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RMMAKAHA@GMAIL.COM 
BUSINESS 
ETHICS 
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SUBJECT: BUSINESS ETHICS 
CODE: 702/S05 
DURATION: 220 Hours 
1.0 GENERAL AIMS 
1.1 To provide students with a sound understanding of business ethics in order to function 
effectively and add value in employment. 
1.2 To help prepare students to function in marketplace with greater sensitivity to ethical 
issues and with keener insight into their possible solutions. 
1.3 To develop knowledge wider contextual issues such as society and business ethics. 
1.4 To develop the analytic tools and research skills needed to address contemporary 
ethical problems in business. 
2.0 OBJECTIVES 
At the end of the course the student should be able to: 
2.1 Demonstrate an understanding of thefundamental concepts, ethical theories and 
issues applicable to business ethics. 
2.2 Articulate some of the ethical dilemmas or problems which occur in business. 
2.3 Discuss the importance and relevance of business ethics in business. 
2.4 Develop an understanding of the value and limitations of methods of ethical analysis 
2.5 Identify and explain the critical issues and challenges in corporate governance. 
2.6 Distinguish between bad and good practices in business. 
2.7 Make sound ethical decisions. 
2.8 Understand five major ethical systems that have direct relevance to managerial 
decision making. 
2.9 Identify the responsibilities of business to its various stakeholders, shareholders, 
employees, suppliers, customers, competitors and government. 
2.10 Analyze and suggest viable ethical solutions. 
3.0 CONTENT 
3.1 Understanding Business Ethics 
ETHICS is a set of standards or code or value system worked out from human reason & experience by 
which free human actions are determined as ultimately right or wrong, good or evil. 
Ethics is the principles of conduct governing an individual or a group. 
• Ethics is “the study of morality”. 
• Although ethics deals with morality, it is not quite the same as morality. Ethics is a kind of 
investigation and includes both the activity of investigating as well as the results of that 
investigation – whereas morality is the subject matter that ethics investigates. 
• Business ethics is a specialized study of moral right and wrong. It concentrates on moral 
standards as they apply to business policies, institutions and behavior. 
• There is no better way to begin an investigation into the relationship between ethics and 
business than by looking at how real companies have actually tried to incorporate ethics and 
business. 
• Morality: can be defined as standards that an individual or a group has about what is right 
and wrong or good and evil.
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3.1.1 The meaning of the Business Ethics and Integrity. 
WHAT ARE BUSINESS ETHICS? 
Business ethics are the code of morals that are the standard of conduct expected of or adopted by a 
business. They are the set of principles which guide business or which a business adopts as the 
acceptable standard of performance in respect of various stakeholders and interested parties. These 
stakeholders include its customers, its suppliers, its employees, its shareholders, government authorities 
and any other party which interacts with the organization. 
WHAT IS BUSINESS INTEGRITY? 
Business integrity is the reliability with which the business undertakes its transactions with the various 
parties with which it interacts. It is the soundness and honesty with which it conducts its business 
transactions and the relationship that it promotes with all parties with which it interacts. 
WHY HAVE BUSINESS ETHICS AND INTEGRITY? 
When business ethics and integrity are present all parties dealing with the business know they can rely 
on the standards with which the business conducts its business transactions. 
WHY ARE BUSINESS ETHICS AND INTEGRITY IMPORTANT? 
Business ethics and integrity are important to all parties dealing with the business. Employees will know 
that they will be paid on time, creditors will be confident of being paid, government authorities will be 
aware that the business respects authority, all parties transacting business with the organization will 
tend to be more cooperative and helpful. In addition the business is likely to be more ordered and 
successful and not lunge from self-generated crisis to self-generated crisis. 
How were Business Ethics Developed? 
If you plan to own or manage a business, it is advisable to have knowledge of business ethics. It is 
basically the code that business persons follow to ensure that they are doing the right things to attain 
success. These codes were developed through years of studies and research. Business ethics is a 
reflection of the norms, values, and folkways of a certain country or place in respect of business 
practice. 
Once you decide to own or manage a business, it is important that you are aware of business ethics. 
Perhaps you're wondering how it is developed. It takes time to develop the ethics. The latter is actually 
a philosophy field that studies values, norms, and systems. In the case of managing and conducting a 
business, it will guide you to do the right things. The field focuses on a commercial enterprise's conduct 
or policies to determine which ones are appropriate to use. It can be difficult to determine which 
ethical conduct is correct. If you are a committed a businessperson, you will take time to know what is 
right or wrong and subscribe to the right ones. 
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Development of Business Ethics 
Business ethics cover various activity including responsibilities, obligations, employees, customers, 
businesses, taxation, environment, and national/multinational governments. There are times when 
ethics is dictated by the folkways and conventions although there are also times when federal, state 
and local government laws dictate action as well. This is where institutionalized business ethics enter the 
scenes which include the contracts product safety, pricing, warranties, and many others. There are 
now professions and corporations that contribute to the establishment of the code of ethics. 
Researchers usually explore business ethics in three ways - studying famous philosophers and their 
views, identifying ethical concerns, and examining various case studies.
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It was only in the 1970's when the business ethics concepts became popular. Certain factors were able 
to contribute to the interest in ethics and a very evident one is the change in societal values. If you're 
part of the executives of a new organization, you can become part of a team to develop the code of 
ethics. However, in the business industry, it's typical for businesses to follow the same set of code as set 
by the industry. They no longer have to create their own and in most will just include new one that 
deemed fit. 
The development of business ethics took a long time to be at its present level. It embraces different 
generations until the present. The code wasn't developed overnight. Businesses within a particular 
trade or practice are expected to comply with the code to make sure that operations are carried out 
properly and without violating morality. This is part of the industry best practices and self-regulation. 
If you want your business to stay competitive, it is important that you know the industry code of ethics. 
Running a business can be very challenging. With the right knowledge, skills, and attitude, you will soon 
experience success. The most successful ones observed the code strictly, and so must your business. 
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Benefits of Practicing Business Ethics 
In the research study, "Does Business Ethics Pay?" by The Institute of Business Ethics (IBE), it was found 
that companies displaying a "clear commitment to ethical conduct" consistently outperform 
companies that do not display ethical conduct. The Director of IBE, Philippa Foster Black, stated: "Not 
only is ethical behavior in business life the right thing to do in principle, we have shown that it pays off in 
financial returns." These findings deserve to be considered as an important insight for companies 
striving for long-term success and growth. 
7 Principles of Admirable Business Ethics 
1. Be Trustful: Recognize customers want to do business with a company they can trust; when trust is at 
the core of a company, it's easy to recognize. Trust defined, is assured reliance on the character, 
ability, strength, and truth of a business. 
2. Keep an Open Mind: For continuous improvement of a company, the leader of an organization must 
be open to new ideas. Ask for opinions and feedback from both customers and team members and 
your company will continue to grow. 
3. Meet Obligations: Regardless of the circumstances, do everything in your power to gain the trust of 
past customers and clients, particularly if something has gone awry. Reclaim any lost business by 
honoring all commitments and obligations. 
4. Have Clear Documents: Re-evaluate all print materials including small business advertising, 
brochures, and other business documents making sure they are clear, precise and professional. Most 
important, make sure they do not misrepresent or misinterpret. 
5. Become Community Involved: Remain involved in community-related issues and activities, thereby 
demonstrating that your business is a responsible community contributor. In other words, stay involved. 
6. Maintain Accounting Control: Take a hands-on approach to accounting and record keeping, not 
only as a means of gaining a better feel for the progress of your company, but as a resource for any 
"questionable” activities. Gaining control of accounting and record keeping allows you to end any 
dubious activities promptly. 
7. Be Respectful: Treat others with the utmost of respect. Regardless of differences, positions, titles, ages, 
or other types of distinctions, always treat others with professional respect and courtesy.
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Recognizing the significance of business ethics as a tool for achieving your desired outcome is only the 
beginning. A small business that instills a deep-seated theme of business ethics within its strategies and 
policies will be evident among customers. It's overall influence will lead to a profitable, successful 
company. By recognizing the value of practicing admirable business ethics, and following each of the 
7 principles, your success will not be far off. 
Characteristics of Business Ethics? 
 Differ with persons: ethical questions do not have a unique solution but a multitude of 
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alternatives 
 Ethical decisions are not limited to them, but affect a wide range of other situations as well. 
 Ethical decisions involve a tradeoff between cost incurred and benefits received. 
 Consequences are not clear 
 Every person is individually responsible for the ethical or unethical decision and action that he 
or she takes 
 Ethical actions are voluntary human actions 
The important characteristics of business ethics are; 
1. As a guide: - Business ethics constitutes the guiding principles of business functions with the help of 
this, businessmen can lean about the progress, situation, environment and conditions of the business. 
2. Goals and means: - Business ethics is that branch of the business environment in which can study 
about the goals and means for the rational selection of sacred objects and their fulfillment. 
3. Art and Science: - Business ethics is concerned with the principles of business behavior, standards, 
moral values etc. With the study of business ethics, we can show the difference between good and 
evil, proper and improve actions of business. For these activities in business, business ethics is known as 
an ideal science. It is an art because it emphasizes practical use of behavioral standards, techniques 
and principles. 
4. Study Human Aspects: -Business ethics all those which are concerned with human aspect. It provides 
information to customers, government, society etc., on good or bad, right or wrong conducts of 
business. 
5. Difference from Social Responsibility: -Social responsibility is concerned with functions, programs and 
policies of an enterprise, whereas business ethics is related with the conduct and behavior of 
businessmen. But social responsibility of business and its policies are influenced by ethics. 
6. Theology based: - The development of business ethics is possible on the basis of theological 
principles, such as service, human welfare, sincerity, good behaviour etc. 
7. Development Personal Dignity: -Personal dignity can develop with the principles of ethics. 
8. Unrelated to Emotions: -Business ethics is not concerned with emotions but is based on reality and 
social customs. As a matter of fact, business ethics is developed after testing the requirements of 
business environment, social customs and traditions. 
9. Universal Philosophy: - Business ethics is a universal philosophy. Ethical principles have relevance in 
every business.
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Why are ethics important in business? 
 Ethics corresponds to basic human needs 
 Values create credibility with the public 
 Values give management credibility with employees 
 Values help better decision making 
 Ethics and profit 
 Law cannot protect society, ethics can 
IMPORTANCE OF BUSINESS ETHICS: 
It is now recognized that it is good business to be ethical. An ethical image for a company can 
build goodwill and loyalty among customers and clients. 
1. Ethical motivation:It protects or improves reputation of the organization by creating an 
efficient and productive work environment. At a time of mass corporate downsizing, one 
of the most effective ways to appeal to the fragile loyalty of insecure employees is to 
promote an ethical culture, which gives employees a greater sense of control 
andappreciation. 
2. Balance the needs and wishes of stakeholders:There is pressure on business to 
recognize its responsibilities to society. Business ethics requires businesses to think 
about the impact of its decisions on people or stakeholders who are directly or 
indirectly affected by those decisions. Companies build their image by acting in accordance 
with their values, whatever they might be. Creating a positive public image comes from 
demonstrating appropriate values. Publicizing and following a company’s values allows 
stakeholders to understand what the company stands for, that it takes its conduct as an 
organization seriously. 
3. Global challenges:Business must become aware of the ethical diversity of this worldbecause 
of increasing globalization of the economy. It must learn the values of other cultures, how to 
apply them to its decisions, and how to combine them with its own values. In a world where 
transnational corporations and their affiliates account for two-thirds of the world’s trade in 
goods, and employ 73 million people, corporations cannot afford to ignore the reality of 
multicultural ethics. 
4. Ethical pay-off:They serve to protect the organization from significant risks, and tosome 
degree help grow the business. Risks such as breaches of law, regulations or company 
standards, and damage to reputation were perceived to be significantly reduced. 
5. Employee Retention:One of the major costs in business is inappropriate turnover. Theloss of 
valuable experience and development of new personnel is a cost companies can control. 
Seldom is pay the primary factor in losing an employee. What would a company give to retain 
valuable employees? With a successful program, the employees work with managers and 
supervisors in making decisions based on the company’s values. A successful Business Ethics 
program establishes a culture that rewards making the right decision. 
6. Prevention and Reduction of Criminal Penalties: 
The United States Sentencing Commission Guidelines state that to receive a 40% reduction in 
federal penalties, a company must have an effective program to detect and prevent 
violations of the law. Executives cannot always be aware of everything done in a company’s 
name. Jeffrey Kaplan in his article The Sentencing Guidelines: The First Ten Years points out 
those recent cases also show that prosecutors are electing not to pursue some actions 
because the companies in question have sound programs in place. This is a tremendous asset 
to companies under regulatory scrutiny. 
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7. Preventing civil lawsuits:Many times employees that experience issues in the workplacefirst try 
to resolve these issues internally. If their complaints are ignored, employees feel compelled to 
go to an outside advocate. That could be a private attorney, government regulator or news 
agency. Giving employees an internal outlet can solve problems without the event becoming 
public knowledge or an issue for the courts. Having the values permeate the company 
culture enhances the staffs trust in senior management. Why? Because with an effective 
program, the staff recognizes that management also operates within these appropriate 
values. 
8. Market Leadership:When a company fully integrates its values into its culture, qualityrises due 
to the employees focus on values. Customers see that the employees care more about the 
customers concerns. Employees reflect appropriate values in their attitude and conduct. Try 
Ethical Business Practices points out those businesses demonstrating the highest ethical 
standards are also the most profitable and successful. 
9. Setting the Example:By setting the example in the community and market, the entireindustry 
has a new standard that allows the community and the market to recognize the company 
as a leader. When the word gets out, competitors will have to answer questions about why 
they were not establishing similar values. 
The Role of Business Ethics Today 
 Business and IT students spend the majority of their time at university learning about economics, 
business development, software engineering and computer programming. This is all valuable 
and necessary knowledge to prepare them for the demands of employment in the business/IT 
sector. However, running or working in a business will raise many difficulties that are completely 
unrelated to the skills or knowledge gained in university. 
 How do you evaluate such problems as hiring the more qualified candidate for a job when 
she has a disability requiring costly adaptations to the work environment, outsourcing 
production materials from countries where child labour and sweatshops are prevalent etc.? 
 In recent years there have been several business scandals that caused serious damage to the 
credibility of the companies involved, occasionally the entire industry in which they operate, 
and the numerous stakeholders of the business. One such example is the collapse of Barings 
Bank - the actions of one rogue trader incurred losses of almost US$1 billion. It has been 
discovered that many high profile people (at home and abroad) are involved in tax-evasion, 
insider trading and fraud, Charlie Haughey and Martha Stewart are two such examples of 
people with considerable wealth and public standing who have been involved in 
questionable business dealings. 
 At this stage in your course, you are well equipped with knowledge of your subject, and 
this will be built on when you go into the workplace due to on-going training and other 
such practices. But it is fair to say that some of you may have never had the chance to 
think of the ethical issues entailed in business and IT. During this course on business ethics 
it is hoped that you will be given such an opportunity and attain a working knowledge of 
the different theoretical frameworks that can be applied to business. 
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ETHICAL ISSUES IN BUSINESS 
Good and bad: 
There are four degrees of rightness and wrongness in behavior, which in order of goodness are: the 
good, benignness, indifference and the bad. 
Good: Taking positive action for good or to prevent harm being done. 
Benign: Avoiding doing harm, supports the doing of good but takes no positive action to do good. 
Indifferent: Ignoring harm done by or to others and disregarding the right of others. 
Bad: Taking action to do harm. Taking no action to prevent harm being done 
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Legal, illegal and just: 
Actions that are good and legal, but not a legal obligation; 
Some actions may raise ethical issues because, although they are good and legal, people do not take 
them because the law does not require them to do so. The question is whether people and 
corporations should do them even though they are not obliged to do so. 
Actions that is wrong and illegal: 
Ethical or moral questions arise because an action is both wrong and illegal. Such actions ought to be 
straight forward to condemn. However, on issues that many would place in this category, others might 
argue that the action is neither wrong nor illegal. 
Actions that is legal, but not necessarily just: 
This includes actions that my be legal but are also arguably bad. Many of the moral and ethical issues 
that affect business fall into this category. 
Actions that are just but illegal: 
This category is one that will always generate controversy. It concerns actions that may be illegal but 
are morally or ethically good. It concerns the question of when a law can be said to be immoral and 
when it is justifiable to break or defy it. Campaigning against a law one disapproves of is acceptable 
within a democratic system; the ethical problem only emerges when a person moves from 
campaigning to disobedience. 
Basic Ethical Values for Business 
1. Trust 
2. Honesty 
3. Fairness 
4. Dignity and Respect for Humanity 
5. Respect for Legitimate Law 
6. Respect for Property 
7. Autonomy and Freedom 
8. Impartiality/Objectivity 
9. Compassion
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The Nolan principles for public life in business: 
The Nolan Committee’s (1995) principles for public life are focused on ensuring that private or sectional 
interests do not prejudice people’s decisions on matters of public interest. 
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Selflessness: 
Holders of public office should act solely in terms of the public interest. They should not do so in order 
to gain financial or other benefits for themselves, their family or their friends. 
Integrity: 
Holders of public office should not place themselves under any financial or other obligation to outside 
individuals or organizations that might seek to influence them in the performance of their official duties. 
Objectivity: 
In carrying out public business, including making public appointments, awarding contracts, or 
recommending individuals for rewards and benefits, holders of public office should make choices on 
merit. 
Accountability: 
Holders of public office are accountable for their decisions and actions to the public and must submit 
themselves to whatever scrutiny is appropriate to their office. 
Openness: 
Holders of public office should be as open as possible about all the decisions and actions that they 
take. They should give reasons for their decisions and restrict information only when the wider public 
interest clearly demands. 
Honesty: 
Holders of public office have a duty to declare any private interests relating to their public duties and 
to take steps to resolve any conflicts arising in a way that protects the public interest. 
Leadership: 
Holders of public office should promote and support these principles by leadership and example. 
Ethical Dilemmas in Business 
There are many areas where ethical dilemmas arise. Here are five categories of common 
ethical dilemmas in business: 
1. Human resource issues 
Human resource issues 
Human is the most important resource to an organization. Issues associated with human 
resources occur as a result of employees working together. These issues are by far the 
largest category of ethical dilemmas in business. 
The four main types of human resource issues are as follows:
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• Hiring and Termination Issues 
Recruitment or hiring process is the first step in selecting human resource into an 
organization, and will significantly influence the successful performance of the organization. 
Ethics plays a very important role during the recruitment of new employees. Law and 
regulations dictate that we have to be ethical in hiring. However, ethical hiring practice goes beyond 
them as well. It has been widely reported by many researchers that ethical hiring practices actually 
result in better employees being recruited. 
It is therefore important that sound ethical rules are followed when hiring a new employee. 
It is of vital importance that candidates are to be selected based on merits. Applicants are 
to be hired based purely on merits such as knowledge, skills, and ability in accordance to the needs of 
the organization. 
If a company provides any special considerations, for example affirmative action, where 
certain groups are given special considerations, these considerations should be well stated 
in the company's policy statement. In any case, any preferential treatment should be one 
that is legally allowed. 
While preferential treatments to certain specific group may be allowed, there should be no 
discrimination to people from any other group due to race, religion, gender, marital or even 
pregnancy status. 
Consistency and objectivity during the recruitment process are very important. Criteria, 
including any changes in the criteria, used for evaluating candidates should be stated and 
explained to order to avoid unnecessary claim of biasness in the recruitment process. 
Objective evaluation results in the best employees being recruited while consistency ensures 
high morale among employees. 
When we recruit new employees, we should tell the applicants about the true state of the 
organization. We should not mislead the applicants. In particular, the applicants should be 
told all pertinent information, including those information that are not publicly known but that will 
materially affect the new employee's future employment prospect with the organization. We can learn 
from the case involving Phil McConkey. Phil McConkey was recruited but he was not aware that the 
company was in the process of being taken over by another entity. One year after joining the 
company he lost his job with he new company. He sued the company for with-holding important 
information from me during the recruitment process. He won the case and was awarded $10 million. 
We should never place misleading job advertisement in order to get applications if we are 
offering a job contract different from what we advertised for. For instance, if we want to 
engage independent contractors instead of normal salaried employment. The reason why 
we choose to engage independent contractors is that we do not have to be burdened with 
high salary cost for employees that are not competent, but we are willing to compensate 
employees according to performance. We should always state clearly our terms of 
employment. In any case, we do not want to be accused of any job scam. 
We have to be extra careful when we are recruiting employees from organizations that have material 
dealing with us include our suppliers, customers and competitors. If we are not 
careful ethical issues very damaging to us can arise. 
When we employ somebody from our suppliers, the suppliers may feel that we have 
unethically poached their good employee. After all, it is through the working relationship we 
have with the suppliers that we can to know the quality of this employee. 
When we employ somebody from our customers we can be accused of returning favor to that person. 
This rule applies especially when employing a former senior government employee that has an 
influence on the awards of contracts to an organization like yours. The case of Ms. Darleen Druyun at
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the Department of Defense and Mr. Michael Sears at Boeing is a good illustration of the importance of 
such a rule. In this case, employment favor was apparently granted by Boeing in exchange for 
favorable consideration for the awards of contracts by Department of Defense. Also, be careful not to 
employ former government employees for the purpose of lobbying for contracts from their previous 
government departments. At least, do not do so within the first two years of the employee leaving the 
government service. 
It is also not very wise to employ somebody from our competitors because we can be 
accused of stealing trade secrets from our competitors. If that employee can pass on his 
previous employer's secrets unethically, what is there to sop him from passing your trade 
secrets to others? 
Even though it may not be considered as unethical by some employers, as a matter of 
courtesy and good public relationship to inform an unsuccessful applicant. 
When an employee is asked to leave, it is also of vital importance that it is handled with 
fairness and care. If it is a case of poor performance or disciplines, the employee has to be 
given prior warning (unless it is violation of a well stated policy or is of a very serious nature) 
and fair hearing. In any case, do not hurt the dignity of the employee and offer to provide 
the necessary assistance where appropriate. 
Before an employee leave for any reason, provide him/her with an opportunity to provide 
feedback on the overall state of the organization by conducting exit interviews. 
• Discrimination is the unfair or preferential treatment of a person on the basis of one or 
more uncontrollable characteristics, including race, gender, age, color, religion, or national 
origin, as well as handicapped or pregnancy status. 
Discrimination against others in the workplace can impair your ability to perform your job 
according to company expectations. 
In most countries, there are laws that protect potential and current employees from 
discrimination based on age, race, color, national origin, religion, and gender, as well as 
pregnancy or handicapped status. 
