companies deemed to be socially responsible according to a given set of criteria. It is a booming market in both the US and Europe. As of 2010, nearly one out of every eight dollars under professional management in the US is involved in socially responsible investing; this is 12.5% of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson.

Sustainability Accounting

Sustainability accounting has increased in popularity over the past few decades. Many companies are adopting new methods and techniques in their financial disclosures that provide information about their core activities and their impact on the environment. As a result of this action, stakeholders, suppliers, and governmental institutions have a better understanding of how companies manage their resources to achieve sustainable development.

Sustainability accounting connects a company’s strategies to a sustainable framework by disclosing three dimensions of information: environmental, economic, and social. In practice, however, it is often difficult to put together policies that simultaneously promote environmental, economic, and social goals.

Social Entrepreneurship

Social entrepreneurship is the recognition of a social problem and the use of entrepreneurial principles to organize, create, and manage a social venture to achieve social change. While a business entrepreneur typically measures performance in profit and return, a social entrepreneur also cares about positive social, cultural, and environmental progress. Social entrepreneurs are commonly associated with the voluntary and not-for-profit sectors, but this doesn’t necessarily mean they don’t make a profit.

Social entrepreneurship practiced with a global perspective or embedded in an international context is called international social entrepreneurship.

One well-known contemporary social entrepreneur is Muhammad Yunus, founder and manager of Grameen Bank and its growing family of social venture businesses. He was awarded a Nobel Peace Prize in 2006. Yunus’ and Grameen Bank’s work supports the claims of modern-day social entrepreneurs regarding the enormous synergies and benefits achieved when business principles are unified with social ventures. In some countries—including Bangladesh and, to a lesser extent, the USA—social entrepreneurs have filled the spaces neglected by a relatively small state. In other countries, particularly Europe and South America, social entrepreneurs tend to work more closely with public organizations at both the national and local levels.

Today, non-profits, non-governmental organizations, foundations, governments, and individuals play a role in promoting, funding, and advising social entrepreneurs around the world.

3.3.4: Stakeholders: Consumers, Employees, and Shareholders

Stakeholders may have different interests related to the pursuit of profit and social impact.

Learning Objective

Identify the importance of an organization recognizing the needs of its stakeholders

Key Points

Corporations are motivated to become more socially responsible because their most important stakeholders expect them to understand and address the social and community issues that are relevant to them.
The perspectives of stakeholders play a role in shaping the organization’s socially responsible activities, as the organization leadership should recognize the needs of its stakeholders in order to function effectively.
It is the stakeholder theory that implies that all stakeholders (or individuals) must be treated equally regardless of the fact that some people will obviously contribute more than others to an organization.

Key Term

stakeholder: A person or organization with a legitimate interest in a given situation, action, or enterprise.

Example

Suppose a corporation is engaging in environmentally harmful practices. This information comes to the attention of the local community near the production plants or the consumers who buy the products. Pressure from these stakeholders can force the corporation into adopting a corporate self-regulation policy that improves their environmental footprint.

Increasingly, corporations are motivated to become more socially responsible because their most important stakeholders expect them to understand and address the social and community issues that are relevant to them. Understanding what causes are important to employees is usually the first priority because of the many interrelated business benefits that can be derived from increased employee engagement (i.e. loyalty, improved recruitment, increased retention, higher productivity, and so on). Key external stakeholders include customers, consumers, investors (particularly institutional investors), communities in the areas where the corporation operates its facilities, regulators, academics, and the media .

Various Types of Stakeholders

This image shows the various internal and external stakeholders.

Branco and Rodrigues (2007) describe the stakeholder perspective of CSR (corporate social responsibility) as the inclusion of all groups or constituents (rather than just shareholders) in managerial decision making related to the organization’s portfolio of socially responsible activities. This normative model implies that the CSR collaborations are positively accepted when they are in the interests of stakeholders and may have no effect or be detrimental to the organization if they are not directly related to stakeholder interests. The stakeholder perspective suffers from a wheel and spoke network metaphor that does not acknowledge the complexity of network interactions that can occur in cross-sector partnerships. It also relegates communication to a maintenance function, similar to the exchange perspective.

