Business ethics, through the simplest lens, refers to the policies, standards, and behaviors (both explicit and implicit) that help to develop trust between buyer and seller in a marketplace. While not always directly visible during consumer transactions, business ethics are vital to any economy’s ability to function.
What are business ethics?
Business ethics refers to the policies and procedures -- written and unwritten -- that establish trust between parties in the course of normal economic activity. "Business ethics" has a very broad definition: It can mean anything from being directly transparent with a counterparty (i.e., not withholding critical information that might influence a decision to participate) to acting professionally when it comes to interacting with colleagues and clients. More than anything, strong business ethics begin with an intact moral code and a willingness to adhere to it in uncertain or changing environments.
Of course, most businesses exist to earn maximum profit -- a reasonable pursuit in a capitalist economy. With that in mind, companies also need to adhere to a variety of ethical standards that act as the backdrop to conducting business. For one, ensuring that a company's books and records are accurate (so that shareholders can make informed decisions about investing) is essential in building the trust necessary for stock investment.
Why do business ethics matter?
Without trust between buyers and sellers, it becomes exceedingly difficult to sustain any sort of business relationship in the short or long term. The reality is that business scenarios come with a variety of temptations that undermine trust: preferring certain customers over others, withholding critical information from a counterparty, or purposely omitting information when acting on either side of a transaction.
Most companies will have a written policies and procedures manual that outlines specifically how an employee is required to behave within the corporate structure, but much of what makes business ethics lies in the unsaid, everyday behavior that signifies trust between clients and colleagues. Really, what this boils down to is maintaining a standard of mutual respect in interpersonal interactions and committing to doing business above board.
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Business ethics in the real world
If you take a look around your own company, you’ll likely see numerous examples of business ethics in action. For example, an investment advisor who works with many clients -- some of whom might be family members -- owes a duty of loyalty to all of their clients, not just to the ones who may be related to them. If a white-hot initial public offering (IPO) were to be released, the advisor would need to offer it fairly across all suitable accounts -- not just the ones to which they felt partial. This is just one example of a situation where business ethics should take precedence over potentially harmful behavior.
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In a more extreme example, if a supposedly unbiased party receives special treatment from a client (think fancy trips, lavish gifts, or the like), there may be a temptation -- or even an expectation -- to treat that particular client in a preferential way. Like it or not, this is a form of bribery; the client expects something in return for their gifts, like an exclusive contract or rights to certain property. Under a sound business ethics plan, employees shouldn’t be overtly influenced to choose one client over another and should act as objectively and transparently as possible when acting with counterparties. This doesn’t necessarily mean choosing unprofitable deals in the name of fairness, but it does mean removing oneself from undue influence when it comes to conducting company transactions.
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An example of business ethics gone wrong
A famous case -- if not the most famous case -- of failed business ethics is the story of Enron Corp. As one of the largest energy and commodities companies, Enron found itself embroiled in an almost laughably aggressive accounting scandal. As it turns out, Enron executives used creative accounting policies to move many of their liabilities off their books while at the same time inflating or outright inventing certain assets on their balance sheet.
While this was an unusually extreme example -- one that ended with the company dissolving and executives going to jail -- it ultimately illustrates a failure of business ethics across the organization. In the end, there was no voice to say that this behavior was wrong and that to mislead investors and employees is a critical misstep in moral judgment. Without sound business ethics, it’s extremely difficult to develop and maintain any sort of trust between a company and external parties.
Business ethics is both a broad and deep subject. You’ll be able to see business ethics in action nearly every day and in a variety of different contexts, so be on the lookout!