• Performance Appraisals are conducted to evaluate an employee’s performance over a set period 
of time. 
When evaluating subordinates, one has to remain consistent and objective. Consistency is 
even more important when evaluating an existing employee than a prospective employee. 
Consistency requires that you treat every employee's misbehaviour the same way. For 
example, it would be wrong to punish one employee's tardiness while leaving another 
employee's tardiness unchecked. 
In order to maintain objectivity, the company’s standardized evaluation forms should be 
used. In this way, uniform criteria can be used for the appraisal of all employees under you. 
Also, all employees in the company are evaluated based on the same criteria. 
Constant feedback and communication between you and your subordinates is necessary to facilitate 
a positive and productive working relationship. Don’t wait until periodic performance evaluations to 
express your observations and suggestions. In fact, it is unethical to base salary adjustments upon 
performance problems that have not been brought to the employee’s attention. 
For employees being evaluated, honesty and acceptance of responsibility for performance 
problems are important ethical considerations. 
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• Disciplinary issues
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Disciplining employees is one of the most difficult parts of a manager’s job. Nevertheless, it 
is vital to the growth and overall success of the organization. 
Disciplining employees both ensures productivity and sets standards for the future. 
Discipline should occur immediately after a problem has occurred. It is imperative that the 
disciplinary actions remain consistent for all employees. 
A serious disciplinary issue is sexual harassment where female employees (less so for male 
employees) are subjected to an unwanted sexual behavior that creates an intimidating or 
hostile work environment. This includes unwelcome sexual advances, requests for sexual 
favors, and other verbal or physical conduct of a sexual nature. This conduct is not only 
unethical, but illegal as well. 
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2. Employee safety issues 
Employee Safety Issues 
Every employee is entitled to a safe and healthy work environment. We shall discuss in 
some details the works of The Occupational Safety and Health Administration (OSHA). 
OSHA 
The Occupational Safety and Health Administration (OSHA) was created to ensure the 
safety and health of America's workers by setting and enforcing standards; providing 
training, outreach, and education; establishing partnerships; and encouraging continual 
improvement in workplace safety and health. 
It is unethical and illegal to force an employee to perform an unsafe task or to work in 
unhealthy environments. To enforce staff protective standards as well as to reach out to 
employers and employees through technical assistance and consultation programs, OSHA 
and its state partners have approximately 2100 inspectors, plus complaint discrimination 
investigators, engineers, physicians, educators, standards writers, and other technical and 
support personnel spread over more than 200 offices throughout the country. 
With some exceptions such as miners, transportation workers, many public employees, and 
the self-employed, nearly every working man and woman in the nation comes under 
OSHA's jurisdiction. Even occupational safety and health professionals, the academic 
community, lawyers, journalists, and personnel of other government entities are served by 
OSHA. 
OSHA enforce the safety and health standards by mechanisms such as Site Specific 
Targeting (SST), Local Emphasis Programs (LEPs), National Emphasis Programs (NEPs), and 
the Enhanced Enforcement Program (EEP). 
The OSHA's Enhanced Enforcement Program (EEP) focuses on employers who, despite 
OSHA's enforcement and outreach efforts, repeatedly ignore their OSH Act obligations, and 
place their employees at risk. EEP targets cases with extremely serious violations related 
to a fatality or multiple willful or repeated violations. The objective of EEP is to assure 
sustained compliance at these workplaces. If an inspection is classified as an EEP, then it 
may receive, among other things, follow-up inspections, inspections of other workplaces of 
that employer, and more stringent settlement provisions. 
3. Conflicts of interest 
Conflicts of interest 
Conflicts of interest arise when an employee’s judgment is compromised due to external 
influences. These situations present a particular ethical dilemma when the best interest of 
the employee and the best interest of the company are at odds.
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Conflicts of interests often arise. A company may specify that an employee must not have 
any financialinterests in a company that has dealings with or competing with it. A conflict of interest 
situation may notarise out of financial interest. We have to be careful that while we attempt to 
eliminate a conflict ofinterests, we do not cause another conflict of interest issue. A recent example is 
when Mr. PaulWolfowitz, the previous President of World Bank, transferred his girlfriend out of the Bank 
to reduce conflict of interest, but because the new terms were too much better than her old terms of 
employment, resulting him being accused of infringement of code of ethics. 
IBM is quite explicit in defining when a financial interest in another organization may lead 
to conflicts ofinterest arise. It states:A financial interest is improper if your job, the amount of your 
investment, or the particular company inwhich you invested could -- when viewed objectively by 
another person -- influence your actions as an IBMemployee. In the case of a supplier or alliance 
company, if you have anything to do, either directly orindirectly, in deciding whether IBM does 
business with that company, you should not have any financial 
interest at all in the company. 
However, most organizations, especially the smaller ones, do not have such clear 
statements on conflict of interest. It is important that the employees themselves be wary 
of the dangers if they do not want to get into trouble with their employers or with the law. 
There is an example of a case that involves two former Boeing employees. Michael Sears 
was the CFO and Darleen Druyun was corporate vice president. Druyun retired earlier from 
the Air Force as the No. 2 acquisition executive. It all began with the request by Druyun to 
Sears for jobs in Boeing for two of Druyun’s family members. She was sentenced to nine-month 
prison sentence because she awarded a contract to Boeing out of gratitude for the 
company for employing her and two family members. Sears was sentenced to four months 
in prison for improperly recruiting Druyun. 
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4. Customer confidence 
Customer confidence 
It is the ethical responsibility of every employee to ensure that customers are treated fairly 
and that no harm comes to customers as a result of using the company’s products or 
services. There are three types of issues associated with customer confidence: 
• Confidentiality has many aspects. It includes not divulging information about the 
particular products or services that a particular customer purchases. It can include medical 
information revealed by a patient or discovered by a physician in connection with the 
treatment of a patient. In general, it can also include protecting information on mergers or 
downsizing plans, or even the fact that an organization or individual is a customer. 
What is the purpose of a physician's ethical duty to maintain patient confidentiality? It is to 
allow the patient to feel free to tell his doctors fully and honestly knowing that the doctor 
will not disclose it to others. Full disclosure by patient enables the doctor to diagnose 
conditions properly and to treat the patient appropriately. In return for the patient's 
honesty, the physician generally should not reveal confidential communications or 
information without the patient's express consent unless required to disclose the 
information by law. Under certain conditions, example when a patient threatens bodily 
harm to himself or herself or to another person, the doctor may have to inform the relevant 
authorities. 
From time to time, the officers in the company will have inside information that may not be 
known to the general public. This may be information about new products, plans or 
processes, mergers, acquisitions, negotiations relevant to significant business deals, 
contracts, sales, lawsuits, or special relationships with others. You cannot use 
undisclosed material information (including material facts and material changes) concerning
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the company, its shareholders or partners to your personal advantage, or the 
corresponding disadvantage of others in the securities market. It is also prohibited for a 
person with such information to give it to others, or tipping, so that the other person 
may improperly make use of the information. 
The issue of confidentially is not very often straight forward. For example, many 
businesses do have to situations that may be awkward because of the need for 
confidentiality, and yet be transparent. These awkward decisions may arise because 
commercial confidentiality requires that the corporation conceals or otherwise deflects 
attention away from certain commercially sensitive information. It is not always easy to 
draw the line between confidentiality and transparency. 
• Product safety means ensuring that the products entering the market are not harmful, 
and is the ethical responsibility of every employee. No product is completely safe, but it is 
the organization’s responsibility to disclose all known effects of the product. 
The recently announced recalls on Aug 14, 2007 by Mattel for 9 million more Chinese-made 
toys, including popular Barbie, Polly Pocket and “Cars” movie items, and warned that more 
could be ordered off store shelves because of lead paint and tiny magnets that could be 
swallowed. 
The recalls came nearly two weeks after Mattel Inc., the nation’s largest toy-maker, 
recalled 1.5 million Fisher-Price infant toys worldwide, which were also made in China, 
because of possible lead-paint hazards for children. 
The recent recalls by millions of toys made in China because of safety issues has done 
tremendous damage to China as a whole. The boss of one of the China toys maker 
committed suicide as a result. 
• Truthful advertising encompasses two primary types of ethical issues: exaggerating 
product features and falsifying product information. Deceptive advertising is unethical and 
it is the responsibility of the employee as well as the organization to see that false 
advertising does not occur. 
The episode of discovery by two students Anna Devathasan and Jenny Suo in New Zealand 
that Ribena contains almost no Vitamin C at all had done tremendous damage to the 
reputation of GlaxoSmithKline, a global drug giant. Still stated in the company's web site is 
the following statement about Ribena: 
First made using blackcurrants in the 1930s, Ribena is a fruit drink available in a number of 
different flavours. The best-selling variety is still made from fresh blackcurrants. Ribena Really 
Light is the low-calorie, friendly to teeth version of Ribena with no added sugar. 
The above statement stated that Ribena was first made using blackcurrants - it is a 
statement of fact. However, it does not state that it is no more made using blackcurrants. 
GlaxoSmithKline had always associate Ribena with blackcurrant in the past (with the claim 
contained four times the vitamin C of oranges) until the episode and most of us were 
made to believe that Ribena was made from blackcurrants. 
GlaxoSmithKline pleaded guilty and admitted it may have misled consumers in adverts that 
said blackcurrants in Ribena syrup had four times the vitamin C of oranges. 
5. Use of corporate resources 
Use of corporate resources 
Ethical use of corporate resources requires that employees be fair and honest to their 
employers. Here are three considerations that fall under this category: 
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• Using company letterhead. Employees should not use company letterhead for personal 
reasons because such use can imply that the information contained in the personal 
document is supported by the organization. Examples include a letter of recommendation 
for a former employee written by an unauthorized employee, as well as personal 
messages that reflect the opinion of the employee and not the company. 
• Using supplies. Unauthorized use of supplies is unethical because it costs your 
organization money, regardless of the quantity of supplies used. Although taking a box of 
pens home from the office might not appear to be an ethical issue, it is. 
Suppose that the box of pens costs the company five dollars. Now consider, that instead 
of taking the box of pens, you took five dollars out of the petty cash box. Ethically, the two 
actions are the same. 
• Skewed financial data. Sometimes, an employee’s compensation is linked to the company’s 
financial performance. One major problem with this approach is the temptation of such employees to 
skew financial data. It is sometimes possible for an employee to accomplish this in a way that is 
unethical, although not illegal. Besides being unethical, such behavior can lead to serious 
consequences when future decisions are made based on the skewed data. 
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3.1.2 Ethical Theories 
Normative Ethical Theories. 
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Normative Ethics 
Normative ethics is the attempt to provide a general theory that tells us how we ought to live. Unlike 
metaethics, normative ethics does not attempt to tell us what moral properties are, and unlike applied 
ethics, it does not attempt to tell us what specific things have those properties. Normative ethics just seeks 
to tell us how we can find out what things have what moral properties, to provide a framework for ethics. 
Normative Ethics 
For any act, there are three things that might be thought to be morally interesting: first, there is the agent, 
the person performing the act; second, there is the act itself; third, there are the consequences of the act. 
There are three types of normative ethical theory–virtue, deontological, and consequentialist–each 
emphasizing one of these elements. 
Virtue Ethics 
This first normative ethical theory, virtue theory, concentrates on the moral character of the agent. 
According to virtue theory, we ought to possess certain character traits–courage, generosity, compassion, 
etc.–and these ought to be manifest in our actions. We therefore ought to act in ways that exhibit the 
virtues, even if that means doing what might generally be seen as bad or bringing about undesirable 
consequences. 
Deontology 
Normative theories of the second type, deontological theories, concentrate on the act being performed. 
According to deontological theories, certain types of act are intrinsically good or bad, i.e. good or bad in 
themselves. These acts ought or ought not to be performed, irrespective of the consequences. 
Consequentialism 
The third approach to normative ethics is consequentialism. Consequentialist theories hold that we ought 
always to act in the way that brings about the best consequences. It doesn’t matter what those acts are; 
the end justifies the means. All that matters for ethics is making the world a better place. 
Application 
To give an example, then, suppose that a man bravely intervenes to prevent a youth from being assaulted. 
The virtue theorist will be most interested in the bravery that the man exhibits; this suggests that he has a 
good character. 
The deontologist will be more interested in what the man did; he stood up for someone in need of 
protection, and that kind of behaviour is intrinsically good. 
The consequentialist will care only about the consequences of the man’s actions; what he did was good, 
according to the consequentialist, because he prevented the youth from suffering injury.
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Descriptive Ethical Theories. 
Descriptive theory explains how things are (e.g., this paper is white; most Americans eat meat; etc.), 
whereas normative or prescriptive theory tells us how things ought to be (people ought to be honest, etc.). 
Ethics is about what ought to be, not what is. 
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DESCRIPTIVE THEORIES 
Most theories of ethics are prescriptive. In other words they don’t just offer insight into what the nature of 
morals are they also give guidance on how you should behave. Since the growth of scientific thinking some 
people have offered descriptive theories of ethics. In other words these are theories that may shed light on 
what people are doing when they make ethical judgements but they don’t (and can’t) actually help you 
make that judgement without some extra input. Below are some examples of descriptive approaches to 
ethics. 
Emotivism: Approval and Disapproval 
Emotivism is a theory of ethics that has given up trying to work out what morally good and morally bad 
might actually mean. Emotivism says that statements about morality don’t really mean much at all instead 
they are just expressions of how a person feels about an issue. For example an emotivist would interpret the 
statement “Animal testing is unethical” as really meaning “I find the idea of testing animals yucky”. 
Note that Emotivism is a descriptive theory of ethics. It describes what ethical statements are like but does 
not give any guidance on how you should behave. Emotivism does NOT say that you SHOULD just follow 
your feelings when it comes to making moral decisions; it is saying that you really don’t have any choice 
but to follow one feeling or another. Although plausible, Emotivism isn’t very helpful. 
Social and Psychological Theories 
As far as we are aware fish don’t agonise over moral dilemmas. Although elephants have emotions they 
don’t seem troubled about the consequences of their actions. Maybe ethics is something to do with being 
human. 
Sociology, anthropology and psychology all can provide interesting insights into ethics. More recently 
evolutionary biology has also attempted to explain some aspects of human behaviour. For example in all 
human societies (with a few particularly odd exceptions) incest is regarded as being very wrong. 
Evolutionary psychology would suggest that this a deep seated instinct that has arisen to protect 
populations from genetic diseases that would quickly be established if people very closely related had 
children together. 
A branch of mathematics called “Game Theory” has also shown why various examples of “nice” 
behaviour in people or animals can be in an individual’s long term interest. 
More generally sociology and anthropology can show why societies need ethical systems so that people 
can get along together. Unfortunately once again because such theories are descriptive they can’t 
directly help us make moral decisions.
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3.1.3 Ethical Environment 
3.1.3.1 Social Emphasis 
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SOCIAL RESPONSIBILITY 
The term social responsibility means different things to different people. Generally, corporate social 
responsibility is the obligation to take action that protects and improves the welfare of society as a whole 
as well as organizational interests. According to the concept of corporate social responsibility, a manager 
must strive to achieve both organizational and societal goals. 
Current perspectives regarding the fundamentals of social responsibility of businesses are listed and 
discussed through (1) the Davis model of corporate social responsibility, (2) areas of corporate social 
responsibility, and (3) varying opinions on social responsibility. 
A model of corporate social responsibility that was developed by Keith Davis provides five propositions that 
describe why and how businesses should adhere to the obligation to take action that protects and 
improves the welfare of society and the organization: 
• Proposition 1: Social responsibility arises from social power. 
• Proposition 2: Business shall operate as an open system, with open receipt of inputs from society 
and open disclosure of its operation to the public. 
• Proposition 3: The social costs and benefits of an activity, product, or service shall be thoroughly 
calculated and considered in deciding whether to proceed with it. 
• Proposition 4: Social costs related to each activity, product, or service shall be passed on to the 
consumer. 
• Proposition 5: Business institutions, as citizens, have the responsibility to become involved in certain 
social problems that are outside their normal areas of operation. 
The areas in which business can become involved to protect and improve the welfare of society are 
numerous and diverse. Some of the most publicized of these areas are urban affairs, consumer affairs, 
environmental affairs, and employment practices. Although numerous businesses are involved in socially 
responsible activities, much controversy persists about whether such involvement is necessary or 
appropriate. There are several arguments for and against businesses performing socially responsible 
activities. 
The best-known argument supporting such activities by business is that because business is a subset of and 
exerts a significant impact on society, it has the responsibility to help improve society. Since society asks no 
more and no less of any of its members, why should business be exempt from such responsibility? 
Additionally, profitability and growth go hand in hand with responsible treatment of employees. customers, 
and the community. However, studies have not indicated any clear relationship between corporate social 
responsibility and profitability. 
One of the better known arguments against such activities is advanced by the distinguished economist 
Milton Friedman. Friedman argues that making business managers simultaneously responsible to business 
owners for reaching profit objectives and to society for enhancing societal welfare represents a conflict of 
interest that has the potential to cause the demise of business. 
According to Friedman, this demise almost certainly will occur if business continually is forced to perform 
socially responsible behavior that is in direct conflict with private organizational objectives. He also argues 
that to require business managers to pursue socially responsible objectives may be unethical, since it 
requires managers to spend money that really belongs to other individuals. 
Regardless of which argument or combination of arguments particular managers might support, they 
generally should make a concerted effort to perform all legally required socially responsible activities, 
consider voluntarily performing socially responsible activities beyond those legally required, and inform all
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relevant individuals of the extent to which their organization will become involved in performing social 
responsibility activities. 
Federal law requires that businesses perform certain socially responsible activities. In fact, several 
government agencies have been established and are maintained to develop such business-related 
legislation and to make sure the laws are followed. The Environmental Protection Agency does indeed 
have the authority to require businesses to adhere to certain socially responsible environmental standards. 
Adherence to legislated social responsibilities represents the minimum standard of social responsibility 
performance that business leaders must achieve. Managers must ask themselves, however, how far 
beyond the minimum they should attempt to go difficult and complicated question that entails assessing 
the positive and negative outcomes of performing socially responsible activities. Only those activities that 
contribute to the business's success while contributing to the welfare of society should be undertaken. 
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Social Responsiveness 
Social responsiveness is the degree of effectiveness and efficiency an organization displays in pursuing its 
social responsibilities. The greater the degree of effectiveness and efficiency, the more socially responsive 
the organization is said to be. The socially responsive organization that is both effective and efficient meets 
its social responsibilities without wasting organizational resources in the process. Determining exactly which 
social responsibilities an organization should pursue and then deciding how to pursue them are perhaps the 
two most critical decision-making aspects of maintaining a high level of social responsiveness within an 
organization. That is, managers must decide whether their organization should undertake the activities on 
its own or acquire the help of outsiders with more expertise in the area. 
In addition to decision making, various approaches to meeting social obligations are another determinant 
of an organization's level of social responsiveness. A desirable and socially responsive approach to meeting 
social obligations involves the following: 
• Incorporating social goals into the annual planning process 
• Seeking comparative industry norms for social programs 
• Presenting reports to organization members, the board of directors, and stockholders on progress in 
social responsibility 
• Experimenting with different approaches for measuring social performance 
• Attempting to measure the cost of social programs as well as the return on social program 
investments 
S. Prakash Sethi presents three management approaches to meeting social obligations: (1) the social 
obligation approach, (2) the social responsibility approach, and (3) the social responsiveness approach. 
Each of Sethi's three approaches contains behavior that reflects a somewhat different attitude with regard 
to businesses performing social responsible activities. The social obligation approach, for example, 
considers business as having primarily economic purposes and confines social responsibility activity mainly 
to conformance to existing laws. The socially responsible approach sees business as having both economic 
and societal goals. The social responsiveness approach considers business as having both societal and 
economic goals as well as the obligation to anticipate upcoming social problems and to work actively to 
prevent their appearance. 
Organizations characterized by attitudes and behaviors consistent with the social responsiveness approach 
generally are more socially responsive than organizations characterized by attitudes and behaviors 
consistent with either the social responsibility approach or the social obligation approach. Also, 
organizations characterized by the social responsibility approach generally achieve higher levels of social 
responsiveness than organizations characterized by the social obligation approach. As one moves from the 
social obligation approach to the social responsiveness approach, management becomes more 
proactive. Proactive managers will do what is prudent from a business viewpoint to reduce liabilities 
whether an action is required by law or not.
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Areas of Measurement. To be consistent, measurements to gauge organizational progress in reaching 
socially responsible objectives can be performed. The specific areas in which individual companies 
actually take such measurements vary, of course, depending on the specific objectives of the companies. 
All companies, however, probably should take such measurements in at least the following four major 
areas: 
1. Economic function: This measurement gives some indication of the economic contribution the 
organization is making to society. 
2. Quality-of-life: The measurement of quality of life should focus on whether the organization is 
improving or degrading the general quality of life in society. 
3. Social investment: The measurement of social investment deals with the degree to which the 
organization is investing both money and human resources to solve community social problems. 
4. Problem-solving: The measurement of problem solving should focus on the degree to which the 
organization deals with social problems. 
The Social Audit: A Progress Report. A social audit is the process of taking measurements of social 
responsibility to assess organizational performance in this area. The basic steps in conducting a social audit 
are monitoring, measuring, and appraising all aspects of an organization's socially responsible 
performance. Probably no two organizations conduct and present the results of a social audit in exactly 
the same way. The social audit is the process of measuring the socially responsible activities of an 
organization. It monitors, measures, and appraises socially responsible performance. 
Managers in today's business world increasingly need to be aware of two separate but interrelated 
concerns Business ethics and social responsibility. 
3.1.3.2 Responsibility to Employees 
Business and Its Ethical Responsibilities towards Employees 
During our lifetime we visualize plethora of things happening around. When we are younger then things are 
different in the society and when we grow older, the things become totally divergent. Then we say by 
taking a sigh that time has changed. Yes, our surroundings get changed and most of the times the 
perspectives are also modified, but one thing always remains same that is the formula of give and take, 
which works in relations as well as business ethics too. 
So if you think you can run your business without being ethical towards your employees then you are 
completely wrong and you ought to consider some facts. There is a small line between being ethical and 
unethical. As taking work from an employee is ethical but making them overloaded is totally unethical and 
inhuman. It is must for every business to be ethical with the employees too. The main point of view is that if 
you really intend to survive in the market for long term in this bottleneck competitive era, then being ethical 
is really a great necessity. The facts say it can prove fruitful for you. If you really think that you can just go for 
ripen fruits by only making fool to the people around then you are really wrong. Employers and 
entrepreneur need to be aware from the fact that if they would fail to comprehend the needs of 
employees or the society then they are really running a blind race without weapons. 