Stakeholder and Other Theories

Whether it is a team, small group, or a large international entity, the ability for any organization to reason, act rationally, and respond ethically is paramount. Leadership must have the ability to recognize the needs of its members (or called “stakeholders” in some theories or models), especially the very basics of a person’s desire to belong and fit into the organization. It is the stakeholder theory that implies that all stakeholders (or individuals) must be treated equally regardless of the fact that some people will obviously contribute more than others to an organization.

Leadership not only has to place aside each of their individual (or personal) ambitions (along with any prejudices) in order to present the goals of the organization, but they also have to engage the stakeholder with the benefit of the organization in mind. Further, it is leadership that has to be able to influence the stakeholders by presenting the strong minority voice in order to move the organization’s members toward ethical behavior. Importantly, the leadership (or stakeholder management) has to have the desire, the will, and the skills to ensure that the other stakeholders’ voices are respected within the organization, and leadership has to ensure that those other voices are not expressing views that are not shared by the larger majority of the members (or stakeholders). Therefore, stakeholder management, as well as any other leadership of organizations, has to take upon themselves the arduous task of ensuring an “ethics system” for their own management styles, personalities, systems, performances, plans, policies, strategies, productivity, openness, and even risk(s) within their cultures or industries.

3.4: Consumer Rights

3.4.1: Basic Consumer Rights

Basic consumer rights ensure a level of protection for consumers owed by a supplier of goods or services.

Learning Objective

Summarize the Consumer Bill of Rights extolled by President John F. Kennedy and the United Nations

Key Points

The Consumer Bill of Rights pushed for by John F. Kennedy established four basic rights; the right to safety, the right to be informed, the right to choose, and the right to be heard.
In 1985, the United Nations added four more rights to protect consumers: the right to satisfaction of basic needs, the right to redress, the right to consumer education, and the right to a healthy environment.
Consumer protection consists of laws and organizations designed to ensure the rights of consumers, as listed above.
In 1985, the United Nations in 1985 added four more rights to protect consumers: the right to satisfaction of basic need, the right to redress, the right to consumer education, and the right to a healthy environment.
Consumer protection is the duty of the laws, government agencies, and organizations created to ensure consumer rights.
Competitive markets also promote the interests of consumers under the principle of economic efficiency.

Key Terms

Consumer: Someone who acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing.
right: A legal or moral entitlement.
consumer rights: The legal and moral duties of protection owed to a purchaser of goods or services by the supplier.

Example

Regulatory bodies, such as the FDA, establish and maintain standards for goods and services. In the FDA’s case, drugs and foods are regulated to ensure consumer safety.

What is a Consumer?

A consumer is defined as “someone who acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing. ” Before the mid-twentieth century, consumers were without rights with regard to their interaction with products and producers. Consumers had little ground on which to defend themselves against faulty or defective products, or against misleading or deceptive advertising methods. By the 1950s, a movement called “consumerism” began pushing for increased rights and legal protection against malicious business practices. By the end of the decade, legal product liability had been established in which an aggrieved party need only prove injury by use of a product, rather than bearing the burden of proof of corporate negligence.

Consumer Bill of Rights

In 1962, President John F. Kennedy presented a speech to the United States Congress in which he extolled four basic consumer rights — later called, The Consumer Bill of Rights. In 1985, these rights were expanded to eight by the United Nations. These eight rights are the:

John F. Kennedy

President John F. Kennedy extolled four basic consumer rights, later called the “Consumer Bill of Rights. “

A painting of John F. Kennedy.

Right to Safety

The assertion of this right is aimed at the defense of consumers against injuries caused by products other than automobile vehicles, and implies that products should cause no harm to their users if such use is executed as prescribed. The Consumer Product Safety Commission (CPSC) has jurisdiction over thousands of commercial products, and powers that allow it to establish performance standards, require product testing and warning labels, demand immediate notification of defective products, and, when necessary, force product recall.