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They need to comprehend few things 
1. Outdated technologies must be discarded and new innovative technologies should be adopted. 
For example if you order your accountant to calculate and make the balance sheet without the 
help of computer then you are really being miser by saving your money but it would not give you 
anything just a bunch of mistakes and abuses from the mouth of employees. 
2. The promises you make with the society or the employee should not be ignored, you need to 
comply with them or your business based on falsehood is never going to work.
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3. Happy Employees of a company or the organization also prove beneficial when they gain benefit 
from the company or the organization. Here you can take an example of an organization which 
always gives less salary to its employees; here it's for sure that those employees are not going to say 
good words about the company or the organization. 
4. The key to success in a business is not get overloaded with work, this will only increase your agony, 
you will never able to get success by overloading yourself or the employees by work. As work with 
enjoyment is necessary. No employee or the owner can work for long hours. 
Mostly reputed companies think that they have got right to inflict pains on the employees by giving 
them big amount of salaries. Ultimately only those companies are successful which give ample 
time to their employees to spend for relatives and families. 
Creating an ethical workplace 
Business managers in most organizations commonly strive to encourage ethical practices not only to ensure 
moral conduct, but also to gain whatever business advantage there may be in having potential consumers 
and employees regard the company as ethical. Creating, distributing, and continually improving a 
company's code of ethics is one usual step managers can take to establish an ethical workplace. 
Another step managers can take is to create a special office or department with the responsibility of 
ensuring ethical practices within the organization. For example, management at a major supplier of missile 
systems and aircraft components has established a corporate ethics office. This ethics office is a tangible 
sign to all employees that management is serious about encouraging ethical practices within the 
company. 
Another way to promote ethics in the workplace is to provide the work force with appropriate training. 
Several companies conduct training programs aimed at encouraging ethical practices within their 
organizations. Such pro grams do not attempt to teach what is moral or ethical but, rather, to give business 
managers criteria they can use to help determine how ethical a certain action might be. Managers then 
can feel confident that a potential action will be considered ethical by the general public if it is consistent 
with one or more of the following standards: 
1. The Golden Rule: Act in a way you would want others to act toward you. 
2. The utilitarian principle: Act in a way that results in the greatest good for the greatest number. 
3. Kant's categorical imperative: Act in such a way that the action taken under the circumstances 
could be a universal law, or rule, of behavior. 
4. The professional ethic: Take actions that would be viewed as proper by a disinterested panel of 
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professional peers. 
5. The TV test: Always ask, Would I feel comfortable explaining to a national TV audience why I took 
this action? 
6. The legal test: Ask whether the proposed action or decision is legal. Established laws are generally 
considered minimum standards for ethics. 
7. The four-way test: Ask whether you can answer yes to the following questions as they relate to the 
decision: Is the decision truthful? Is it fair to all concerned? Will it build goodwill and better 
friendships? Will it be beneficial to all concerned? 
Finally, managers can take responsibility for creating and sustaining conditions in which people are likely to 
behave ethically and for minimizing conditions in which people might be tempted to behave unethically. 
Two practices that commonly inspire unethical behavior in organizations are giving unusually high rewards 
for good performance and unusually severe punishments for poor performance. By eliminating such 
factors, managers can reduce much of the pressure that people feel to perform unethically. They can also 
promote the social responsibility of the organization.
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3.1.3.3 The Ethical Dimensions of Business 
Good and bad: 
There are four degrees of rightness and wrongness in behavior, which in order of goodness are: the good, 
benignness, indifference and the bad. 
Good: Taking positive action for good or to prevent harm being done. 
Benign: Avoiding doing harm, supports the doing of good but takes no positive action to do good. 
Indifferent: Ignoring harm done by or to others and disregarding the right of others. 
Bad: Taking action to do harm. Taking no action to prevent harm being done 
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Legal, illegal and just: 
Actions that are good and legal, but not a legal obligation; 
Some actions may raise ethical issues because, although they are good and legal, people do not take 
them because the law does not require them to do so. The question is whether people and corporations 
should do them even though they are not obliged to do so. 
Actions that is wrong and illegal: 
Ethical or moral questions arise because an action is both wrong and illegal. Such actions ought to be 
straight forward to condemn. However, on issues that many would place in this category, others might 
argue that the action is neither wrong nor illegal. 
Actions that is legal, but not necessarily just: 
This includes actions that my be legal but are also arguably bad. Many of the moral and ethical issues that 
affect business fall into this category. 
Actions that are just but illegal: 
This category is one that will always generate controversy. It concerns actions that may be illegal but are 
morally or ethically good. It concerns the question of when a law can be said to be immoral and when it is 
justifiable to break or defy it. Campaigning against a law one disapproves of is acceptable within a 
democratic system; the ethical problem only emerges when a person moves from campaigning to 
disobedience. 
3.1.3.4 The Business Role in Ethical Behavior 
How Can We Create Ethical Organizations? 
Corporate indiscretion, wrongdoing, and corruption are perpetually the subject of media attention as well-known 
companies such as Enron, Tyco, WorldCom, and most recently the News of the World, have been 
found guilty of unlawful behavior; and the U.S. economic crisis has in part been blamed on unethical 
actions from Wall Street. These corporate scandals and current financial woes have brought renewed 
interest to business ethics—namely, understanding the factors that promote ethical behavior in 
organizations. Although conventional wisdom suggests that unethical behavior is the result of a few “bad 
apples,” there is mounting evidence that in addition to the personal values of employees, the 
organizational environment plays a critical role in encouraging ethical conduct.
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If the organizational environment is important in promoting ethical conduct, how can such a context be 
created? We argue that there are three key pieces of the ethical environment that work together to 
promote ethical behavior: (1) ethical leadership, (2) ethical practices, and the (3) ethical climate. 
Ethical leaders set the tone for how employees should behave in organizations. Ethical leaders are both 
moral persons who have desirable characteristics and moral managers who influence employees conduct 
directly: 
• Moral Persons: listen to employees, conduct their personal lives in an ethical manner, have the best 
interests of employees in mind, make fair decisions, can be trusted. 
• Moral Managers: Discipline employees who violate ethical standards, discuss business ethics or 
values with employees, set an example of how to do things the right way in terms of ethics, define 
success not just by results but also the way they are obtained, ask “What is the right thing to do?” 
when making decisions. 
Ethical practices are actions or activities related to ethics that are repeated and recognizable in 
organizations—they are what organizations actually do rather than just what is touted. Research 
demonstrates there are six critical organizational practices related to ethics: 
• Recruitment and Selection: Using ethical hiring practices, hiring employees with strong ethical 
values, emphasizing ethics when recruiting new employees, searching for ethical applicants 
• Orientation and Training: Requiring attendance at ethics training, using the things employees learn 
in ethics training when performing their jobs, discussing ethical issues with new employees as part of 
their initial orientation 
• Policies and Codes: Strictly following written codes of ethics, the ethics code serving as more than 
just window dressing, enforcing all ethical behaviors—not just the ones that are high profile 
• Reward and Punishment Systems: Providing positive feedback and rewards for making ethical 
decisions, measuring and tracking ethical behaviors, disciplining employees who violate ethical 
standards 
• Accountability and Responsibility: Holding employees accountable for their actions, taking 
responsibility for the outcomes of one’s own actions, questioning authority if unethical behavior 
occurs 
• Decision-Making: Taking ethical issues into account when making decisions, discussing ethical 
concerns at meetings, talking about whether something is the “right thing to do” 
Ethical climate is a general perception organizational employees have about whether the organization is 
ethical. In an ethical climate you would see the following things: 
• Employees have a lot of skill in recognizing ethical issues 
• Success is defined not just by the results, but also the way they are obtained 
• Employees continually strive to maintain high ethical standards 
• Employees have a lot of knowledge regarding how to handle ethical issues 
• Employees rarely feel pressured to compromise the organization’s ethical standards to achieve 
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business objectives 
Although there is a human tendency to blame a few “bad apples” for wrongdoing in organizations, the 
inconvenient truth is that the organizational environment—including the leadership, practices, and 
climate—is the most critical factor in creating ethical organizations.
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Encouraging Ethical Behavior in Organizations 
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3.1.4 Unethical Practices in Business 
3.1.4.1 Unethical Practices in Business 
Abusive or Intimidating Behavior 
Accurate but Incomplete Disclosures 
Discrimination against Protected Class 
Receiving/Offering Bribes, Kickbacks or Incentives 
Theft or Fraud: Personal Use of Company Property or Expense Account 
Misrepresentations 
Sexual Harassment 
Termination without Fair Notice or Cause 
Mistreating Employees 
Many examples exist of unethical corporate conduct toward employees or other workers in the 
supply chain. Many U.S. corporations used Third- World sweatshops to produce their goods; some 
have even been found to use child labor. Every year, lawsuits are filed against employers who are 
accused of sexual harassment or discrimination against their employees. Some employers have 
been sued for threatening or firing whistle-blowers, or employees who point out illegal practices or 
safety violations in the workplace. Some U.S. businesses use undocumented workers because they 
can pay them less than minimum wage. 
Financial Misconduct 
Examples of financial misconduct include price-fixing, or an illegal agreement between industry 
competitors to fix the price of a product at an artificially inflated level; physicians who refuse to 
treat non-insured patients, or perform unnecessary procedures to make more money; tax evasion; 
tax fraud; and cooking the books to make the company look more profitable than it is. Other 
possibilities include paying unjustifiable salaries and bonuses to top officials regardless of work 
performance -- sometimes in spite of it -- and chasing short-term profit by placing investor's money 
in questionable investments. 
Misrepresentation 
Corporate misrepresentation can take many forms. It can be as simple as a salesman who lies 
about his company's products, or it can be false or misleading advertising. Misrepresentation can 
involve a coverup of illegal workplace conditions or transactions; falsified data in a shareholder 
report; lying to a union about corporate profits; or hiding or denying safety problems with a 
product. Other examples include corporate board members with conflict of interests, doctors who 
push the most expensive drugs rather than the most effective ones, and brokers who recommend 
stocks that they own in an effort to drive up the price. 
Kinds of Unethical Behavior in Business 
Unethical behavior in business runs the gamut, from simple victimless crimes to huge travesties that can hurt 
large numbers of people. Whether it is stealing a pen, padding an expense report, lying to avoid a penalty 
or emitting toxic fumes into the air, unethical behavior cannot be condoned by a company. A strict ethics 
policy is the cornerstone for any 
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Theft 
Theft at work comes in a variety of forms, and oftentimes employees do not view it as unethical behavior, 
believing no one gets hurt by the action. Employees take home office supplies, use business computers for 
personal tasks, pad expense accounts and abuse sick time or allotted personal days. Unethical behavior 
also includes having another employee punch a time card, or not punching out for lunch hours or other 
nonapproved time off. Though these may seem like minor infractions, they eventually have an impact on 
the bottom line of the company, which then hurts all employees. Theft also affects employee morale and is 
disheartening to those who choose to behave ethically.
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Vendor Relationships 
Businesses that buy from and sell products to other businesses are sometimes subject to unethical behavior. 
The practice of accepting gifts from a vendor in exchange for increased purchasing is not only unethical, it 
may have legal repercussions. The same can be said for offering a customer kickbacks to increase his 
purchasing habits. Ethics policies often contain guidelines for giving or accepting gifts with vendors or other 
business associates, such as a cap on the value of the gift. Other businesses strictly forbid giving gifts or any 
other item with monetary value. This is a safeguard to prevent any perception of unethical behavior. 
Bending the Rules 
Bending the rules in a business situation is often the result of a psychological stimulus. If an employee is 
asked to perform an unethical task by a supervisor or manager, he may do it because his allegiance to 
authority is greater than his need to abide by the rules. Turning the other way to avoid trouble for another 
employee is still unethical, even though the motivation may be empathetic. For example, knowing that a 
coworker is having issues outside work justifies watching him leave early each day without reporting it. 
Withholding information that can change an outcome also falls under the umbrella of unethical behavior, 
even if the perpetrator believes he is doing what is in the best interest of the business. For example, if a poor 
earnings report is withheld until after a stockholder meeting. 
Environmental 
Unethical behavior by companies, such as releasing pollutants into the air, can affect cities, towns, 
waterways and masses of people. Though accidents can occur, the release of harmful toxins into the 
environment due to lax safety standards, improper maintenance of equipment or other preventable 
reasons is unethical. If a business willingly continues production of a product knowing inherent 
environmental risks exist, it can certainly be categorized as unethical behavior. 
Wages and Working Conditions 
Other unethical practices include not paying workers a fair wage, employing children under the legal 
working age and unsafe or unsanitary working conditions. Any practices that are not in compliance with 
fair labor standards and federal working guidelines fall into this category. 
Examples of Unethical Behavior in an Organization 
Unethical behavior in the workplace can be defined as any action that does not conform with the 
standards of conduct established by the organization. Unethical behavior can occur in the relationships 
between employees, in the way an employee goes about his business or how he uses company resources. 
Unethical behavior can even break the law in some situations. 
Inappropriate Computer Use 
Employees may use company computers to engage in unethical behavior. For example, an employee 
who is not permitted to use the Internet for personal reasons commits an unethical act by shopping online 
while at work. Random Internet surfing takes away from the time she spends on work-related activities. 
Employees sometimes use company email to spread inappropriate websites or videos to co-workers, some 
of which could be deemed offensive by the recipients. 
Time Misuse 
Unethical behavior can include stealing time from the company, as the company is compensating 
employees and receiving no productivity in return. In addition to time spent on aimless Internet surfing, time 
misuse can consist of extending breaks beyond the allotted time, congregating around the water cooler or
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engaging in lengthy gossip sessions during working time, falsifying time sheets, coming into work late or 
leaving early and running personal errands while traveling on company business. 
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Sexual Harassment and Bullying 
An employee could commit unethical behavior by sexually harassing co-workers. This could involve making 
lewd comments, touching inappropriately or making unwanted sexual advances. Bullying typically involves 
attempting to intimidate a co-worker by making demeaning comments about him, spreading gossip or 
even making verbal or physical threats. In general, a bully attempts to make the workplace as 
uncomfortable as possible for a co-worker. In some cases, ongoing bullying can escalate into violence in 
the workplace. 
Illegal Acts 
Some unethical acts can also be illegal. For example, an employee who has access to a company's 
financial records, such as a bookkeeper or accountant, could use her access and expertise to embezzle 
company funds. An employee having access to personnel files, such as a human resources representative, 
could commit identity theft and use employees' Social Security numbers to raid bank accounts or 
fraudulently obtain credit cards. In cases such as the 2001 Enron scandal, top company executives used 
questionable accounting practices to manipulate the company's stock price for their own financial gain. 
3.1.4.2 Approaches to improve ethical conduct in the workplace 
Ways to Prevent Unethical Behavior in the Workplace 
Unethical behaviors can plague a workplace, whether an executive steals money from the company or an 
associate falsifies documents. Unethical behaviors can damage a company's credibility, causing the 
business to lose customers and ultimately shut down. However, business owners and their management 
teams can work with employees to prevent unethical behaviors. 
Create a Code of Conduct 
A written code of conduct provides employees and managers with an overview of the type of conduct 
and behaviors the company expects. It outlines what behaviors are unacceptable and what measures are 
taken if an employee violates the code of conduct. 
Lead By Example 
Employees look to business owners and managers for direction on how they should conduct themselves. As 
a business owner, make ethics-based decisions and monitor the individuals you put into leadership roles at 
your company for the same values. 
Reinforce Consequences 
Business owners must hold their employees accountable when they act unethically. Start by informing new 
employees of the rules during their orientation sessions. If an employee acts unethically, refer to the code of 
conduct and take the necessary measures to warn or terminate. 
Show Employees Appreciation
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Loyal employees feel that a company values the hard work they put into accomplishing tasks on a daily 
basis. A loyal employee is less likely to act unethically. Show appreciation to the employees for work well 
done on a regular basis to encourage loyalty. 
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Welcome an Ethics Speaker 
Schedule an ethics trainer to visit your work site to discuss ethical behavior and explain why it is important in 
organizations, regardless of the size or industry. Ethics trainers use role-playing, motivational speaking, 
videos and handouts to illustrate the importance of ethics in the workplace. 
Create Checks and Balances 
Rather than putting related responsibilities in the hands of one employee, create a system of checks and 
balances to minimize the opportunities for unethical behavior. For example, a sales associate rings up 
customer purchases, while an accountant balances the books to ensure that all payables are received 
and documented. 
Hire for Values 
When business owners hire employees, many seek to bring on individuals who have the education and 
experience that prove they are skilled workers, capable of handling the tasks at hand. Employers who want 
to prevent unethical behavior also look at candidates' values to ensure they mesh with the company's 
culture. 
How to Change Unethical Behavior in Business 
Defining what encompasses ethics is a matter that engenders significant thought and debate. It's not 
defined only by the law or religion; it's not about a person's beliefs. Instead, a person who behaves ethically 
is following a standard of right and wrong when it comes to society, fairness and rights. The ethical person 
who follows these standards employs honesty, compassion and loyalty, according to Santa Clara 
University's Markkula Center for Applied Ethics website. When co-workers behave unethically in the 
workplace, often the best remedy is to set a high standard of ethical behavior yourself. 
Step 1 
Practice what you preach. The best way to influence others is to behave ethically yourself. That involves 
treating others with fairness and respect, and following the standard of behavior your workplace demands. 
This can be as simple as getting to work on time, not fudging your hours and delivering your work in a 
prompt and high-quality manner. You'll also need to demonstrate integrity, caring and teamwork. When 
others can rely on you to behave honestly, you're well on your way to influencing others' behavior. 
Step 2 
Identify a short-term solution in your workplace. For example, if your place of business has a high rate of 
employee theft because employees are allowed to rummage through inventory unseen, perhaps it's time 
to consider putting a lock on the storage room or installing a security camera. If you opt to install a security 
camera, consider alerting your staff ahead of time. 
Step 3 
Identify the cause of the unethical behavior. What is the behavior's root cause? Are employees stealing 
ideas or not sharing credit? They may be feeling the need for more feedback from you -- especially if 
you're stingy with praise. People need to feel appreciated and part of a dynamic environment. Forcing 
staff to jockey for your attention is demoralizing. It also causes resentment.
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Step 4 
Establish procedures that encourage ethical behavior. Consider implementing pre-employment personality 
tests that determine a candidate's capacity for wrongdoing, and be sure your business's plan clearly states 
that unethical means do not justify the ends. Discourage cheating and idea-stealing by instituting a zero-tolerance 
policy for those who break the rules ... and walk the talk by implementing the policy's resulting 
action. 
Step 5 
Praise good ethics publicly. Thank employees whose behavior is a model you'd like others to follow. Provide 
an incentive, if necessary, such as a financial bonus or a comp day. 
How to Enforce Ethical Behavior in the Workplace 
When employees fail to behave ethically, you must act swiftly to corral the bad behavior. If you don't, the 
inappropriate behavior might spread throughout your business, causing further problems. Victimized 
employees deserve your protection, so you must shield them from the unethical behavior of others. If the 
unethical actions rise to the level of illegality, discuss the situation with your lawyers and the appropriate 
authorities. Stay watchful and ask employees to report any concerns they have; knowing what's going on 
in your organization at all times helps you nip problems in the bud. 
Step 1 
Post clear guidelines that delineate the type of behavior you expect. For example, ban discrimination and 
harassment of any sort. Warn employees not to take company supplies for personal use. 
Step 2 
Outline potential punishments for unethical behavior, but use them as a last resort. Workers respond better 
to positive reinforcement than they do to the threat of punishment. 
Step 3 
Enact a rewards system that promotes ethical behavior. For example, if employee theft is a problem, 
reward whistleblowers who notify management of problem employees. If an employee acts ethically even 
at a personal cost, publicly praise and reward her. 
Step 4 
Ensure privacy for whistleblowers and people who file complaints. If workers fear retaliation from peers, they 
might hesitate to bring important matters to your attention. 
Step 5 
Create an ethics panel if your business is large enough to warrant such a measure. The ethics panel should 
consist of reputable members of your organization whose judgment employees respect. Ask the panel to 
investigate and pass judgment whenever it is not clear whether a worker has crossed ethical boundaries. 
Step 6 
Create the position of ethics compliance officer if your business is too small for a multiperson panel. Appoint 
someone objective and reputable so that employees know there is no favoritism and bias.
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Step 7 
Punish workers as necessary to ensure everyone knows there are consequences for unethical behavior. For 
example, if someone steals credit for a project, demote that person. If someone harasses or discriminates 
against another employee, fire or suspend that person, depending on the severity of the infraction. 
INDIVIDUAL RESPONSES TO ETHICAL ISSUES 
Personal values in the workplace: 
It is difficult to discuss ethics in business and organizational context without talking about values. 
The difference between ethics and values: 
Ethics: is a branch of philosophy and is therefore concerned with formal academic reasoning about right or 
wrong, but values are the common sense often taken for granted beliefs about right or wrong that guide us 
in our daily lives. 
Values: are core ideas about how people should live and the ends they should seek. 
1. They are shared by a majority of people within a community or society. 
2. They are simply expressed generalities, often no more than single words such as peace honesty, 
kindness, integrity and courage. 
3. As they are very broad, they do not give guidance on how particular things should be evaluated 
Rekeach defined values as a small number of core ideas or cognitions present in every society about 
desirable end. 
Moral values concern interpersonal behavior at workplace. E.g. being honest is desirable. 
Competence values concern one’s own valuation of one’s behavior. E.g. behaving imaginatively is 
desirable. (Intelligence) 
Personal values – concern the ends or terminal states that are desirable for the self. E.g. peace of mind 
Social values – concern the ends that one would desire for society. E.g. world peace is desirable. 
Attitudes like values are evaluations of whether something is good or bad, but unlike values they are 
evaluations of particular things, issues people places etc. They relate to specific circumstances, they are 
more changeable than values. 
Belief is an acceptance that something is true or not. This acceptance does not imply any judgment about 
whether that thing is good or bad. 
INDIDVIDUAL RESPONSES TO ETHICAL SITUATIONS 
Responses to ethical situations involve thinking about the issue and it includes what people say, how they 
say it and how they behave. There are two main cognitive processes involved in choosing responses: 
1. Categorization 
2. Particularization
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Categorization involves putting an issue into a box or category and saying “that is the way in which I will 
deal with this matter.” Someone might decide, for example, that an issue is a matter of following the core 
values set by an organization or an issue is a question of loyalty. 
Categories that people may use to classify issues are discussed below: 
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1. Ethical Neutrality 
People put ethical issues into the category of ethical neutrality when they argue that nothing should be 
done about an issue that troubles them. They decide to ignore what they see as injustice, because to raise 
the issue would cause them trouble. 
2. Ethical awareness: 
At this stage a person knows what is right, but cannot say why. Their reaction to an issue may only involve 
making their feelings known but may extend to active opposition to the proposal under consideration. 
3. Ethical convention: 
An issue is allocated to the category of ethical convention when it is thought that it can best be resolved 
by applying accepted norms to it. A feature of conventional ethical norm is that they are informal and 
unwritten or if they are written they are expressed in general terms and not as detailed prescription. 
4. Ethical puzzle: 
A puzzle can only exist in a clear moral context in which there is little argument about the values 
appropriate to its resolution. It is a belief that things are proper by sticking to the rules and regulations and 
not bending them to allow for special cases. 
5. Ethical problem: 
An issue is likely to be categorized as a problem because it involves many different values and principles 
which when taken in isolation, make perfect sense, but which when taken together, fall into conflict. 
6. Ethical dilemma: 
A dilemma is a perplexing stage involving difficult or unpleasant choices. The options presented by a 
dilemma are often unpleasant because they demand a choice between conventions. 
7. Ethical Cynicism : 
Cynicism emerges when ethical duty turns bitter. The cynic believes that all ethical issues will be resolved in 
ways which primarily meet the person’s private interests of those involved. Sometimes he thinks it would be 
better to leave matters to chance than to try to improve things. The cynic’s aim is to cast blame on those 
who are trying to deal with an issue. 
8. Ethical negotiation: 
This is a search for consensus or compromise between differing positions. This category is not concerned 
with the rightness of a decision, but with the correctness of the process used to arrive at it. The morality of 
an action is ignored only a broad acceptability of an action, as determined by voting, opinion polling, 
consensus seeking, deal cutting and negotiation is required. Responding to opinion becomes more 
important than doing the right thing.
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WHISTLEBLOWER OR WITNESS 
Whistle blowing takes place when employees who for a variety of reasons come to a position where they 
are so uncomfortable with a particular practice or activity within their employing organization that they 
feel no alternative but to raise the matter with another person. This other person might be a work 
colleague, a senior member of the organization, a family member, or a non-related third party who is 
external to the employing organization. 
When is Whistle blowing Act Performed? 
Whistle blowing act is a release of confidential organizational information to an external third part. 
When might whistle blowing be justified? 
Generally, whistle blowing is likely to do harm to an organization. It can only be justifiable under the 
following conditions: 
1. A product or policy of an organization needs to posses the potential to do harm to some member 
of society. 
2. The concerned employee should first of all report the facts, as far as they are known, to their 
immediate superior. 
3. If the immediate superior fails to act effectively, the concerned employee should take the matter 
to more senior managers, exhausting all available internal channels in the process. 
4. The prospective whistleblower should hold documentary evidence that can be presented to 
external audiences. In this condition it is argued that evidence should show that the product or 
policy ‘poses a serious and likely danger to the public or the user of the product’. 
5. The prospective whistleblower must believe that the necessary changes will be implemented as a 
result of their whistle blowing act. 
6. The sixth condition is a general one and it is that the whistleblower must be acting in good faith, 
without malice or vindictiveness. 
How to Contrast the Difference between Ethical  Unethical Values within an 
Organization 
Establishing an ethical value system in an organization or business requires a formal statement of the ethical 
values of the group and training employees and members to follow those values. Organizational values 
determine the rules governing the behavior of group members. Developing a program to demonstrate the 
contrast between ethical and unethical values and behavior establishes the first step in creating a 
company culture emphasizing and reinforcing ethical standards. 
Step 1 
Develop a policy outlining mandated appropriate ethical values and acceptable actions. Invite the 
group's membership and elected, volunteer or appointed officers to meet to brainstorm the language and 
the components of the official value statement. Make rough drafts of the commonly held values from 
these brainstorming sessions. 
Step 2
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Edit the ethical policy into a document that incorporates an overall mission statement and contains a 
narrative to indicate the ethical values endorsed by the organization. Hold a vote to ask the group's 
officers and membership to formally endorse the document. 
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Step 3 
Incorporate the ethical policy in organization handbooks and formal staff documents. Issue a handbook to 
each member of the organization and require a signature from each member stating the member 
understands the policy. Develop a video or interactive online presentation demonstrating the values 
statements presented in the handbook. If staff members lack the skills to develop the presentations, hire a 
professional firm to complete the project. 
Step 4 
Ask the organization's officers and membership to meet again to create a list of specific examples of 
appropriate ethical and inappropriate unethical behaviors. Incorporate specific behaviors related to the 
organization. Encouraging the recruitment of diverse members to the organization, for example, presents 
an ethical value. Discriminating against potential members based on age, gender, cultural differences, 
race or religion illustrates unethical values within an organization. Direct officers and members to explore 
ethical questions directly related to the specific organization. 
Step 5 
Mandate that staff, employees and members of the organization, especially new hires, meet yearly to 
brush up on the ethical policy. Direct the discussion to a survey of the ways members might subvert the 
ethical code. Explore possible deterrents to unethical behavior. 
3.1.5 The Nature of Morality 
Morality is the standards that an individual or a group has about what is right and wrong, 
good or evil. Moral standards are norms we have about the kinds of actions we believe are 
morally right and wrong as well as the values we place on the kinds of objects we believe 
are morally good and morally bad (Smith, 2003). From there, we can say that Ethics is a 
branch of philosophy (moral philosophy) that examines the moral standards of an individual 
or society, and asking how these standards apply to our lives and whether these are 
reasonable or unreasonable. As part of the general nature of ethics, we uphold moral rights 
(Smith, 2003). The three important features of moral rights are: 
 MORAL RIGHTS are tightly correlated with duties. Duties are generally the other side of moral 
rights (Smith, 2003). For example, my right to work implies the government's duty to make jobs 
available to the people. 
 MORAL RIGHTS provide individuals with autonomy and equality in the free pursuit of their interests 
(Smith, 2003). For example, the right to worship as I choose implies that I am free to pursue this 
interest as I personally choose. No one can dictate to me how I ought to worship (Halle, 2000). 
 MORAL RIGHTS provide a basis for justifying one's actions and for invoking the protection or aid of 
others. My right to something is my justification for doing it. For example, why do I work? - Because 
it is my right to work! And no one can restrain me from working group, or an exchange (Smith, 
2003). The better the quality of a person's contributed product, the more he or she should receive.
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CHARACTERISTICS OF MORAL STANDARDS 
Typically, a person’s moral standards are first absorbed as a child from family, friends and various social 
influences such as church, school, television, magazines, music etc. 
Moral standards have five characteristics: 
1. Moral standards deal with matters that we think can seriously injure or benefit human beings. 
e.g. moral standards against theft, rape, murder, child abuse, assault, slander, fraud etc 
2. Moral standards are not established or changed by the decision of particular authoritative bodies. 
Laws and legal standards are established by legislature, but moral standards are not and their 
validity does not rest on voting procedures. The validity of moral standards rests on the adequacy 
of the reasons that are taken to support and justify them. 
3. Moral standards should be preferred to other values especially self interest. 
4. Moral standards are based on impartial considerations. Moral standards are based on “the 
moral’s point of view.” That is the point of view that does not evaluate standards according to 
whether they advance the interest of a particular individual or group, but one that goes beyond 
personal, interest to a “universal” standpoint in which everyone’s interest are impartially counted as 
equal. 
5. Moral standards are associated with special emotions and a special vocabulary. E.g. if I act 
contrary to a moral standard, I will normally feel guilty, ashamed or remorseful. 
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MORAL DEVELOPMENT 
According to a psychologist by the name of Lawrence Kohlberg there is a sequence of six identifiable 
stages in the development of a person’s ability to deal with moral issues: He grouped theses stages of 
moral development into three levels each containing two stages. The sequence of the levels is given as 
follows: 
LEVEL ONE: PRE-CONVENTIONAL STAGES: 
At these first two stages, the child is able to respond to rules and social expectations and can apply the 
labels good, bad, right and wrong. These rules, however, are seen as something externally imposed on the 
self. Right or wrong are interpreted in terms of the pleasant or painful consequences or in terms of physical 
power of those who set the rules. 
Stage One: Punishment and Obedience orientation: 
At this stage, the physical consequences of an act wholly determine the goodness or badness of that act. 
The child’s reasons for doing the right thing are to avoid punishment or defer to the superior physical power 
of authorities. There is little awareness that others have needs and desires similar to one’ own. 
Stage Two: Instrument and Relativity Orientation: 
At this stage, right actions become those that can serve as instruments for satisfying the child’s needs or the 
needs of those for whom the child cares. Child is now aware that others have needs and desires similar to 
his or her own and begins to defer them to do what he or she wants. 
LEVEL TWO: CONVENTIONAL STAGES 
At this stage, the person is motivated to conform to the group’s norms and subordinates the needs of the 
individual to those of the group. Maintaining the expectations of one’s own family, peer group, or nation is
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now seen as valuable in its own right regardless of the consequences. The person also exhibits loyalty to 
the group and its norms. 
Stage Three: Interpersonal Concordance Orientation 
Good behavior at this stage is living to the expectations of those whom one feels loyalty, affection and trust 
such as family and friends. Doing what is good/right is motivated by the need to be seen as a good 
performer in one’s own eyes and in the eyes of others. 
Right and wrong at this more mature conventional stage now come to be determined by loyalty to one’s 
own larger nation or surrounding society. Laws are to be upheld except where they conflict with other 
fixed social duties. The person is now able to see other people as parts of a larger social system that 
defines individual roles and obligations and he/she can separate the norms generated by this system from 
his or her interpersonal relationships and motives. 
LEVEL THREE: POST-CONVENTIONAL, AUTONOMOUS, OR PRINCIPLED STAGES 
At this stage the person no longer simply accepts the values and norms of the groups to which he or she 
belongs. The proper laws and values are those that conform to principles to which any reasonable person 
would be motivated to commit him or himself. E.g. fairness, justice, human rights etc 
Stage Four: Social Contract Orientation: 
At this first post-conventional stage, the person becomes aware that people hold a variety of conflicting 
personal views and opinions and emphasizes fair ways of reaching consensus by agreement, contract, and 
due process. The person believes that all values and norms are relative and that, apart from this 
democratic consensus, all should be tolerated. 
Stage Five: Universal Ethical Principles Orientation: 
At this final stage, right action comes to be defined in terms of moral principles chosen because of their 
logical comprehensiveness, universality and consistency. These are not concrete like the ten 
commandments, but abstract general principles dealing with justice, society’s welfare, the equality of 
human right, respect for dignity of individual human right. The person’s reason for doing what is right is now 
based on a commitment to these moral principles. 
MORAL RESPONSIBILITY AND BLAME 
A person is morally responsible only for those acts and their foreseen injurious effects: 
(a) Which the person knowingly and freely performed or brought about which it was morally wrong for 
the person to perform or bring about. 
(b) Which the person knowingly and freely failed to perform or prevent and which it was morally wrong 
for the person to fail to perform or prevent. 
(c) There are two conditions which can completely eliminate a person’s moral responsibility for 
causing a wrongful injury and these are (1) ignorance and (2) inability. These are called excusing 
conditions because they fully excuse a person from being held responsible for something. It is 
however important to understand exactly when ignorance and inability remove a person’s 
responsibility because they do not always do. There are some exceptions and these are: 
1. When a person deliberately keeps himself ignorant of a certain matter to escape responsibility. 
2. When a person negligently fails to take adequate steps to become informed about a matter that is 
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What eliminates responsibility? 
1. Ignorance of fact, this generally eliminates moral responsibility completely because a person 
cannot be obligated to do something over which he or she has no control: Moral obligation 
requires freedom because people cannot control matters of which they are ignorant, they cannot 
have any moral obligations with respect to such matters. 
2. Ignorance of relevant moral standard generally removes responsibility because a person is not 
responsible for failing to meet obligations of whose existence he or she is genuinely ignorant. 
3. Inability eliminates responsibility because a person may lack sufficient power, skill opportunity or 
resources. A person may be physically constrained, or a person’s mind may be psychologically 
impaired in a way that prevents him or her from controlling his or her actions. 
In addition to these two excusing conditions, ignorant and inability, there are some mitigating factors such 
as: 
1. Circumstances that leave a person uncertain, but not altogether unsure about what they are 
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doing. 
2. Circumstances that make it difficult, but not impossible for the person to avoid doing it. 
3. Circumstances that minimize, but not completely remove a person’s involvement in an act. 
These can lessen a person’s responsibility for wrong doing depending on the seriousness of the wrong. 
Morality and ethics: 
 Morality is the standard an individual or community keeps about what is right and wrong or good 
and evil. 
 Moral norms deal with topics that either seriously harm or benefit human beings. 
 Moral standards are not dependent on or changed by the decision of authoritative bodies. 
 Moral demands enjoy a self-driven force. Expressed through the medium of special emotions. 
 Ethics helps one to address questions such as what do moral principles mean in a given situation. 
 Ethics offers certain moral standards to judge a particular human behavior or situation. 
The Nature of Morality and Moral Theories 
The words moral and ethics (and cognates) are often used interchangeably. However, it is useful to 
make the following distinction: 
Morality is the system through which we determine right and wrong conduct -- i.e., the guide to good or 
right conduct. 
Ethics is the philosophical study of Morality. 
What, then, is a moral theory?
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A theory is a structured set of statements used to explain (or predict) a set of facts or concepts. A moral 
theory, then, explains why a certain action is wrong -- or why we ought to act in certain ways. In short, it is 
a theory of how we determine right and wrong conduct. Also, moral theories provide the framework upon 
which we think and discuss in a reasoned way, and so evaluate, specific moral issues. 
Seen in this light, it becomes clear that we cannot draw a sharp divide between moral theory and applied 
ethics (e.g., medical or business ethics). For instance, in order to critically evaluate the moral issue of 
affirmative action, we must not attempt to evaluate what actions or policies are right (or wrong) 
independent of what we take to determine right and wrong conduct. You will see, as we proceed, that we 
do not do ethics without at least some moral theory. When evaluating the merits of some decision 
regarding a case, we will always (or at least ought to always) find ourselves thinking about how right and 
wrong is determined in general, and then apply that to the case at hand. Note, though, that sound moral 
thinking does not simply involve going one way -- from theory to applied issue. Sometimes a case may 
suggest that we need to change or adjust our thinking about what moral theory we think is the best, or 
perhaps it might lead us to think that a preferred theory needs modification. 
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Another important distinction: 
Are moral theories descriptive or prescriptive ? 
In presenting a moral theory, are we merely describing how people, in their everyday 'doings' and 
'thinkings,' form a judgement about what is right and wrong, or are we prescribing how people ought to 
make these judgements? 
Most take moral theories to be prescriptive. The descriptive accounts of what people do is left to 
sociologists and anthropologists. Philosophers, then, when they study morality, want to know what is the 
proper way of determining right and wrong. There have been many different proposals. Here is a brief 
summary. 
Theories of Morality 
(1) Moral Subjectivism 
Right and wrong is determined by what you -- the subject -- just happens to think (or 'feel') is right or wrong. 
In its common form, Moral Subjectivism amounts to the denial of moral principles of any significant kind, 
and the possibility of moral criticism and argumentation. In essence, 'right' and 'wrong' lose their meaning 
because so long as someone thinks or feels that some action is 'right', there are no grounds for criticism. If 
you are a moral subjectivist, you cannot object to anyone's behaviour (assuming people are in fact acting 
in accordance with what they think or feel is right). This shows the key flaw in moral subjectivism -- probably 
nearly everyone thinks that it is legitimate to object, on moral grounds, to at least some peoples' 
actions. That is, it is possible to disagree about moral issues. 
(2) Cultural Relativism 
Right and wrong is determined by the particular set of principles or rules the relevant culture just happens to 
hold at the time. 
Cultural Relativism is closely linked to Moral Subjectivism. It implies that we cannot criticize the actions of 
those in cultures other than our own. And again, it amounts to the denial of universal moral 
principles. Also, it implies that a culture cannot be mistaken about what is right and wrong (which seems 
not to be true), and so it denies the possibility of moral advancement (which also seems not to be true).
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(3) Ethical Egoism 
Right and wrong is determined by what is in your self-interest. Or, it is immoral to act contrary to your self-interest. 
Ethical Egoism is usually based upon Psychological Egoism -- that we, by nature, act selfishly. Ethical 
egoism does not imply hedonism or that we ought to aim for at least some 'higher' goods (e.g., wisdom, 
political success), but rather that we will (ideally) act so as to maximize our self interest. This may require 
that we forgo some immediate pleasures for the sake of achieving some long term goals. Also, ethical 
egoism does not exclude helping others. However, egoists will help others only if this will further their own 
interests. An ethical egoist will claim that the altruist helps others only because they want to (perhaps 
because they derive pleasure out of helping others) or because they think there will be some personal 
advantage in doing so. That is, they deny the possibility of genuine altruism (because they think we are all 
by nature selfish). This leads us to the key implausibility of Ethical Egoism -- that the person who helps others 
at the expense of their self-interest is actually acting immorally. Many think that the ethical egoist has 
misunderstood the concept of morality -- i.e., morality is the system of practical reasoning through which 
we are guided to constrain our self-interest, not further it. Also, that genuine altruism is indeed possible, 
and relatively commonly exhibited. 
(4) Divine Command Theory 
Many claim that there is a necessary connection between morality and religion, such that, without religion 
(in particular, without God or gods) there is no morality, i.e., no right and wrong behaviour. Although there 
are related claims that religion is necessary to motivate and guide people to behave in morally good way, 
most take the claim of the necessary connection between morality and religion to mean that right and 
wrong come from the commands of God (or the gods). This view of morality is known as Divine Command 
Theory. The upshot is that an action is right -- or obligatory -- if God command we do it, wrong if God 
commands we refrain from doing it, and morally permissible if God does not command that it not be done. 
Divine Command Theory is widely held to have several serious flaws. First, it presupposes that God or gods 
exist. Second, even if we assume that God does exist, it presupposes that we can know what God 
commands But even if we accept theism, it looks like even theists should reject the theory. Plato raised the 
relevant objection 2500 years ago. He asked: 
Is something right (or wrong) because the gods command it, or do the gods command it because it is 
right? 
If the latter, then right and wrong are independent of the gods' commands -- Divine Command Theory is 
false. If the former, then right and wrong are just a matter of the arbitrary will of the gods (i.e., they might 
have willed some other, contradictory commands). 
Most think that right and wrong are not arbitrary -- that is, some action is wrong, say, for a 
reason. Moreover, that if God commands us not to do an action, He does so because of this reason, not 
simply because He arbitrarily commands it. What makes the action wrong, then, is not God's commanding 
it, but the reason. Divine Command Theory is false again. 
(5) Virtue Ethics 
Right and wrong are characterized in terms of acting in accordance with the traditional virtues -- making 
the good person. 
The most widely discussed is Aristotle's account. For Aristotle, the central concern is Ethica = things to do 
with character. Of particular concern are excellences of character -- i.e., the moral virtues.
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Aristotle, and most of the ancient Greeks really had nothing to say about moral duty, i.e., modern day 
moral concepts. Rather, they were concerned with what makes human beings truly 'happy'. True 
'happiness' is called Eudaimonia (flourishing / well- being / fulfilment / self- actualization). Like Plato, 
Aristotle wants to show that there are objective reasons for living in accordance with the traditional virtues 
(wisdom, courage, justice and temperance). For Aristotle, this comes from a particular account of human 
nature -- i.e., the virtuous life is the 'happiest' (most fulfilling) life. 
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Three steps to the argument: 
(1) The ultimate end of human action is happiness. 
(2) Happiness consists in acting in accordance with reason. 
(3) Acting in accordance with reason is the distinguishing feature of all the traditional virtues. 
Aristotle thought that humans had a specific function. This function is to lead a life of true flourishing as a 
human, which required abiding by the dictates of rationality and so acting in accordance with the 
traditional virtues. 
(6) Feminist Ethics 
Right and wrong is to be found in womens' responses to the relationship of caring. 
Comes out of the criticism that all other moral theories are 'masculine' -- display a male bias. Specifically, 
feminists are critical of the 'individualistic' nature of other moral theories (they take individualism to be a 
'masculine' idea). Rather, feminist ethics suggests that we need to consider the self as at least partly 
constructed by social relations. So morality, according to some feminist moral philosophers, must be 
ground in 'moral emotions' like love and sympathy, leading to relationships of caring. This allows legitimate 
biases towards those with whom we have close social relationships. 
(7) Utilitarianism 
Right and wrong is determined by the overall goodness (utility) of the consequences of action. 
Utilitarianism is a Consequentialist moral theory. 
Basic ideas: 
All action leads to some end. But there is a summum bonum -- the highest good/end. This is pleasure or 
happiness. Also, that there is a First Principle of Morals -- 'Principle of Utility', alternatively called 'The 
Greatest Happiness Principle' (GHP), usually characterized as the ideal of working towards the greatest 
happiness of the greatest number. The GHP implies that we ought to act so as to maximize human welfare 
(though Bentham thought we should include all sentient animals in his utilitarian calculations). We do this in 
a particular instance by choosing the action that maximizes pleasure/happiness and minimizing suffering. 
Jeremy Bentham -- the first to formulate Utilitarianism -- did not distinguish between kinds of 
pleasures. However, Bentham's student, John Stuart Mill, produced a more sophisticated version of 
Utilitarianism in which pleasures may be higher or lower. The higher pleasures (those obtained, e.g., 
through intellectual pursuits), carried greater weight than the lower pleasures (those obtained through 
sensation). The upshot is that in determining what action to perform, both quality and quantity of 
pleasure/happiness count. 
Note: Utilitarians are not a Hedonist. Hedonists are concerned only with their own happiness. Utilitarians are 
concerned with everyone's happiness, so it is Altruistic. In general, morally right actions are those that 
produce the best overall consequences / total amount of pleasure or absence of pain.
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Modern versions of Utilitarianism have dropped the idea of maximizing pleasure in favour of maximizing the 
satisfaction of all relevant peoples' preferences and interests. Also, some distinguish between Act 
Utilitarianism and Rule Utilitarianism. Act Utilitarianism is pretty mush as described above, where we make 
the utilitarian calculation based on the evaluation of the consequences of a single isolated act. It is 
thought by some that this leads to a number of significant problems -- for instance, that one person may be 
harmed if that leads to the greatest good for everyone. To overcome these problems, some advocate 
Rule Utilitarianism -- the view that we should adopt only those rules (for governing society) that produce the 
greatest good for all. 