Right to Be Informed

This right states that businesses should always provide consumers with enough appropriate information to make intelligent and informed product choices. Product information provided by a business should always be complete and truthful. This right aims to achieve protection against misleading information in the areas of financing, advertising, labeling, and packaging.

Right to Choose

The right to free choice among product offerings states that consumers should have a variety of options provided by different companies from which to choose. The federal government has taken many steps to ensure the availability of a healthy environment open to competition through legislation, including limits on concept ownership through Patent Law, prevention of monopolistic business practices through Anti-Trust Legislation, and the outlaw of price cutting and gouging.

Right to Be Heard

This right asserts the ability of consumers to voice complaints and concerns about a product in order to have the issue handled efficiently and responsively. While no federal agency is tasked with the specific duty of providing a forum for this interaction between consumer and producer, certain outlets exist to aid consumers if difficulty occurs in communication with an aggrieving party. State and federal attorney generals are equipped to aid their constituents in dealing with parties who have provided a product or service in a manner unsatisfactory to the consumer in violation of an applicable law.

Right to Satisfaction of Basic Needs

To have access to basic, essential goods and services: adequate food, clothing, shelter, health care, education, public utilities, water, and sanitation.

The Right to Redress

To receive a fair settlement of just claims, including compensation for misrepresentation, shoddy goods or unsatisfactory services.

Right to Consumer Education

To acquire knowledge and skills needed to make informed, confident choices about goods and services, while being aware of basic consumer rights and responsibilities and how to act on them.

Right to a Healthy Environment

To live and work in an environment which is non-threatening to the well-being of present and future generations.

Consumer Protection

Even though consumers have these rights, they can easily be ignored. That’s where consumer protection comes in. Consumer protection consists of laws and organizations designed to ensure the rights of consumers, as well as fair trade competition and the free flow of truthful information in the marketplace. The laws are designed to prevent businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors and may provide additional protection for the weak and those unable to take care of themselves.

Organizations that promote consumer protection include government organizations, individuals as consumer activism, and self-regulating business organizations, such as consumer protection agencies and organizations, the Federal Trade Commission, the Better Business Bureaus, etc.

Consumer interests can also be protected by promoting competition in the markets, which directly and indirectly serve consumers, consistent with economic efficiency.

3.4.2: Forces in Consumerism

The modern understanding of consumerism refers to an emphasis on the consumption of goods, often with a connotation of excess.

Learning Objective

Discuss the forces driving the evolution of consumerism as an economic order that encourages the purchase of goods and services in ever-greater amounts

Key Points

The modern definition of consumerism, derived from the works of economist Thorstein Veblen, refers to the preoccupation with the acquisition of goods.
Though consumerism is an international and historical phenomenon, it was magnified dramatically by the Industrial Revolution, which made mass production of consumer goods a reality.
With the progression of mass production and consumption, some argue that materialism and desire for social status became more prominent in cultures around the world. Modern consumers are now able to emulate the wealthy and iconic through consumption of certain goods.
Increasing awareness of environmental and social concerns has given rise to ethical consumerism. Consumers are becoming much more conscious of how their consumption behavior is impacting the world around them, and they are beginning to change their purchasing decisions accordingly.

Key Terms

consumerism: An economic theory that increased consumption is beneficial to a nation’s economy in the long run.
conspicuous consumption: A public display of acquisition of possessions with the intention of gaining social prestige; excessive consumerism in order to flaunt one’s purchasing power.
ethical consumerism: consumption of goods and services with a conscious awareness of ethical and environmental implications

Examples

An example of ethical consumerism is consciously purchasing coffee from a cafe that buys fair trade coffee beans. Concern for the conditions of producers in developing countries and the environmental sustainability of their farming practices shapes the preferences of this ethical consumer.
Example of ethical consumerism would be consciously purchasing coffee from a cafe that buys fair trade coffee beans. Concern for the conditions of producers in developing countries and the environmental sustainability of their farming practices shapes the preferences of this ethical consumer.