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Other key points: 
• For Utilitarians, no action is intrinsically right or wrong. 
• No person's preferences or interests (including your own, your relatives, friends, neighbours, etc.) 
carry a greater weight than any other person's. 
• Usually we cannot make the required utilitarian calculation before acting. So, in most situations, 
following 'rules of thumb' will produce the best consequences. 
• Democratic and economic principles reflect Utilitarianism. 
Some things to ask about Utilitarianism: 
• How can we determine accurately what the consequences of an action will be? 
• Do people have rights that cannot be overridden by the goal of the best consequences for all? 
(8) Kantian Theory 
Right and wrong is determined by rationality, giving universal duties. 
Kantianism is a Non-consequentialist moral theory. 
Basic ideas: 
That there is the supreme principle of morality. Good and Evil are defined in terms of Law / Duty / 
Obligation. Rationality and Freedom are also central. Kant thought that acting morally was quite 
simple. That is: 
- you ought to do your duty (simply because it is your duty). 
- Reason guides you to this conclusion. 
Good Will (i.e., having the right intentions) is the only thing that is good without qualification. So, actions 
are truly moral only if they have the right intention, i.e., based on Good Will. 
What establishes Good Will? 
- only can be a law of universal conformity -- I should never act except in such a way that I can also will 
that my maxim should become a universal law. 
This is called the Categorical Imperative = Principle of Universalizability (something like The Golden 
Rule). The basic idea is that we should adopt as action guiding rules (i.e., maxims) only those that can be 
universally accepted. Consider someone wondering if they could break a promise if keeping it became 
inconvenient. We might formulate the following maxim governing promises: 
I can break promises when keeping them becomes inconvenient.
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Can this be universalized? Kant says no because making promises then becomes, in essence, 
contradictory. The thinking is that a promise is, by definition, something you keep. The above maxim would 
lead to a contradiction of will, i.e., I'll make a promise (something I keep), but I'll break it if I choose. The 
more general way to understand the Principle of Universalizability is to think that we must always ask the 
following questions: What if everyone did the action you are proposing? Or, what if I were in the other 
person's position? This leads to the basic idea behind the Golden Rule. 
Kant had another way of formulating the Categorical Imperative that is worth noting. 
Never treat anyone merely as a means to an end. Rather, treat everyone as an end in themselves. 
We can understand this by noting an example, i.e., the slave society. What is wrong with the slave society, 
following the above principle, is that a slave is treated as a means to the slave owner's ends, i.e., as an 
instrument or tool, not as a person. The upshot is that no person's interests (or rights) can be overridden by 
another's, or the majority. 
Many think that this way of formulating the Categorical Imperative shows that Kantianism is clearly anti- 
Utilitarian. 
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Some things to ask about Kantianism: 
• Is it true that having good intentions is the only thing that counts morally? 
• Must we always ignore good consequences? 
• Is it always wrong to treat people merely as a means to an end? (Can we do otherwise?) 
(9) Rights-based Theories 
We are to act in accordance with a set of moral rights, which we possess simply by being human. 
Rights-based views are connected to Kantianism and are Non-consequentialist. The basic idea is that if 
someone has a right, then others have a corresponding duty to provide what the right requires. 
Most distinguish between positive and negative rights. A positive right is one in which the corresponding 
duty requires a positive action, e.g., giving a charitable donation in order to sustain someone's right to life, 
shelter, education, etc. A negative right is one in which the corresponding duty merely requires refraining 
from doing something that will harm someone. Some claim -- e.g., Libertarians -- that only negative rights 
count morally. For instance, the right to life does not require that we give what is needed to sustain life, 
rather merely that we refrain from taking any action that would take life. [Note: others argue that there is 
really no significant distinction between positive and negative rights, arguing that a positive right can be 
understood negatively, and visa versa. Also, that there is no morally significant difference between, for 
example, letting someone die and killing them. Obviously, this is a hotly disputed issue.] 
Some things to ask about Rights-based theories: 
• Where do rights come from? From nature (we have them simply by being human)? From 
principles of Justice? Or, from Utilitarian procedures? 
• How do we decide between competing rights? 
(10) Contractarianism 
The principles of right and wrong (or Justice) are those which everyone in society would agree upon in 
forming a social contract.
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Various forms of Contractarianism have been suggested. In general, the idea is that the principles or rules 
that determine right and wrong in society are determined by a hypothetical contract forming 
procedure. Here is John Rawls's example. 
Through a thought experiment, Rawls developed a way of getting people to come up with universal 
principles of justice. The basic idea is nothing new -- i.e., of impartial developing a social contract 
of universal principles -- but many find Rawls' novel method very appealing. The idea is to start by thinking, 
hypothetically, that we are at the beginning of forming a society and we want to know which principles of 
justice to ground the society. However, in this 'original position' we do this without knowing which position 
we will occupy in the future society -- we don't know if we will be rich or poor, male or female, old or young, 
etc. We then advocate those principles that will be in our self-interest (though we don't know what 'self' 
that will be). This forces us to be impartial, and if we are rational, to propose universal principles. The idea 
of the thought experiment is not to think that we actually begin again, and construct a society from 
scratch. Rather, we can use the thought experiment as a test of actual principles of justice. If a principle is 
one that would not be adopted by people in the original position, behind the 'veil of ignorance' (about 
who they will be), then it is unjust and should be rejected. 
[Rawls claims that people in this original position will choose conservatively when developing principles 
governing the distribution of benefits and burdens. This conservatism, Rawls claims, will lead to the 
choosing two basic principles: (1) that each member of the society should have as much liberty as possible 
without infringing on the liberty of others; and (2) the 'maximin' rule for decisions about economic justice -- 
namely, that they will choose those rules that would maximize the minimum they would receive. In other 
words, make the society in which the least well off are in the best possible position. Deviations from equality 
of distribution of benefits and burdens is justified only if it advantages the least well off. Rawls thought that 
some inequalities would be adopted because rewarding on the grounds of merit and hard work, for 
example, would lead to a society in which there was a greater production of social benefits, so the least 
well of would be better off than in a society of pure equality.] 
3.1.6 Leadership, Power and Integrity 
ETHICAL LIMITATIONS AND DANGERS OF MANAGERIAL ROLES 
There are various stances people may take in relation to their values then different people may have 
different potential strengths and weaknesses in their approach to ethical issues in organizations. Managers 
can take one of five positions in their approach to ethical issues at workplace. i.e. prophets, subjectivists, 
rhetoricians, quietists and balancers 
(1). Prophets want to act on the world, or at least their organization, without the constraint of comment or 
caution from others. They are unwilling to debate. Their monocular ethical vision means they may do 
great harm if their vision happens to be wrong or bad. They do not pay attention to questioning voices. 
They are positive prophets who have a particular prescription for how things should be changed and 
people developed. They require disciples who will ‘buy into’ the particular values and principles they offer. 
(2). Subjectivists are doubters. They are the opposite of the prophets who doubt little. Questioning the way 
things are done shows engagement with the world, but is beset with anxieties as the ground of their 
questioning constantly shifts. The ethical limitation of the subjectivists is that they do not believe in the 
existence of objective ethical standards and think everyone has to make their own choices while 
recognizing that individuals' own choices implicitly impose expectations on others. They suffer an instability 
caused by the collective implications of their individualism. 
(3). Rhetoricians: These managers enjoy debates in which some win and others lose. The point for them is 
not to be right, but to win. They create facades of performance metrics and annual reports that are 
required to keep top management content. Such material will be provided by managers despite their 
doubts about their worth. 
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(4). Quietists: they disengage from ethical problems of the world. Its limitation is that a quietist manger 
would not see it as their role to react to wrongdoing within their organization. Quietism is the resignation of 
self to achieve contentment. 
(5). Balancers: There are two managerial roles, the culture designer and the transactional manager, that 
are intermediate between the four stances. Their ethical problem is maintaining the equilibrium. If culture 
designers lose their balance they will become either more like prophets or more like subjectivists. If the 
transaction manger becomes unbalanced they are more likely to move towards either the quietists’ or 
rhetoricians’ stances. 
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Components of Ethical Leadership 
Ethical leadership begins with the way leaders perceive and conceptualize the world around them. Ethical 
leadership, organizational ethics, and social responsibility are inseparable concepts. They are developing 
concepts, to be sure, but inseparable. How ethical leaders relate to and come to understand the world 
around them involves judgment and action. These can be developed. In sum, the leader's role is to guide 
the human potential of the organization's stakeholders to achieve organizational aspirations in ways that 
liberate rather constrain their imaginations and judgment. 
Ethical leadership must, then, be effective, efficient, and excellent if it is not to waste human potential. It is 
not enough to be ethical in one's individual actions to be an ethical leader. To be effective, efficient, and 
excellent, four components of ethical leadership must be understood and developed: purpose, 
knowledge, authority, and trust. 
The relationship between these four components can be visualized as interrelated components, as 
described in the figure opposite. Attention to any one component alone is incomplete and misleading. 
• Purpose — The ethical leader reasons and acts with organizational purposes firmly in mind. This 
provides focus and consistency. 
• Knowledge — The ethical leader has the knowledge to judge and act prudently. This knowledge is 
found throughout the organization and its environment, but must be shared by those who hold it. 
• Authority — The ethical leader has the power to make decisions and act, but also recognizes that 
all those involved and affected must have the authority to contribute what they have toward 
shared purposes. 
• Trust — The ethical leader inspires — and is the beneficiary of — trust throughout the organization 
and its environment. Without trust and knowledge, people are afraid to exercise their authority. * 
Modes of Ethical Leadership 
It is often thought that ethical leadership must be soft leadership. Nothing could be further from the truth. 
Being an ethical leader means applying the right amount of authority in each situation. Sometimes the 
situation requires leadership that is anything but gentle. Gratuitously tough leadership, however, cannot be 
maintained for long without developing resentment and cynicism. 
It is helpful to think of the ethical leader as exercising authority within five modes or levels of intervention 
into the judgments and actions of followers: 
• Inspiration — Setting the example so that other committed members will contribute their fullest 
capabilities to achieve organizational purposes. (the lowest degree of intervention) 
• Facilitation — Supporting other committed members, and guiding them where necessary, so that 
they are able to contribute their capabilities as fully as possible. 
• Persuasion — Appealing to reason to convince other members to contribute toward achieving 
organizational purposes. 
• Manipulation — Offering incentives other than the intrinsic value of contributing to the 
achievement of organizational purposes, where commitment is lacking.
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• Coercion — Forcing other members to contribute some degree of their capability where they have 
little or no commitment to do so on their own. (The highest degree of intervention). 
It is also helpful to consider the components of ethical leadership together with the modes of intervention. 
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Integrating Components and Modes 
The leader must employ the authority granted him or her by the organization to achieve the purposes of 
the organization, all the while recognizing that the knowledge needed to exercise this authority resides 
throughout the organization and its environment. 
He or she must ensure that the purposes of the organization are known and shared, that it has the capacity 
to support its members' exercising their capabilities, and that communication between mangers and other 
employees is open and honest. 
The mode of intervention selected will depend upon the health of the organization and the pressures in its 
environment. 
• The ideal is to inspire others as a steward of the vision, values, and excellence of the organization, 
as reflected in its culture. 
• Often persuasion and facilitation are required of otherwise capable and committed members, 
where they are unsure of their own capability. 
• Sometimes even manipulation and coercion are appropriate, where the organization is not 
healthy and the pressures are intense. 
The modes of ethical leadership intervention depend in large part on the organizational culture. If the 
culture allows the organization to learn and grow within its environment, leadership may be largely 
inspirational. 
If the culture does not support organizational learning and growth within that environment, then 
manipulative, even coercive, leadership would be necessary. Somewhere in between is leadership that is 
facilitative or persuasive. In any event, leaders must make their roles as integrity champions larger than life. 
Otherwise they and their examples will be lost in the pressures of day-to-day life. They must speak in terms of 
vision, values, and integrity. And, when the leader is not involved in a part of the organization's business, he 
or she must know who speaks for values and integrity. 
Moreover, the style of ethical leadership will vary with the degree to which it reflects the Organizational 
Culture and the urgency of its situation in the environment. 
• In its least demanding sense, ethical leadership is a stewardship that preserves the aspirations and 
culture of the organization. 
• In its most demanding sense, it scans the community and develops and communicates 
organizational aspirations: the organization's core purpose, core values, and vision of a desired 
future and persuades, manipulates, and coerces its stakeholders to comply until the culture has 
adapted. 
• In between these extremes, ethical leadership balances (1) achieving the organizational 
aspirations that are realistically attainable at this time with (2) developing the organizational 
culture over time. 
Different styles of leadership are necessary to maintain or implement change in the organizational culture 
that is optimal for it to survive and thrive within the organization's context. 
The specific culture required, and the challenges it must face, will be suggested by the nature of its 
essential social responsibility and dynamics of its larger community.
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3.1.6.1 Leadership and Source of Power 
One can define leadership as influencing the activities of others toward accomplishing a goal. And we 
can define power as a leader’s potential to influence the activities of others toward accomplishing a goal. 
Without a source of power there can be no leadership. 
One can define two power bases: position and personal. Position power is the power given to the leader 
by the organization. It’s the power granted to the leader based on the job title. 
Personal power is power other people give to the leader. That includes the leader’s subordinates, peers 
and bosses. Personal power is an indication of the level of commitment others have to the leader. Personal 
power is linked to one’s personality, competence and integrity. 
Table outlines the seven key types of power. 
Source Type Influence on others 
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Coercive power Position 
The ability to impose sanctions or punishment to gain 
compliance 
Reward power Position 
The ability to provide rewards or recognition to gain 
compliance 
Legitimate power Position 
The right to influence the activities of others based on job title 
or position 
Expert power Personal Respect gained based on skills, expertise or experience 
Referent power Personal Positive personal traits or integrity 
Information 
Position and 
Possession of or access to, valuable information 
power 
personal 
Connection 
power 
Position and 
personal 
Access to others who can provide rewards or sanctions 
Table 1. The table shows the seven major sources of a leader’s power. 
A leader should consider these sources of power and be able to incorporate them appropriately. A leader 
should consider the best sources of power to be employed to achieve success and effectiveness. 
So, now you should be asking yourself: “Is there one best and preferred source of power?” The answer is 
yes, if you’re only concerned with immediate success. For instance, imagine a fire breaks out and you 
need to ensure a process for volatile hydrocarbons is shut down safely. In this case, position power is the 
best choice. In most other situations you need to move among the sources of power. 
Table 2 shows examples of actions that might enhance various sources of power.
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Leader action Typical effects Effect on power 
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Uses sanctions to gain compliance, 
gives corrective feedback for poor 
performance 
• Team believes the leader will use 
sanctions when necessary 
• Increases coercive and 
referent power in team 
members' eyes 
• The boss notes the leader didn't 
abuse delegated authority 
• Builds referent power 
with the boss 
• Leader gains respect because of 
judicious use of coercive power 
Makes good decisions in the area 
of authority 
• Team members and peers 
perceive the leader as competent 
• More legitimate and 
expert power with boss, 
team and peers 
• The boss notes good decision-making 
and may grant more 
authority 
Uses rewards appropriately, 
recognizes notably good 
performance 
• Team members perceive the 
leader will use rewards or positive 
recognition 
• Increase reward and 
referent power with team 
• The boss, peers and team 
members notice and respect the 
proper use of reward authority 
• Increases referent power 
with boss and peers 
Table 2. This table shows the benefits that accrue to those who wield power appropriately. 
Power can be lost quickly if a leader misuses legitimate power. Table 3 offers a few examples of how this 
can happen. 
Leader action Typical effects Effect on power 
Uses sanctions inappropriately, 
misuses corrective feedback 
• Team loses respect for the leader 
• Reduces referent power 
with boss, team and peers 
• The boss notes the leader can't 
handle sanction authority 
• Might also erode 
coercive power 
• The leader loses respect from peers 
Threatens sanctions but never 
follows through 
•Team doesn't perceive the leader will 
use sanctions 
•Reduces coercive power 
with the team 
Gives rewards to everyone, 
regardless of performance 
• Team feels there is no need to work 
harder if everyone gets the same 
reward 
• Reduces reward power 
with team 
• Rewards become expected, as 
opposed to being performance-based 
• Reduces referent power 
with boss, peers and team 
• The boss notes the leader is abusing 
the rewards system 
Table 3. These are some examples of the negative fallout from abuse of power. 
A leader must use power wisely and justly, or it can become a liability rather than an asset. It only takes one 
incompetent act to result in an immediate loss of power. Good leaders work to build their sources of power 
and use their powers to influence others wisely.
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The Five Sources of a Leader’s Power, and how (and how not) to use them 
Power is a force of influence and authority. Most leaders wield power, but how power is manifested and 
used often differs between leaders. Where does a leader get power from? Or do a leader’s followers give it 
to them? Well it’s both. In this post, we’ll be looking at the five different sources of power a leader can use, 
with some advice on when these powers should be used, and perhaps when not. 
The five sources of a leader’s power come from distinctly different sources. Here’s an overview: 
1. Expert Power: When a leader has significant domain knowledge/skills. E.g. an expert accountant 
influences how junior accountants go about their tasks 
2. Positional Power: Comes when a leader has a legitimately held position of authority. E.g. typically, 
the CEO of an organization has the highest positional power 
3. Reward Power: Is evident when a leader can give, or take away, a reward. E.g. a leader can 
influence a follower’s behavior by awarding a bonus, or taking away perks 
4. Coercive Power: This is felt when a leader creates the perception of a threat. E.g. a leader has 
coercive power if her followers believe that she will initiate disciplinary action 
5. Personal Power: Influence gained by persuasion. E.g. a manager may have to rely on nothing more 
than a friendly please and thankyou for an employee to perform a task 
So now we will look at each of these sources of power and consider when they could be used, and when 
it’s not appropriate to use them… 
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Expert Power 
If you’re reading this then you’re probably like most professionals and leaders that potentially have expert 
power. It is the esoteric nature of the professional’s subject matter that means most superiors or colleagues 
don’t possess the same applicable knowledge or judgment as you, even if you have no formal authority on 
the subject. Therefore your word on your subject carries weight and has the means to influence the 
outcome of decisions where it applies. For example, a programmer can influence the design of a niche 
application because of their knowledge of a code base, and a support engineer can influence how a 
support process operates because they are known to be the best at supporting that function. 
It is common, therefore, that followers can have more expert power than their leaders. New leaders 
particularly can possess far less knowledge than their followers. This can put you in a vulnerable position. To 
gain the same level of knowledge can be time-consuming and possibly not practical, if skills are hard to 
acquire. You wouldn’t expect an Finance Director to take a Cisco Systems course so that they can directly 
influence the outcome of a computer network investment, would you? As a leader in this situation, you 
should not rely only on expert power to influence outcomes and use other sources of power accordingly. 
Therefore, by possessing expert power you have something that most others cannot easily acquire. It is a 
powerful asset. But is it always used for the greater good? No. Withholding knowledge as a means of 
gaining or maintaining power is all too common. Leaders who identify this practice have a difficult 
challenge, but it must be avoided. One might see this where IT departments are in the process of being 
outsourced, or if an employee feels threatened by new members of their team. As a leader in this situation 
you should apply other powers to resolve the problem, such as rewarding knowledge sharing or building 
closer relationships with the affected employee to persuade him out of this way of thinking. 
Use expert power when… 
• you have a genuine expertise in a subject 
• or you have access to resources within your control who do 
Don’t use expert power when…
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• you’re unsure of your competence in a subject 
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Positional Power 
Positional power is gained by a person’s role in their organization. In many organizations a grading system is 
used to position an employee, or it maybe evident in an organization chart. However your organization 
elevates its employees in the structure, positional power is a function of one’s formal authority. It’s being the 
boss. As the boss you can decide who does what job and who goes where. As the formal authority, you 
have influence because you have been given the accountability for that department or function. 
Being the boss, however, does not guarantee that you will have followers that comply of their own free will. 
It does not mean you will be the leader. Using only positional power means you make decisions without 
consideration of personal relationships, individual needs and personal objectives. It could result in 
compliance, and only compliance. You might see that your subordinates work to rule or union policy, and 
behave inflexibly. Subordinates in this sense are wielding positional power too in order to influence an 
outcome. Ensuing disputes can be very costly and disruptive, and its likely as a leader you will come out of 
this for the better. Using positional power is not bad, but should be used in conjunction with other sources of 
power to be most effective. 
Use positional power when… 
• you need something done quickly when you don’t have time to explain why 
• if a political situation has grown that needs stemming 
• your accountabilities are in serious jeopardy 
Don’t use positional power when… 
• you’re feeling impatient or frustrated 
• you have purely personal reasons to influence an outcome 
• your values are at odds with someone else’s 
• you’ve recently entered a new post with an unfamiliar team 
Reward Power 
One has reward power if you have the potential to influence the actions or behaviors of others if you have 
control over desired resources, such as salary benefits, human resources or capital. In essence, it is due to 
your ability to offer incentives. For example, a leader of a programming team can increase productivity in 
their team by offering benefits like new programming tools or a team outing to paintball. A common 
practice in many organizations with a salesforce is to offer places at a sales conferences in exotic 
locations. It is sometimes as simple as a leader offering affiliation with themselves, such as meetings over 
coffee or public recognition. 
Having the potential to administer reward is a powerful force. It is an effective motivation mechanism. 
However, it must be used carefully. One mistake that leaders often make is to assume that the reward is 
worth the effort in the eyes of their followers. Another possibility is that it could create or reinforce an 
entitlement culture where explicit rewards are the only motivation, and the revocation of the rewards 
creates the opposite outcome. It is also possible that followers who do not receive rewards can foster 
jealousy or resentment creating further problems within the organization. 
Use reward power when… 
• you need something done quickly 
• your team needs a motivation boost 
• you’re asking your followers to go above and beyond their duty
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• you want to create friendly competition 
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Don’t use reward power when… 
• resources are scarce, so that someone wins, someone loses 
• you have doubts about your ability to provide the reward 
• they are targeted towards individuals in situations where there are petty jealousies exhibited in your 
team 
Coercive Power 
Coercion is a potential to influence others by sanctions or other negative action. For example, an engineer 
works longer hours unpaid because their performance review is due with her leader. It is a product of fear 
of loss. 
Coercion is not always the same as a threat, which is a direct and deliberate action of coercion. Indirect 
coercion can be due to a perception by the engineer, in the above example, that a threat is in place, 
even if a threat had never been expressed by their leader. Another example is where a designer 
compromises on a design to align to their leader’s personal motives, where the leader is known to have a 
temper and short-fuse. 
Coercion is not inherently ‘bad’. Coercive power can be instrumental in an organization if certain 
standards are required or regulations upheld. For example a programmer works in an organization where 
software standards must be applied to comply with contractual obligations. To be effective, the 
programmer must know that there are penalties to himself (e.g. given a warning or a black mark on their 
performance) and also to their employer. Another example is a HR policy which stipulates the immediate 
firing of an employee who makes racist comments. 
Coercion as a staple source of power rarely makes for a good leader. Ruling with an iron fist behind your 
back doesn’t foster good working relationships and respect. Its also likely to result in employee’s revolting, 
reflecting your coercive tactics in the form of strike action or similar. Coercion should be used sparingly, if at 
all, and only to stem negative behaviors in your followers that may be outside of behavioral policies, but 
only once other forms of power have been exhausted. 
Use coercive power when… 
• you need to ensure standards and policies are adhered to 
• there is significant risk in a situation 
• you have no other option 
Don’t use coercive power when… 
• you have the ability to apply other power. Rather, use positional power if you must 
• you won’t be around to put things right, afterwards 
• you’re feeling frustrated and emotional 
Personal Power 
Personal power is created by strong relationships between a leader and her followers. It is the potential 
influence that you have due to the quality of this bond; a product of trust and affiliation. A business analyst 
will accept the influence and decision of his leader if he believes his motives are aligned to their shared 
values. Personal power begins when two or more people have rapport and build upon their relationship. 
The more that the follower sees good in the actions of the leader, the more personal power the leader will 
possess over the follower. Personal power is synonymous with friendship.
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Personal power comes into play when a leader can influence a follower by a conversation. A simple 
exchange of words in terms of a request is often enough, even if the follower does not necessarily 
understand or agree with the request or decision. Personal power can be an optimal means of making 
progress, but it does come at a price. The leader must work hard at building and maintaining these 
relationships. 
Personal power can have a downside when discipline has to be practiced by the leader. Having a 
crunchy conversation with a follower who you share a strong relationship can be awkward. It is common 
for leaders to shy away from the discipline, leaving unresolved issues that can fester for later explosion. 
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Use personal power when… 
• there is a strong relationship between you and your followers 
• your desired outcome does not conflict with your followers values, or the values of your 
organization 
• your desired outcome is flexible 
Don’t use personal power when… 
• there is not a strong relationship between you and your followers 
3.1.6.2 Creating and maintaining a culture of integrity 
Integrity is a concept of consistency of actions, values, methods, measures, principles, expectations, and 
outcomes. In ethics, integrity is regarded as the honesty and truthfulness or accuracy of one's actions. 
Integrity can be regarded as the opposite of hypocrisy, in that it regards internal consistency as a virtue, 
and suggests that parties holding apparently conflicting values should account for the discrepancy or alter 
their beliefs. Integrity means making the correct choice when faced between right and wrong. It further 
encompasses adherence to ethics and morals, and is often linked with honesty. 
In the history, the word integrity stems from the Latin adjective integer (whole, complete). In this context, 
integrity is the inner sense of wholeness deriving from qualities such as honesty and consistency of 
character. As such, one may judge that others have integrity to the extent that they act according to the 
values, beliefs and principles they claim to hold. 
A value system's abstraction depth and range of applicable interaction may also function as significant 
factors in identifying integrity due to their congruence or lack of congruence with observation. A value 
system may evolve over time while retaining integrity if those who espouse the values account for and 
resolve inconsistencies. 
If employers will demonstrate honesty and integrity in all situations, employees will catch on and follow 
suit. Rather than constantly be riding individuals about their character or criticizing individuals for poor 
choices, show true character through silent and humble actions. Promote integrity in the workplace by 
holding ongoing seminars and trainings, regarding ethics in the workplace. Choose a value each month to 
discuss in the workplace at monthly meetings. This is another way to remind individuals to be thinking 
about good characteristics. 
Integrity is the number one quality of leadership. Integrity in leadership is expressed in terms of constancy 
and consistency. It is manifested in an absolute devotion to keeping one's word. The glue that holds all 
relationships together-including the relationship between the leader and the led-is trust, and trust is based 
on integrity.
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Integrity is so important that functioning in our society would be impossible without it. We could not make 
even a simple purchase without a high level of confidence that the price was honest and that the change 
was correct. The most successful individuals and companies in America are those with reputations of high 
integrity among everyone they deal with. This level of integrity builds the confidence that others have in 
them and enables them to do more business than their competitors whose ethics may be a little shaky. Earl 
Nightingale once wrote, If honesty did not exist, it would have to be invented, as it is the surest way of 
getting rich. A study at Harvard University concluded that the most valuable asset that a company has is 
how it is known to its customers, its reputation. 
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The Benefits of Integrity 
The study of great leaders have shown one consistent character in each of them, that is integrity. Integrity is 
the stable force behind countless leadership role models. Great leaders model integrity by being honest 
and doing what is right no matter the circumstances. Integrity requires managers to make the right choice, 
even when they do not receive personal gain from the outcome, and to put own personal agenda aside 
for the greater good of the organization and the people. 
Effective leaders know that workers need a leader who has integrity. Without it, workers will be missing a 
vital ingredient in their ability to perform. Much like the foundation of a building, integrity is essential for 
lasting success and provides a work environment with three key qualities: stability, safety and reference. 
Stability. People who see their boss as honest and having a strong commitment to doing the right thing are 
assured that they work in an environment of stability. They know that their boss' integrity will not be shaken 
when tough decisions need to be made. Their boss will stick up for their employees and support them. They 
will treat people fairly and will be more willing to share information with their employee that is necessary for 
them to do their jobs. Conversely, a leader who is not upfront with people and hides behind their own 
deceit for their own self-protective purposes will create an environment of fear, uncertainty and an 
atmosphere of everyone for themselves! These sorts of leaders are more prone to play favourites or other 
political games and leave their team to figure out the rules of engagement. 
Safety. Managers with a strong foundation of integrity make it safe for their employees to perform at their 
peak. Leadership integrity gives people a sense of empowerment. A good leader knows that there is safety 
in providing people with the freedom to be open and honest. People know that there will not be retribution 
for their ideas and opinions. A good leader knows how to allow people this freedom while, at the same 
time, ensuring that it is done respectfully and appropriately. Workers that feel safe will perform better. It is 
also the best ingredient for instilling an environment of innovation. And with innovation comes 
transformation. 
Reference. A manager's integrity forms a baseline that serves as a reference or measure. A leader with a 
strong foundation of integrity is a guiding light to those around them. Employees tend to emulate what their 
boss does. In a high performing environment, leaders with integrity are the role models for others to see and 
follow and form the standards for how others ought to behave. 
Practices to create and maintain culture of integrity 
An organisation have to put forth some practices so as to create and maintain integrity. The culture of 
integrity is not automatic and hence organisations particularly managers have to work hard to achieve it. 
Some practice include effective training, practising fairness in every activity in the organisation, designing a 
code of conduct, treatment of gratuities, gifts and entertainment. 
Effective Training. Organisations should ensure that its workers receive constant training for good habits, 
organisational goals and achievements attached to integrity. Each useful information should be made 
available to the organisation. Ways of conducting business and treating customers and suppliers should be 
well communicated and encouraged. A sense of belonging should be instituted. Each worker should be
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responsible for proper business behaviour. Effective training can be done to new employees on the day of 
orientation. However, it should be repeated at constant intervals to maintain the culture of integrity. 
Code of Conduct (Financial And Business Records). Employees involved in the preparation of the 
company's financial statements must prepare those statements in accordance with applicable 
accounting principles and standards so that the financial statements materially, fairly and completely 
reflect the business transactions and financial condition of the company. Company policy prohibits any 
employee from knowingly making or causing others to make a misleading, incomplete or false statement in 
connection with an audit or any filing with any governmental or regulatory entity. 
Company policy also prohibits any employee from falsifying or causing others to falsify any company 
record or documentation. In addition, an employee must not omit or cause others to omit any material 
information that is necessary to prevent a statement made in connection with any audit, filing or 
examination of the company's financial statements from being misleading. Employees are prohibited from 
maintaining any undisclosed or unrecorded corporate account, fund or asset or any arrangement, 
including off-balance-sheet items or arrangements, with a misleading purpose. 
Destruction or falsification of any document that is potentially relevant to a violation of law or a 
government investigation may lead to prosecution for obstruction of justice. Therefore, if an employee has 
reason to believe that a violation of the law has been committed or that a government criminal or 
regulatory investigation is about to be commenced, he or she must retain all records. Questions with regard 
to destruction or retention of documents in this context should be directed to the Company's Legal 
Department. 
Gifts, Gratuities and Entertainment. Employees and their family members should not accept gifts, gratuities 
or entertainment from persons, firms, or corporations with whom the Company does or might do business 
other than those of modest value, consistent with generally accepted ethical business practices. It is also 
the Company's policy not to offer gifts, gratuities or entertainment to persons, firms or corporations with 
whom the Company does or might do business other than those of modest value, consistent with generally 
accepted ethical business practices. 
There are some cases where refusal of a valuable gift would be offensive to the person offering it. This is 
particularly true when employees are guests in another country, and the gift is offered as part of a public 
occasion. In these cases, the employee to whom the gift was offered may accept the gift on behalf of the 
Company, report it to a supervisor and turn it over to the Company. 
The Company, as a responsible corporate citizen, can make donations of money or products to worthy 
causes, including fundraising campaigns conducted by its customers. To remain an appropriate donation, 
the contribution should not be connected to any specific customer purchases or purchasing commitments. 
Equal Employment Opportunity. To maintain the culture of integrity, the organization should be committed 
to provide equal opportunity in all aspects of employment and also a work environment free of unlawful 
discrimination or harassment of any kind. Employees are responsible for understanding and complying with 
the organization’s policies on equal employment opportunity and unlawful harassment. Copies of these 
policies can be obtained from the Company's Human Resources department. Fairness in the treatment of 
various issues on different employees should be monitored. Avoiding the work of nepotism and corruption 
will help a long way in enhancing integrity. 
Incentives, Rewards and Punishment. Managers may use incentives to help employees operate with 
integrity. Incentives do motivate employees to strive to operate within company limits. Just like rewards 
helps employees to improve their way of operating to the desired ways. This is inform of rewarding (every 
year) the best employee to maintain or apply company ethics. However, for many of those who do not 
support organization culture or they break rules of integrity, some form of punishment should be designed 
and applied on them. 
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3.1.6.3 Methods of influence 
Effective leaders know how to influence people. In most organizations, its not about authority, it's about 
influence. Discover the power inherent in nine spheres of influence. 
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• Power Overview 
• Authority 
• Expertise 
• Punishment 
• Postive Reinforcement 
• Persuasion 
• Coaching 
• Relationships 
• Vision 
• Charisma 
Overview 
In politics, a sphere of influence is typically defined as the cultural, economic, military or political influence 
a state exerts over another state. Similarly, powerful leaders have a sphere of influence used on the 
influence people around them. 
Written in 1959, French and Raven The Bases For Social Power is commonly cited in management texts as 
the model for how to influence people. However, they listed only five sources, which they referred to as: 
• Reward, 
• Coercive, 
• Legitimate (authority), 
• Referent (charisma) and 
• Expertise. 
It's been over 45 years since this classic article on how to influence was published and times change. For 
example, there is a great deal of research in both psychology and management that we can now draw 
on to better understand the nature of leader influence. Besides the five that used by French and Raven, I 
believe there are four more: 
• Coaching, 
• Vision, 
• Relationship, and 
• Persuasion. 
And while reward and coercion are commons terms in how to influence, it would be more helpful to think 
in terms of behavioral modification (or operant conditioning) which uses two motivational consequences 
that leaders need to understand: positive reinforcement and punishment. 
Power lasts 10 years, influence not more than a hundred. — Korean Proverb
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EFFECTIVE LEADERS KNOW HOW TO INFLUENCE PEOPLE 
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• Power Overview 
• Authority 
• Expertise 
• Punishment 
• Postive Reinforcement 
• Persuasion 
• Coaching 
• Relationships 
• Vision 
• Charisma 
How To Influence With Authority 
Power corrupts, and absolute 
power corrupts absolutely..—Lord 
Acton, Letter to Bishop Mandell 
Creighton, 1887 
When I make a mistake, I am an 
idiot. . . When my boss makes a 
mistake, he's only human. — 
Unknown 
Authority is defined as a legitimate right to influence people based 
on one's position inside an organization or nation. It works best in 
large bureaucratic organizations and is a major mechanism of 
political leadership. 
It is usually a vertical relationship, a top-down influence mechanism 
associated with obedience, conformity and compliance. Typically, 
there is also a status difference. 
For example, people follow a doctor's instruction because that 
person has expertise but we do what a police officer says because 
the officer represents authority. 
Influence By Coaching 
Coaches have to watch for what 
they don't want to see and listen to 
what they don't want to hear. — 
John Madden 
Coaching (and by extension, mentoring and teaching) exert 
influence on people by providing new knowledge and new skills on 
how to influence people. Unfortunately, consultants are not 
coaches, neither are most executives. 
Traditionally, managers and supervisors have never assumed the 
mantel of leadership required to function as a coach—telling 
someone what to do is not the same as showing someone how to do 
it. Neither do the vast majority of CEO's. 
I like to ask what people will take pride in. Contrary to what you see 
on the resumes, work activities don't put a smile on people's face. 
What brings the smile is the leader who mentored, taught and 
coached them to be better human beings. 
The Sphere of Persuasion 
You can lead an organization 
through persuasion or formal edict. 
I have never found the arbitrary 
use of authority to control an 
Long a key skill of great sales people throughout history, persuasion 
becomes a bulwark for the leadership when authority does not work.
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organization either effective or, for 
that matter, personally interesting. 
If you cannot persuade your 
colleagues of the correctness of 
your decision, it is probably 
worthwhile to rethink your own. — 
Alan Greenspan, chairman of the 
Federal Reserve Board 
Technically, persuasion ends with someone saying, I agree. 
But agreement doesn't mean people will actually take action. 
Unfortunately, persuasive influence of people requires a fair amount 
of sales savvy and a fairly sophisticated understanding on attitude 
change and cognition. 
___________________________________ 
Persuasive Humor. I am reminded of the story of how God called 
Noah in to build an ark so that he, his family, and all the species of 
the earth could survive the flood He would let loose in two weeks. 
Noah was shocked and said, “two weeks! God, do you know how 
long it takes to build an ark?” And God replied, Noah, how good 
are you at swimming?” 
The Motivational Sphere of Positive Reinforcement 
Reinforcements continue to be 
important, of course, long after an 
organism has learned how to do 
something, long after it has 
acquired behavior. They are 
necessary to maintain the behavior 
in strength. 
B. F. Skinner, Harvard University, 
Harvard Educational Review, 1954 
There are two types of reinforcement and two types of punishment 
to influence people according to a theory of psychology known as 
operant conditioning. Some refer to it more of a learning theory, 
while others think operant conditioning is a theory of motivation. It's 
potential for influencing people lies in the fact that consequences 
work in both people and animals. 
Practically speaking, negative reinforcement presents ethical issues 
so shrewd leaders focus on developing influence through the use of 
positive reinforcement to increase the likelihood of DESIRED 
BEHAVIOR. 
The Motivational Sphere of Punishment 
You can get more with a kind 
word and a gun than you can with 
a kind word alone. — Al Capone 
(1899-1947), Chicago Mobster 
Positive and negative punishment has a very narrow definition in 
operant conditioning. In this case, the definition is going to be 
expanded to include the threatened use of a punishment. One 
could make an argument that the threatened use of punishment 
(escape-avoidance) can reduce undesired behavior just as much 
as much psychological pain as its real use. 
To say one will have to use punishment to change undesired 
behavior says something about human nature. Nasty bosses and 
individuals who make Fortune Magazines toughest boss list use this as 
a primarily influence technique. 
Something best used when all other forms of leadership influence 
don't work, it's proper use is subject to legal statutes and ethical 
constraints to decrease UNDESIRED BEHAVIOR. 
___________________________________ 
Punishment Humor. A seeing eye dog was trying to gets its master 
across the street but the light was not working. The dog tried once 
but oncoming traffic drove the two of them back to the curb. The 
dog tried a second time but the horns from a group of taxis drove
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them back again. They tried a third time, this time they were 
successful despite a the loud horns and the curses of drivers. 
Once on the other side of the street, the dog’s master reached out 
for a biscuit to give it to the dog. An person who had observed the 
whole thing went over the the person and said, “You probably 
shouldn't reward the dog for putting your life in danger by giving him 
a biscuit.” But the dog’s master replied, “Reward, hell. I am just trying 
to find which side is his head so I can kick his behind.” 
Relationship Influence 
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He who mistrusts most should be 
trusted least. — Theognis of 
Megara, Greek poet 
Your people won't remember, and 
don't really give a damn how 
much money you saved the 
company. — unknown 
Not considered a sphere of influence by many scholars, it's power 
lies in a both knowing how to develop, maintain and repair 
relationships. In many cultures, such as in Latin American and Asia, 
business leaders place a greater emphasis on relationship 
development than is commonly done in America. Typically, business 
does not begin until a sound relationship is established. And doing 
business gets difficult when that relationship gets strained. 
Assuming leaders devoted the time and effort to develop trust, 
rapport, credibility, and empathy; they have the foundation 
elements on how to influence people through reciprocity. 
___________________________________ 
Relationship Humor. The doctor looked benignly at the woman who 
had come to him for an examination. Mrs. Brown, he said, I have 
good news for you. The woman said, ' I'm glad of that, doctor, but 
I'm Miss Brown. Miss Brown, said the doctor without changing 
expression, I have bad news for you. 
Influence Through Expertise 
Why don't you write books people 
can read? — Nora Joyce to her 
husband James (1882-1941) 
How to use expertise as a form of influence is somewhat of a 
paradox. There are experts with little influence and ignorant dolts 
who seem to speak the gospel. 
Experts are people whom we think have valuable information. Often 
they are people who know how to make the right decision or solve 
that intractable problem. It helps to have depth of knowledge to be 
perceived as an expert, and this is an important part of the success 
doctors, lawyers and consultants experience. 
How to influence influence with expertise lies partly in the 
psychological theory known as attribution theory. But too often, we 
accept false beliefs and false arguments as truth. 
___________________________________ 
Expertise Humor. The man told his doctor that he wasn't able to do all the 
things around the house that he used to do. When the examination was 
complete, he said, Now, Doc, I can take it. Tell me in plain English what is 
wrong with me. Well, in plain English, the doctor replied, you’re just lazy. 
Okay, said the man. Now give me the medical term so I can tell my wife.
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Influence Through Vision 
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In 1929, days after the stock market 
crash, the Harvard Economic 
Society reassured its subscribers: 
“A severe depression is outside the 
range of probability”. 
In a survey in March 2001, 95% of 
American economists said there 
would not be a recession, even 
though one had already started. 
— American's Vulnerable 
Economy, The Economist, 
November 15, 2007 
Few leaders know how to influence with vision to motivate people 
and themselves. Those that do can accomplish great events. People 
that have it seem to harness an inner strength that keeps pushing 
them forward on a path no matter how difficult. 
The visionary leader also understands how to influence people 
through the use of expectations. Setting positive and negative 
expectations exert tremendous influence, but few leaders 
understand how to use them properly. 
The Charismatic Sphere of Influence 
I don't know how to define it, but I 
know it when I see it. 
Charismatic leadership is one of the most powerful methods of how 
to influence people, but also one of the most elusive. It's difficult to 
develop, but well worth the effort. 
It's been associated with religious prophets, great preachers, famous 
teachers and those who get tagged with the title of transformational 
leaders. 
One basis for it's influence lies in an understanding of the nature of 
the psychological mechanism of identification. We tend to identify 
with individuals and their causes resonate with ours. 
Conclusion 
A leaders use of influence is like singing—if one only belts out only note there's no song. But If you have 
nine notes, the song sounds like real music. 
Each of the nine methods of how to influence can be turned into a skill. Just because you don't have it 
today, doesn't mean you can't develop it in the future. 
3.1.6.4 Abuses of Power 
ABUSE OF POWER 
Abuse of power or authority may be the prime source and true essence of moral EVIL - Evil is the ABUSE of 
power. Moral EVIL begins to exist when someone refuses to accept responsibility for the welfare of others, 
especially those naturally under his or her direct care. It can be said that someone has POWER, if that 
someone can decisively influence (the) reality (of others). 
In this context, AUTHORITY is power that derives from a social accord or convention, such as the laws or 
customs of a social group such as a state or an organization.
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So then, what is abuse of power? 
ABUSE OF POWER is the illegitimate use of power. 
ABUSE OF POWER is that situation that exists whenever someone who has POWER over others, (that is, the 
capacity to impose his or her will on those others) for example, by virtue of his or her superior mental 
dexterity, social position, physical strength, knowledge, technology, weapons, wealth, or the trust that 
others have in him or her, unjustifiably uses that power to EXPLOIT or HARM those others, or through lack of 
action, ALLOWS exploitation or harm to occur to them. 
It follows that someone who does not have (a particular form of) power cannot abuse it. 
It also follows that the main (and perhaps the only) principle of human ethics and morality should be to 
avoid the abuse of power. 
(It should be noted that the decision to adopt an ethical principle as one's own is a purely personal one, 
and cannot be forced on someone. However, one cannot adopt a principle one does not know exists. 
Also, it is not very likely that someone will adopt a principle that is not congruent with his or her mental 
structure - and this mental structure is so powerfully influenced by early childhood experiences). 
From this it follows that it is extremely unethical to put oneself (or to stay) in a position of conflict of interest, 
i.e., where one's benefit or profit depends on harming or exploiting others. And of course, it also follows 
that putting a subordinate in a position of conflict of interest demonstrates a complete ignorance of ethics. 
Additionally, it follows that if those who want to stop or impede the abuse of power (or those who are 
charged with this duty) do not have sufficient power (even if it were only moral power), they and their 
efforts will only serve as a source of amusement to those who abuse it. 
Abuse of power in the workplace 
Abuse of power in the workplace is becoming a concern in the world. According to the Workplace Bullying 
and Trauma Institute, 54 million employees surveyed in September 2007 reported being victims of abuse in 
the workplace. Understanding the different definitions, types, effects, consequences and warnings of such 
abuse--and knowing what resources are available for victims--can help employees and supervisors handle 
abuse of power in the workplace. 