Consumerism

Consumerism is a social and economic order that encourages the purchase of goods and services in ever-greater amounts. The term is often associated with criticisms of consumption starting with Thorstein Veblen. While the term “consumerism” is also used to refer to the consumerists movement, consumer protection or consumer activism, the focus of this section relates to the first definition.

In economics, consumerism refers to economic policies that place emphasis on consumption. In an abstract sense, it is the belief that the free choice of consumers should dictate the economic structure of a society (cf. Producerism, especially in the British sense of term).

The term “consumerism” was first used in 1915 to refer to “advocacy of the rights and interests of consumers” (Oxford English Dictionary). Today the term consumerism more commonly refers to the, “emphasis on or preoccupation with the acquisition of consumer goods” (Oxford English Dictionary), a movement that emerged in the 1960s. This more modern conceptualization is based on the writings of sociologist and economist Thorstein Veblen who lived at the turn of the 20^th century. He coined the term “conspicuous consumption” to describe this apparently irrational and confounding form of economic behavior. Veblen’s scathing proposal was that unnecessary consumption is a form of status display .

Conspicuous Consumerism

Conspicuous consumption is when goods are consumed to enhance one’s social status.

History of Consumerism

Consumerism today is an international phenomenon. People purchasing goods and consuming materials in excess of their basic needs is as old as the first civilizations (e.g. Ancient Egypt, Babylon and Ancient Rome).

The seeds of modern day consumerism grew out of the Industrial Revolution. In the nineteenth century, capitalist development and the industrial revolution were primarily focused on the capital goods sector and industrial infrastructure. For example, after observing the assembly lines in the meat packing industry, Frederick Winslow Taylor brought his theory of scientific management to the organization of the assembly line in other industries; this unleashed incredible productivity gains and reduced the costs of all commodities produced on assembly lines. Henry Ford and other leaders of industry understood that mass production presupposed mass consumption.

In the agrarian economy, the working classes labored long hours and had little time for consumption. While previously the norm had been the scarcity of resources, the Industrial Revolution created a new economic situation. After the Industrial Revolution, products were available in outstanding quantities, at low prices, being thus available to virtually everyone. Access to credit, in the form of installment payments aided further consumption.

Modern Consumerism

Beginning in the 1990s, the reason most frequently given for attending college had changed. Making a lot of money outranked previous reasons such as becoming an authority in a field or helping others in difficulty. This rationale correlates with the rise of materialism, specifically the technological aspect: the increasing prevalence of mp3 players, digital media, tablets and smartphones. Madeline Levine criticized what she saw as a large change in American culture; “a shift away from values of community, spirituality, and integrity, and toward competition, materialism and disconnection.”

Businesses have realized that wealthy consumers are the most attractive targets of marketing. Consequently, upper class tastes, lifestyles, and preferences trickle down to become the standard for all consumers. The not so wealthy consumers then “purchase something new that will speak of their place in the tradition of affluence”. A consumer can have the instant gratification of purchasing an expensive item to improve social status.

Emulation is also a core component of 21^st century consumerism. As a general trend, regular consumers seek to emulate those who are above them in the social hierarchy. The poor strive to imitate the wealthy and the wealthy imitate celebrities and other icons. The celebrity endorsement of products can be seen as evidence of the evocation of the desire of modern consumers to purchase products partly or solely to emulate people of higher social status. This purchasing behavior may co-exist in the mind of a consumer with an image of oneself as being an individualist.

Ethical Consumerism

The rise in popularity of ethical consumerism over the last two decades can be linked to the rise of the Corporate Social Responsibility (CSR) movement. As global population increases, so does the pressure intensify on limited natural resources required to meet rising consumer demand. Industrialization of developing countries, facilitated by technology and globalization is further straining these resources. Consumers are becoming more and more aware of the environmental and social implications of their day-to-day consumer decisions and are therefore beginning to make purchasing decisions based on environmental and ethical implications. However, the practice of ethical consumerism is in its nascent stages and far from universal.