Definitions 
o Men and women define and recognize power differently. According to a Science Daily 
article from April 2007, men understand power in terms of a hierarchy in which bosses 
abuse power by sexually harassing employees--asking them personal questions and 
touching them inappropriately. Women understand power in terms of gender differences, 
meaning they perceive that any man, regardless of his job title at work, can abuse his 
power to target female employees. This difference has led scholars to examine power 
abuse by both supervisors and co-workers in various workplace environments. 
Types 
o Employees need to distinguish between the various forms of abuse of power in the 
workplace. According to the Gender and Diversity program's website, supervisors can 
abuse their power through their speech, including making criticisms about employees’ 
physical appearance, work skills and intellect. The tone of a supervisor's voice--for 
example, a supervisor raising her voice at an employee or using foul language--can 
constitute emotional abuse. Ignoring employees and threatening employees with
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paycheck reductions or loss of a promotion are abusive. So are physical forms of abuse, 
including touching, hitting and slapping. 
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Effects 
o Supervisors’ abuse of power has several effects on employees. The U.S. Workplace Bullying 
Survey conducted by the Workplace Bullying and Trauma Institute in September 2007 
found that employees who suffered from abuse experienced a significant amount of stress 
at work and the stress lasted longer than a year. Moreover, employees reported feeling 
mentally distressed, which affected their focus at work. Another study by the Counseling 
Outfitters showed that employees dealing with workplace abuse suffer from lack of self-esteem 
and decreased productivity. 
Consequences 
o Supervisors who abuse their authority at work can face serious consequences. Abusing 
people on the basis of sex, race or age is illegal behavior under federal and state laws, 
according to the CBS Business Network. Employers who allow a supervisor to abuse his 
power risk lawsuits and financial damages and fines. According to Counseling Outfitters, 
organizations suffer from higher turnover and absenteeism rates when abuse of power in 
the workplace is not curbed. 
Warnings/Resources 
o Knowing how to handle abuse in the workplace is critical. Counseling Outfitters cautions 
employees that reporting the abuse to the abuser's supervisor can escalate the problem if 
the abuser's supervisor blames the victim for the problem or doesn't believe the victim. An 
alternative option is to use resources offered by the organization and outside 
organizations, including in-house employee assistance programs, labor relations agencies 
and state and federal agencies that handle abuse and harassment in the workplace. If 
the abuse becomes physical, employees can contact legal authorities. 
3.2 The Importance of Ethics in Business 
Importance of Ethics in Business 
• Ethics in Business matters, because there is much evidence to prove that Unethical Behavior can 
cost a Company its Reputation, affect its Share Price and lower its Profits. 
• Some of the Scandals in Business World have their origin in scant regard to Morality. 
• Business Ethics are Rules of Business Conduct by which Propriety of Business Activities may be 
judged. 
• There is a growing realization all over the world that Ethics is Vitally Important for any Business and 
the Progress of the Society. 
• Experience has shown that Good Ethics is Good Business. 
• Commerce through Corruption, Administration through Bribery and Politics through Blackmail in 
India has become the Rule rather than exception.
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• Corruption, Bribery and Nepotism are nothing but degradation of Values and Professional Ethics. 
• Ethics and Human Values can save a Soulless Society from total death. 
• We must remember that Business satisfies only Hunger of b=Body. Values satisfy Hunger of Heart 
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and Soul. 
• Ethical Behavior is essential from both Macro and Micro-Perspective. 
• According to Macro-Argument, Unethical Behavior distorts the Market System that leads to an 
inefficient allocation of resources. 
• The Micro-Argument highlights the importance of Ethics to the Individual Firm. 
• Unethical Behavior leads to decreased long term Performance. 
• The Market System leads to a more efficient way of allocating Resources than any Command 
System. 
• The conditions required for efficient operation of the Market System are: 
1) The Right to Own and Control Property. 
2) Freedom of Choice in Buying and Selling Goods and Services. 
3) The Availability of Perfect Information regarding these Goods and Services. 
ADDITIONAL 
1. Satisfying Basic Human Needs: Being fair, honest and ethical is one the basic human needs. Every 
employee desires to be such himself and to work for an organization that is fair and ethical in its 
practices. 
2. Creating Credibility: An organization that is believed to be driven by moral values is respected in 
the society even by those who may have no information about the working and the businesses or 
an organization. Infosys, for example is perceived as an organization for good corporate 
governance and social responsibility initiatives. This perception is held far and wide even by those 
who do not even know what business the organization is into. 
3. Uniting People and Leadership: An organization driven by values is revered by its employees also. 
They are the common thread that brings the employees and the decision makers on a common 
platform. This goes a long way in aligning behaviors within the organization towards achievement 
of one common goal or mission. 
4. Improving Decision Making: A man’s destiny is the sum total of all the decisions that he/she takes in 
course of his life. The same holds true for organizations. Decisions are driven by values. For example 
an organization that does not value competition will be fierce in its operations aiming to wipe out 
its competitors and establish a monopoly in the market. 
5. Long Term Gains: Organizations guided by ethics and values are profitable in the long run, though 
in the short run they may seem to lose money. Tata group, one of the largest business 
conglomerates in India was seen on the verge of decline at the beginning of 1990’s, which soon 
turned out to be otherwise. The same company’s Tata NANO car was predicted as a failure, and 
failed to do well but the same is picking up fast now. 
6. Securing the Society: Often ethics succeeds law in safeguarding the society. The law machinery is 
often found acting as a mute spectator, unable to save the society and the environment. 
Technology, for example is growing at such a fast pace that the by the time law comes up with a 
regulation we have a newer technology with new threats replacing the older one. Lawyers and 
public interest litigations may not help a great deal but ethics can.
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What are the benefits of running an ethical business? 
• Solid business relationships 
• Repeat business 
• Referrals and recommendations 
• A growing client base 
• A solid reputation built on honesty, trust, integrity and value 
• Increased profitability 
• Sleeping soundly at night! 
• Remember people are not just buying your product or service – they are buying you! 
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What is ethical business? 
Ethics are in the eye of the beholder so whatever ethics may mean to one person, may mean something 
completely different to the other. Ethics and integrity are governed by values. Your values shape your 
conscience and your beliefs around what is morally acceptable or not. Everyone has different standards to 
which morals, integrity and ethics are measured against. Your values develop from a young age and may 
change at different stages throughout your life, dependent on circumstances, age and whether you 
choose to develop yourself personally. 
To run a business ethically, you may consider the following factors:- 
• Practicing what you preach and walking your talk (and hopefully it’s something positive!) 
• Meaning what you say and saying what you mean 
• Doing what you are say you are going to do 
• Be a shining example to others 
• Fulfilling and exceeding your clients’ expectations
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3.2.1 The Macro Perspective 
TYPES OF ETHICAL ISSUES 
3.2.1.1Effect of Unethical Behavior. (Bribery, Coercive Acts.Deceptive 
Information, Theft, Unfair Discriminationetc.) From a Macro Perspective 
1) Bribery: Bribery reduces the freedom of choice by changing the conditions, under which a 
Decision is made. A Bribe is used to make one choice more attractive to a Decision Maker. Greater 
appeal is created by enhancing the Personal Gain associated with the choice by the addition of 
an unearned Income Payment. 
2) Coercive Acts: Coercive Acts, in the form of Threats that prevent a Seller from dealing with certain 
Customers, decrease effective Competition. This usually results in higher prices and often poorer 
Products. 
3) Deceptive Information:Deceptive Information creates false impressions and leads Buyers to select 
Goods and Services that provide less Satisfaction than those which they would have purchased, 
had accurate information been available to them. 
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4) Theft: Theft may lead to Break-Down of a Market. Theft increase the cost of providing Goods and 
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Services. 
5) Unfair Discrimination: Unfair Discrimination often results in the purchase of Services from less 
capable people or Sale of Goods and Services to less capable People. This will result in lower level 
of Satisfaction.
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3.2.2 The Macro Perspective – Ethics and Trust 
• Ethics is closely associated with Trust. 
• In order to develop Trust, Behavior must be Ethical. 
• If Trust is important, and Ethical Behavior is necessary to obtain Trust, then Ethics is as important as 
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Trust. 
• Trust in a Business setting reduces Costs, makes life more pleasant and improves Efficiency. 
• Two Norms are to be Honored in all situations: 
1) Commitments are to be honored in all situations. 
2) One ought to produce a Good Product and stand by it. 
• Every Commercial Transaction has an element of Trust within itself and Business would not run 
smoothly if Business People do not Trust each other. 
• Trust involves three fundamental Issues: 
1) Predictability. 
2) Dependability. 
3) Faith.
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3.2.2.1 Trust in Supplier Relations 
3.2.2.2 Trust in Customer Relations 
3.2.2.3 Trust in Employee Relations 
1. Trust in Supplier Relations:Suppliers provide a Firm with Products and Services it needs to conduct 
Business. An Exchange Relationship is based on Trust between both Parties that each will honor his 
Commitment and minimize Surprise. This will reduce the risk involved in the Buying Process. 
2. Trust in Customer Relationships:The Company’s contact with a Customer is mostly through its Sales 
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Force. 
• A Salesman earns a Customer’s Trust by being Dependable, Honest, Competent and Customer 
Oriented. 
• Customers rely on Suppliers to provide Goods and Services of Acceptable Quality as Promised at 
Reasonable Prices. 
3. Trust in Employee Relations:Trust applies to Peers as well as Superiors and Sub-Ordinates. 
4. 
The following factors promote Trust: 
a) Open Communications. 
b) Giving Employees a Greater Share in the Decision Making. 
c) Sharing Of Critical Information. 
d) Trust Based Sharing of Perceptions and Feelings. 
e) Trust is an Important Element in the Employee Empowerment Process. 
3.3 Methods of Ethical Analysis: Their Values and Limitations 
3.3.1 Economic Analysis 
Economic Analysis (Pareto Optimality) 
Ethics are not relevant in business, beyond the normal standards not to lie, cheat, or steal. All that is 
necessary is to maintain price-competitive markets and recognize the full costs of production in those 
prices, and then the market system will ensure that scarce resources are used to optimally satisfy consumer 
needs. A firm that is optimally satisfying consumer needs, to the limit of the available resources, is operating 
most efficiently and most profitably. Consequently, business managers should act to maximize profits, while 
following legal requirements of non-conclusion and equal opportunity and adhering to personal standards 
of truthfulness and honesty. Profit Maximization leads automatically from the satisfaction of individual 
consumer wants to the generation of maximum social benefits. Profit maximization is the only moral 
standard needed for management. 
If we look at microeconomic theory as an ethical system of belief, explaining our responsibility to others 
within the company and within the society - to employees, customers, suppliers, distributors, and residents 
of the local area - then is simply falls apart because of the unlikely assumptions about human nature and 
human worth. 
3.3.2 Legal Analysis 
The law can be defined as a consistent set of universal rules that are widely published, generally accepted, 
and usually enforced. These rules describe the ways in which people are required to act in their 
relationships with others within a society. They are requirements to act in a given way, not just expectations 
or suggestions or petitions to act in that way.
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The law is a guide to managerial decisions and actions, but it is not enough. And certainly, the absence of 
a law is not enough to excuse some of those decisions and actions. 
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3.3.3 Ethical Analysis 
Philosophic analysis, based on rational thought processes. The view is that a manager should always act in 
accordance with either a single principle of behavior or a single statement of belief that is right and 
proper and just in and by itself.This is moral reasoning: logically working from a first principle through to a 
decision on the duties we owe to others. 
Philosophy is the study of thought and conduct. Normative philosophy is the study of proper thought and 
conduct; that is, how we should behave. 
Morality refers to the standards of behavior by which people are judged, and particularly to the standards 
of behavior by which people are judged in their relationships with others. Ethics, on the other hand, 
encompasses the system of beliefs that supports a particular view of morality. The difference between 
morality and ethics is easy to remember if one speaks of moral standards of behavior and ethical systems 
of belief. 
Ethical Relativism - Are there objective universal principles upon which one can construct an ethical system 
of belief that is applicable to all groups in all cultures at all times? Fortunately there is one principle that 
does seem to exist across all groups, cultures, and times and that does form part of every ethical system; 
that is the belief that members of a group do bear some form of responsibility for the well-being of other 
members of that group. 
Definitions and Concepts for Ethical Analysis 
Definitions 
[Many discussions of ethics and ethical issues founder on disagreements about definitions. Ethics is unique 
among disciplines in that practitioners often cannot agree on a common definition of their topic. Ethics 
Scoreboard can't solve that problem, which is many centuries old. Here it attempts to put forth definitions 
that explain what words mean when they are used on this website.] 
Values: Those qualities of behavior, thought, and character that society regards as being intrinsically good, 
having desirable results, and worthy of emulation by others. 
Morals: Modes of conduct that are taught and accepted as embodying principles of right and good. 
Morality: A system of determining right and wrong that is established by some authority, such as a church, 
an organization, a society, or a government. 
Ethics: The process of determining right and wrong conduct. 
Ethical System: A specific formula for distinguishing right from wrong. 
Unethical: An action or conduct which violates the principles of one or more ethical systems, or which is 
counter to an accepted ethical value, such as honesty. 
Non-ethical considerations: Powerful human motivations that are not based on right or wrong, but on 
considerations of survival and well-being, such as health, security, love, wealth, or self-esteem. 
Concepts
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Non-Ethical Considerations: Defined above, non-ethical considerations are important because 
they are often the powerful impediments to ethical conduct, and the cause of many conflicts of interest. 
Non-ethical considerations are many and diverse, and include: 
• The need and desire for shelter, health, wealth, fame, security, self-esteem, reputation, power, 
professional advancement, comfort, love, sex, praise, credit, appreciation, affection, or 
satisfaction 
• The desire for the health, comfort, safety, welfare and happiness for one's family, loved ones, 
friends, colleagues, an co-workers 
• The pursuit of vengeance or retribution 
• Hunger, lust, pain, ambition, prejudice, bias, hatred, laziness, fatigue, disgust, anger, fear 
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 …and many more 
Ethical Dilemma: This is an ethical problem in which the ethical choice involves ignoring a powerful non-ethical 
consideration. Do the right thing, but lose your job, a friend, a lover, or an opportunity for 
advancement. A non-ethical consideration can be powerful and important enough to justify choosing it 
over the strict ethical action. 
Ethical Conflict: When two ethical principles demand opposite results in the same situation, this is an ethical 
conflict. Solving ethical conflicts may require establishing a hierarchy or priority of ethical principles, or 
examining the situation through another ethical system. 
Ethical Gray Area: Gray areas are situations and problems that don't fit neatly into any existing mode of 
ethical analysis. In some cases, there may even be a dispute regarding whether ethics is involved. 
Reciprocity: The ethical system embodied by The Golden Rule, and given slightly different form in other 
religions and philosophies. It is a straight-forward way of judging conduct affecting others by putting 
oneself in the position of those affected. Reciprocity should always be available in any ethical analysis, but 
it is frequently too simple to be helpful in complex ethical situations with multiple competing interests. 
Absolutism: Absolutist systems do not permit any exception to certain ethical principles. The champion of all 
absolutists, philosopher Emmanuel Kant, declared that the ethical act was one that the doer was willing to 
have stand as a universal principle. 
One principle of absolutism is that human beings can never be harmed for any objective, no matter how 
otherwise worthwhile. Absolutism has the advantage of making tough ethical calls seem easy, and the 
disadvantage of making debate impossible. One sees absolutism reflected today in the controversies over 
war, torture, abortion, cloning, and capital punishment. 
Utilitarianism: Utilitarianism accepts the existence of ethical conflicts and the legitimacy of some ethical 
dilemmas, and proposes ethical analysis based on the question, Which act will result in the greatest good 
for the greatest number of people?' It entails the balancing of greater and lesser goods, and is useful for 
unraveling complex ethical problems. Its drawback, or trap, is that utilitarianism can slide into The ends 
justify the means without some application of absolutist and reciprocity principles. 
The Gödel Incompleteness Principle: Czech-born mathematician Kurt Gödel proved that at the margins of 
any large logical system, such as arithmetic, or conceptual construct, such as Newtonian physics, problems 
would arise that could not be solved without going outside the system itself. If the system were enlarged to 
include these problems' solution, it would lose its integrity as a system. Hence all systems must be 
incomplete. In ethical terms, Gödel's liberating discovery means that no one ethical system will work for 
every problem, and that the fact that such a system does not solve a particular problem does not mean 
the system is invalid.
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Cognitive Dissonance: Cognitive dissonance is a psychological phenomenon first identified by Leon 
Festinger. It occurs when there is a discrepancy between what a person believes, knows and values, and 
persuasive information that calls these into question. The discrepancy causes psychological discomfort, 
and the mind adjusts to reduce the discrepancy. In ethics, cognitive dissonance is important in its ability to 
alter values, such as when an admired celebrity embraces behavior that his or her admirers deplore. Their 
dissonance will often result in changing their attitudes toward the behavior. Dissonance also leads to 
rationalizations of unethical conduct, as when the appeal and potential benefits of a large amount of 
money makes unethical actions to acquire it seem less objectionable than if they were applied to smaller 
amounts. 
3.4 Corporate Governance 
3.4.1 The meaning and Fundamentals of Corporate Governance 
Definition of Corporate Governance 
The definition of corporate governance most widely used is the system by which companies are directed 
and controlled (Cadbury Committee, 1992). More specifically it is the framework by which the various 
stakeholder interests are balanced, or, as the IFC states, the relationships among the management, Board 
of Directors, controlling shareholders, minority shareholders and other stakeholders. 
The OECD Principles of Corporate Governance states: 
Corporate governance involves a set of relationships between a company’s management, its board, its 
shareholders and other stakeholders. Corporate governance also provides the structure through which the 
objectives of the company are set, and the means of attaining those objectives and monitoring 
performance are determined. 
While the conventional definition of corporate governance and acknowledges the existence and 
importance of 'other stakeholders' they still focus on the traditional debate on the relationship between 
disconnected owners (shareholders) and often self-serving managers. Indeed it has been said, rather 
ponderously, that corporate governance consists of two elements: 
1. The long term relationship which has to deal with checks and balances, incentives for manager 
and communications between management and investors; 
2. The transactional relationship which involves dealing with disclosure and authority. 
This implies an adversarial relationship between management and investors, and an attitude of mutual 
suspicion. This was the basis for much of the rationale of the Cadbury Report, and is one of the reasons why 
it prescribed in some detail the way in which the board should conduct itself: consistency and 
transparency towards shareholders are its watchwords. 
As fundamentally important as these traits are, we prefer to take a rather broader view, which places the 
Cadbury Code and other codes developed since (Combined Code, Sarbanes-Oxley, King, etc) in a wider 
context and shows its recommendations emerging naturally in the course of a company’s evolution. In an 
early book on corporate governance, also published in 1992, one of the creators of this website developed 
a definition of corporate governance as consisting of five elements which the board must consider: 
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• long term strategic goals 
• employees: past, present and future 
• environment/community 
• customers/suppliers 
• compliance (legal/regulatory)
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What is good corporate governance? 
Regulators, courts and investors frequently extol the virtues of 'good corporate governance' i 
organisations but often fail to define exactly what that means. It's often a case of we'll know it when we 
see it or, in the case of the regulators, courts and investors, we know what it isn't when we see it. 
It is important to understand that what w 
would be considered 'good corporate governance' differs for 
each individual organisation according to its circumstances. What is inadequate for one organisation may 
be onerous for another. It is also important to realise that good corporate governance isn't 
compliance. Whilst compliance will keep you out of trouble, it won't help your organisation be successful. 
To understand what would constitute good corporate governance for your organisation, it helps to 
understand what corporate governance is 
from a fundamental level. 
The most fundamental definition for corporate governance is based on the idea that an organisation is 
essentially a nexus of contractual agreements between many parties for the purpose of achieving the 
organisation's objectives. These parties include shareholders, directors, managers, suppliers, employees, 
customers, financiers, government authorities, other stakeholders and the society in which the company 
operates. Whilst some of these contractual agreements are formal written 
Likewise, some of these contractual agreements are financially based but many are not. 
Although the company enjoys the status of a person through legal 
constituted entirely by the actions and interac 
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ones, many are implicit. 
fiction, in reality a company is 
interactions of people with other people, products of technology, 
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systems, and the natural world. Corporate governance involves managing the framework within which 
these complex relationships operate. 
The quality and nature of these relationships has a strong influence on the long term financial interests of 
the organisation. It can be expected that the negotiation and administration of these contractual 
agreements to the benefit of each of the parties involved will maximise the long term results of the 
organisation. 
So good corporate governance is all about ensuring that the needs and interests of all of an organisation's 
stakeholders are taken into account in a balanced and transparent manner. 
However, good corporate governance is not just a matter of having the right policies and procedures in 
place. It has to be embedded into the culture of the organisation from the very top down. As Justice 
Owen, the Royal Commissioner into the collapse of HIH Insurance, warned: 
Systems and structures can provide an environment conducive to good corporate governance 
practices, but at the end of the day it is the acts or omissions of the people charged with relevant 
responsibilities that will determine whether governance objectives are in fact achieved. (The failure of HIH 
Insurance. HIH Royal Commission. 2003) 
Good corporate governance is also no guarantee of success. It is a necessary but not sufficient 
foundation for success as strategic factors play a more important role in determining the eventual success 
or failure of an organisation. In the majority of large business failures, it is essentially the failure of the 
underlying business strategy that causes each business to fail. Corporate governance issues allow the 
flawed businesses to continue and amplify the magnitude of their eventual collapse. 
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Justice Owen expressed the view: 
“Good governance processes are likely in my view to create an environment that is conducive to success. 
It does not follow that those who have good governance processes will perform well or be immune from 
failure. Risk exists to some extent at the heart of any business. Risks are taken in the search for rewards. No 
system of corporate governance can prevent mistakes or shield companies and their stakeholders from 
the consequences of error. Corporate failures will occur.” (The failure of HIH Insurance. HIH Royal 
Commission., 2003) 
3.4.2 Purpose of Corporate Governance in Society 
Why is Corporate Governance Important? 
Corporate governance is the way a corporation polices itself. In short, it is a method of governing the 
company like a sovereign state, instating its own customs, policies and laws to its employees from the 
highest to the lowest levels. Corporate governance is intended to increase the accountability of your 
company and to avoid massive disasters before they occur. Failed energy giant Enron, and its bankrupt 
employees and shareholders, is a prime argument for the importance of solid corporate governance. Well-executed 
corporate governance should be similar to a police department’s internal affairs unit, weeding 
out and eliminating problems with extreme prejudice. A company can also hold meetings with internal 
members, such as shareholders and debt holders – as well as suppliers, customers and community leaders, 
to address the request and needs of the affected parties. 
Principles of Corporate Governance
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• Shareholder recognition is key to maintaining a company’s stock price. More often than not, 
however, small shareholders with little impact on the stock price are brushed aside to make way 
for the interests of majority shareholders and the executive board. Good corporate governance 
seeks to make sure that all shareholders get a voice at general meetings and are allowed to 
participate. 
• Stakeholder interests should also be recognized by corporate governance. In particular, taking the 
time to address non-shareholder stakeholders can help your company establish a positive 
relationship with the community and the press. 
• Board responsibilities must be clearly outlined to majority shareholders. All board members must be 
on the same page and share a similar vision for the future of the company. 
• Ethical behavior violations in favor of higher profits can cause massive civil and legal problems 
down the road. Underpaying and abusing outsourced employees or skirting around lax 
environmental regulations can come back and bite the company hard if ignored. A code of 
conduct regarding ethical decisions should be established for all members of the board. 
• Business transparency is the key to promoting shareholder trust. Financial records, earnings reports 
and forward guidance should all be clearly stated without exaggeration or “creative” accounting. 
Falsified financial records can cause your company to become a Ponzi scheme, and will be dealt 
with accordingly. 
Corporate Governance as Risk Mitigation 
Corporate governance is of paramount importance to a company and is almost as important as its primary 
business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and 
criminal liability of the company. It also enhances a company’s image in the public eye as a self-policing 
company that is responsible and worthy of shareholder and debt holder capital. It dictates the shared 
philosophy, practices and culture of an organization and its employees. A corporation without a system of 
corporate governance is often regarded as a body without a soul or conscience. Corporate governance 
keeps a company honest and out of trouble. If this shared philosophy breaks down, then corners will be 
cut, products will be defective and management will grow complacent and corrupt. The end result is a fall 
that will occur when gravity – in the form of audited financial reports, criminal investigations and federal 
probes – finally catches up, bankrupting the company overnight. Dishonest and unethical dealings can 
cause shareholders to flee out of fear, distrust and disgust. 
3.4.3 Critical Issues and Challenges in Corporate Governance 
Corporate Governance Issues  Challenges 
Corporate governance refers to the structure of a large business and how the business decides its policies 
and growth strategy. Corporate governance typically means that a board of directors controls the entire 
corporation while an executive board (possibly the same thing) makes key business decisions, and layers of 
management progress beneath them into different departments. Corporate governance is a key issue in 
society and can be a struggle for corporations on several levels. 
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Bureaucratic Layers 
o First, corporate governance structures are very top heavy. They require many layers of 
management and long lists of vice presidents and presidents for information to pass 
through. This makes it very difficult for the company leaders to receive accurate, important 
data from the lower levels of the company, especially if managers along the way want to 
distort the message to make themselves sound better. Ultimately, the chain of command 
becomes so long that the business is unwieldy, responding slowly to change. Flat business 
structures with few layers of management are the goal of many corporations.
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Accountability 
o Corporate governance has earned a negative connotation in society, mostly because of 
the questionable practices of key executives and board members. Not all corporations 
commit fraud, of course, but those that do receive a lot of attention, and many executives 
have become used to taking questionably large bonuses even in a contracting economy. 
This has lead to an atmosphere of distrust among consumers and investors, which 
corporations fight by showing increased transparency in their work and mission. 
Governance Standards 
o Internally, corporate governance faces a different type of struggle. A board of executives 
can make good decisions on company policy and propagate standards throughout the 
business. But what if managers prefer not to listen? Rebellious managers can ignore or 
subvert corporate decisions at many levels of the business, and there are often a few 
troublemakers in all businesses. Corporate boards need methods of enforcing standards 
and disciplining managers when necessary, a component of governance few boards 
consider. 
Board Terms 
o Board terms are a complex issue. In a board of directors, directors typically only sit on the 
board for a brief term, rarely more than several years. Life-term board members can cause 
problems with ingrained beliefs and concentration of power, so businesses prefer to cycle 
board members. But the corporation must decide how to cycle. If all directors switch 
around at the same time, the corporation may be left open for a hostile acquisition. If the 
board decides to stagger member terms, it must decide when to stagger and how to 
accomplish it. 
Issues in Corporate Governance 
Corporate governance is a firm's central leadership structure, such as the Board of Directors. It is responsible 
for promulgating laws, policies and processes that allow a firm to achieve its goals and objectives. Board 
members set the direction of the firm. They devise a strategy for managers to institute and employees to 
follow for meeting the firm's objectives. 
Internal Controls and Risk Management 
o The board is charged with ensuring that the firm is financially stable and sound. This 
requires strong leadership, strict regulation and supervision as well as successful market 
discipline. It also mandates an effective internal control and risk-management system. This 
provides valuable information to determine whether a firm meets the targets it sets and 
highlights deficits in the strategy. However, these systems are only as good as those who 
run them. Firms falter when the board does a poor job communicating goals and 
objectives down the chain of command. Internal controls and risk-management systems 
only succeed when an organization's culture permits all employees at every level to 
understand their value and role in the firm's success. 
Lack of Disclosure 
o Disclosure practices must keep pace with a firm's ever-changing business and risk-management 
procedures. Although firms have improved in this area, they generally do 
not update their disclosure practices to adequately reflect the need for information by 
shareholders, investors and creditors. A firm must reevaluate information it makes public
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and information kept proprietary on a more regular basis to account for adjusting market 
conditions and regulatory changes in order to maintain consumer confidence. Nothing 
weakens confidence more than a firm believed to unnecessarily withholding important 
information from consumers. 
Sound, Universal Accounting System 
o Investors must accurately assess the value of a firm. It is a key element of a firm's ability to 
attract capital and remain financially viable. In recent years, regulators have called into 
question the reliability of accounting practices used by some firms in the U.S. financial 
industry. The need for oversight from the public sector of the private sector has raised 
legitimate concern about the ability to maintain a truly free-market economy without 
tighter regulatory controls. William McDonough, president of the Federal Reserve Bank of 
New York, suggests developing a sound, universal accounting system--one that includes 
necessary checks and balances and enables firms to operate free of overly restrictive 
regulatory 
3.4.3.1 Corporate Boards and Types of Boards in Different Sectors 
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Types of boards of directors 
To prevent the concentration of power and information in one or a few individuals, boards are advised to 
have a balance of executive and non-executive directors, some of whom are independent. Experts differ 
over the number of independent directors a board should have, but it is generally accepted that one-third 
to one-half of a board’s directors should be independent. 
An executive director is also an executive of the company, such as a CEO or CFO. A non-executive 
director is not part of management and is valued for external perspectives and unique expertise. 
“Non-executive” directors should meet in private regularly, without the presence of “executive” directors, 
according to governance experts.
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One-Tier Board Model - consists of both inside (executive) directors and outside (nonexecutive) directors. 
Inside directors are perceived as the decision managers and outside directors are assumed to have the 
power and duty to monitor those decisions. 
Two-Tier Board Model - The two-tier board system, consisting of a supervisory board and a management 
board, better known as the German board model, establishes different authorities and responsibilities for 
members of each board. 
Modern Board Model - the structure of the modern board based on the two components of strategic 
board and oversight board is the natural offshoot of the emerging corporate governance reforms. 
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The independent director 
Definitions of what “independent” means vary, but usually require the person to be free of financial, family 
and employment ties, or any other meaningful relation with the company, its directors and employees. 
Other criteria include: 
• Not a recent employee 
• No recent material business relationship with the company 
• No recent or current compensation from the company, other than director’s fee, share options, 
performance-related pay or pension 
• No close family ties with any of the company’s advisers, directors or senior employees 
• No cross-directorships or significant links with other directors through involvement in other 
companies or bodies 
• Not a significant shareholder 
• Not a long-term member 
Source: “Corporate Governance Board Leadership Training Resources,” Global Corporate Governance 
Forum, International Finance Corporation, World Bank Group. 
In many countries, boards must have a specific propor-tion of independent directors. Boards of directors 
can be either one-tier or two-tier. 
• A one-tier, or unitary, board delegates day-to-day business to the CEO, management team, or 
executive committee, and is composed of both executive and non-executive members. This 
structure is most often found in countries with a common law tradition, such as the United States, 
the United Kingdom and Commonwealth countries. 
• A two-tier, or dual, board divides supervisory and management duties into two separate bodies. 
The supervisory board oversees the management board, which handles day-to-day operations. 
This structure is common in countries with civil law traditions, primarily in Germany, but also in some 
companies in France and in many Eastern European countries. 
3.4.3.2 Need for Executive and Functioning Boards 
Make notes
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3.4.3.3 Structure and composition of Boards 
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Board Characteristics 
Board Leadership – The effectiveness of board meetings depends largely on the leadership ability of the 
chairperson to set an agenda and direct discussions. The board agenda is usually prepared by chairperson 
in collaboration with the CEO. 
CEO Duality – implies that the company’s CEO holds both the position of chief executive and the chair 
of the board of directors. They are pros and cons of that model, but investors usually prefer to separate 
the positions. If they don’t, then it is preferable that the company’s board consists of a ‘substantial’ 
majority of independent directors. 
Lead Director – demand for Lead Director increased because of the presence of CEO duality, resulting 
from growing concern that duality places too much power in the hands of CEO, which may impede 
board independence. 
Board Composition – in terms of ratio of inside and outside directors, and the number of directors 
influence the effectiveness of the board. A board size of nine to fifteen is considered to be 
adequately tailored to the number of board standing committees. 
Board Authority – is granted trough shareholder elections. SOX substantially expanded the authority of 
directors, particularly audit committee members, as being directly responsible for hiring, firing, 
compensating, and overseeing the work of the companies’ independent auditors. 
Responsibilities – the primary responsibility of the board of directors that the companies assets are 
safeguarded and that managerial decisions and actions are made in a manner of maximizing 
shareholders wealth while protecting the interests of other shareholders. 
Resources – board of directors should have adequate resources to effectively fulfill its oversight 
functions. Resources available to the board consist of legal, financial, and information resources. 
Board Independence – implies that, to be independent director shouldn’t have any relationship with the 
company other than his or her directorship that my compromise the director’s objectivity and loyalty to 
the company’s shareholders. 
Director compensation – best practices suggest that increases in stock ownership, reduction in cash 
payments, and charges in compensation should be aligned with shareholders long-term interest 
determined by board, approved by shareholders, and fully disclosed in public reporting. 
Structure and Makeup of the Board of Directors 
The board is made up of individual men and women (the directors) who are elected by the 
shareholders for multiple-year terms. Many companies operate on a rotating system so that only a 
fraction of the directors are up for election each year; this makes it much more difficult for a complete
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board change to take place due to a hostile takeover. 
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In most cases, 
Directors either, 1.) Have a vested interest in the company, 2.) Work in the upper management of the 
company, or 3.) Are independent from the company but are known for their business abilities. 
The number of directors can vary substantially between companies. Walt Disney, for example, has sixteen 
directors, each of whom are elected at the same time for one year terms. Tiffany  Company, on the other 
hand, has only eight directors on its board. In the United States, at least fifty percent of the directors must 
meet the requirements of independence, meaning they are not associated with or employed by the 
company. In theory, independent directors will not be subject to pressure, and therefore are more likely to 
act in the shareholders' interests when those interests run counter to those of entrenched management. 
The Basics of Corporate Structure 
Board of Directors, Corporate Culture, Corporate Governance, Investing Basics, ShareholdersCEOs, CFOs, 
presidents and vice presidents: what's the difference? With the changing corporate horizon, it has become 
increasingly difficult to keep track of what people do and where they stand on the corporate ladder. 
Should we be paying more attention to news relating to the CFO or the vice president? What exactly do 
they do? 
Corporate governance is one of the main reasons that these terms exist. The evolution of public ownership 
has created a separation between ownership and management. Before the 20th century, many 
companies were small, family owned and family run. Today, many are large international conglomerates 
that trade publicly on one or many global exchanges. 
In an attempt to create a corporation where stockholders' interests are looked after, many firms have 
implemented a two-tier corporate hierarchy. On the first tier is the board of governors or directors: these 
individuals are elected by the shareholders of the corporation. On the second tier is the upper 
management: these individuals are hired by the board of directors. Let's begin by taking a closer look at 
the board of directors and what its members do. 
Board of Directors 
Elected by the shareholders, the board of directors is made up of two types of representatives. The first type 
involves individuals chosen from within the company. This can be a CEO, CFO, manager or any other 
person who works for the company on a daily basis. The other type of representative is chosen externally 
and is considered to be independent from the company. The role of the board is to monitor the managers 
of a corporation, acting as an advocate for stockholders. In essence, the board of directors tries to make 
sure that shareholders' interests are well served. 
Board members can be divided into three categories: 
• Chairman – Technically the leader of the corporation, the chairman of the board is responsible for 
running the board smoothly and effectively. His or her duties typically include maintaining strong 
communication with the chief executive officer and high-level executives, formulating the 
company's business strategy, representing management and the board to the general public and 
shareholders, and maintaining corporate integrity. A chairman is elected from the board of 
directors. 
• Inside Directors – These directors are responsible for approving high-level budgets prepared by 
upper management, implementing and monitoring business strategy, and approving core 
corporate initiatives and projects. Inside directors are either shareholders or high-level
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management from within the company. Inside directors help provide internal perspectives for 
other board members. These individuals are also referred to as executive directors if they are part 
of company's management team. 
• Outside Directors – While having the same responsibilities as the inside directors in determining 
strategic direction and corporate policy, outside directors are different in that they are not directly 
part of the management team. The purpose of having outside directors is to provide unbiased and 
impartial perspectives on issues brought to the board. 
Management Team 
As the other tier of the company, the management team is directly responsible for the day-to-day 
operations (and profitability) of the company. 
• Chief Executive Officer (CEO) – As the top manager, the CEO is typically responsible for the entire 
operations of the corporation and reports directly to the chairman and board of directors. It is the 
CEO's responsibility to implement board decisions and initiatives and to maintain the smooth 
operation of the firm, with the assistance of senior management. Often, the CEO will also be 
designated as the company's president and therefore also be one of the inside directors on the 
board (if not the chairman). 
• Chief Operations Officer (COO) – Responsible for the corporation's operations, the COO looks after 
issues related to marketing, sales, production and personnel. More hands-on than the CEO, the 
COO looks after day-to-day activities while providing feedback to the CEO. The COO is often 
referred to as a senior vice president. 
• Chief Finance Officer (CFO) – Also reporting directly to the CEO, the CFO is responsible for 
analyzing and reviewing financial data, reporting financial performance, preparing budgets and 
monitoring expenditures and costs. The CFO is required to present this information to the board of 
directors at regular intervals and provide this information to shareholders and regulatory bodies 
such as the Securities and Exchange Commission (SEC). Also usually referred to as a senior vice 
president, the CFO routinely checks the corporation's financial health and integrity. 
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Composition of Boards 
• Size of the board. There’s no magic number, but the average board size is 9 to 10 members. Boards 
that are too large may be unwieldy; boards that are too small may not be able to handle the 
workload. 
• Number of independent outsiders on the board. A majority is considered ideal by many observers. 
• The presence of executive, audit, compensation and nominating committees. Compensation and 
audit committees should be made up of independent directors. Some observers believe that the 
audit committee chairman should be a qualified or registered accounting practitioner — but 
again, there is no universal agreement on this point. 
• Limited directorships. A board member generally should serve on no more than three boards, and 
the boards should not have conflicting interests. 
• Disclosure. Companies must disclose transactions with executives, directors and other related 
parties that might constitute a conflict of interest. 
Common convention holds that directors should own enough shares in the company so that they have a 
vested interest. On the other hand, corporate governance advocates caution against directors who have 
such large shareholdings and option grants that their judgment could be impaired by the desire to see the 
share price rise through accounting maneuvers for a short-term gain. 
Directors should be paid adequately for their time on board business, and to compensate them for their 
expertise and experience.
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Major Differences between Direction and Management 
Directors Managers 
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Decision-making 
Required to determine the future of the 
organization and protect its assets and 
reputation. They also need to consider 
how their decisions relate to stakeholders 
and the regulatory framework. 
More concerned with implementing 
board decisions and policies. 
Duties, 
Responsibilities 
They have the ultimate responsibility for 
the company’s long-term prosperity. 
Directors are normally required by law to 
apply skill and care in exercising their duty 
to the company and are subject to 
fiduciary duties. They can be personally 
liable if they are in breach of their duties 
or act improperly. They can be held 
responsible sometimes for the company’s 
acts. 
Not usually bound by directional 
responsibilities. 
Relationship with 
Shareholders 
Shareholders can remove them from 
office. In addition, a company’s directors 
are accountable to the shareholders. 
Appointed and dismissed usually by 
directors or management; they seldom 
have any legal requirement to be held to 
account. 
Leadership 
Provide the intrinsic leadership and 
direction at the top of the organization. 
Day-to-day leadership is in the hands of 
the CEO; managers act on the director’s 
behalf. 
Ethics, Values 
Play a key role in determining the 
company’s values and ethical positions. 
Must carry out the ethos, taking direction 
from the board. 
Company 
Administration 
Responsible for the company’s 
administration. 
Related duties associated with the 
company’s administration can be 
delegated to management, but this does 
not relieve the directors of their ultimate 
responsibility. 
Statutory Provisions 
In many countries, there are numerous 
statutory provisions that can create 
offenses of strict liability under which 
directors may face penalties if the 
company fails to comply. 
These statutory provisions do not usually 
affect managers. 
Source: Chris Pierce, “The Effective Director,” London: Kogan Page, 2003.
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3.4.3.4 The Roles and Duties of Boards of Management 
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What Is the Role of the Board of Directors in a Corporation? 
All corporations, whether nonprofit or for-profit, must have a board of directors that acts as the governing 
body. Furthermore, the board of directors must determine the corporation's purpose for existence. 
According to the All Business website, many states allow corporations 
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Ethics 
o Board members must adhere to the highest ethical standards, as they are a reflection of 
the company they represent. Board members must act in a prudent manner, and all 
decisions should align with the best interests of the corporation. Board members of 
corporations must put their personal agenda to the side when handling corporate affairs. 
Appointing Corporate Officers 
o In most instances, the board of directors doesn't handle the daily operations of the 
corporation. Instead, the board of directors is responsible for electing corporate officers 
who will manage the daily operations of the corporation. The board of directors also must 
select an individual to serve as chief executive officer of the company (CEO). As 
mentioned on the Free Management Library website, a corporate board of directors must 
evaluate the performance of a CEO and offer guidance in the areas of strategy 
implementation and leadership. The board of directors has the power to retain or dismiss 
the CEO. 
Govern 
o The board of directors create and approve the bylaws of a corporation. The bylaws 
govern the corporation by setting the rules and regulations that shareholders, board 
members and other key individuals must follow. Typically, the board of directors approves 
the corporate bylaws at the first corporate board meeting. 
Corporate Resources 
o A board of directors must acquire resources for the corporation. In the case of a nonprofit 
corporation, that might mean it solicits donations for the corporation. With a for-profit 
corporation, a board of directors can acquire resources by issuing company stock. Once 
the corporation has these resources, the board of directors must determine how to 
manage them in accordance with the best interests of the corporation. To this end, the 
board of directors may create budgets to provide transparency and insure that corporate 
funds are properly allocated. 
Considerations 
o Many states require board members to conduct at least one meeting per year. A number 
of corporations opt to hold quarterly board meetings. Furthermore, states require 
corporations to keep accurate minutes of board meetings. Corporate minutes show the 
process used by the board of directors to make important corporate decisions. Board 
members must keep accurate records to prove that the corporation adheres to the 
highest ethical standards.
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The Role of Directors in Corporate Governance 
Corporate directors are responsible for the entire company. 
A corporation's Board of Directors consists of individual corporate directors who govern by performing basic 
operational and accountability functions and assuming general responsibility for the organization as a 
whole. 
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Mission and Policy 
o Corporate directors are ultimately responsible for governing corporations. They define the 
company's mission and purpose, setting broad policies and objectives. Corporate directors 
also set priorities for the organization's major operations and review its performance to 
ensure its long-term fiscal health. 
Private Accountability 
o Corporate directors are responsible to corporation shareholders and creditors. 
Shareholders own the company's stock and thus have a stake in its performance. Creditors 
are the people and organizations that finance the organization, but don't own company 
stock. 
Management Selection and Oversight 
o Corporate directors are responsible for selecting and appointing a corporation's chief 
executive. They're also charged with reviewing and evaluating his performance, offering 
administrative guidance and making decisions about his tenure. 
Public Accountability 
o Corporate directors are responsible for publishing records of products, services and 
expenses to the public. They provide fiscal accountability by evaluating and approving 
the budget, developing policies that establish resource management, and assuming 
responsibility for new programs. 
Fiduciary Duties 
o Corporate directors are responsible for performing fiduciary duties established by law, 
including loyalty, care and disclosure. Loyalty requires acting according corporate, not 
private interests. Care requires that directors make rational decisions by showing up and 
paying attention to corporate issues. Disclosure requires that they disclose all relevant 
material to shareholders when seeking shareholder approval.
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Fiduciary Duties of Board of Directors 
Fiduciary duty means that, as shareholders’ guardians, directors must be trustworthy, acting in the best 
interest of shareholders, and investors in turn have confidence in the directors’ actions. 
MANDATED BY LAW AND SPECIFIED IN COMPANIES CHARTERS AND BYLAWS 
The corporate governance literature presents the following fiduciary duties of boards of directors: 
- Duty of due care 
- Duty of loyalty 
- Duty of Good Faith 
- Duty to Promote Success 
- Duty to Exercise Diligence, Independent Judgment, and Skill 
- Duty to Avoid Conflict of Interests 
- Fiduciary Duties and Business Judgment Rules. 
• Duty of Due Care - determines the manner in which directors should carry out their 
responsibilities. Failure to uphold the set stipulations may constitute a breach of the fiduciary 
duty of care of expected directors. 
• Duty of loyalty - requires directors to refrain from pursuing their own interests over the interests of 
the company. Breach of loyalty can occur even in the absence of conflicts of interest if directors 
consciously disregard their duties to the company and its shareowners. 
• Duty of Good Faith – It’s an important of directors fiduciary obligations, and any irresponsible, 
reckless, irrational or disingenuous behaviors or conduct can breach that fiduciary duty. 
• Duty to promote success – directors should act in a good faith and promote the success of the 
company to benefit of its shareholders and other stakeholders. Includes: approving the 
establishment of strategic goals, objectives and policies that promote enduring shareholders value 
as well as protect existing value. 
• Duty to exercise due diligence, independent judgment, and skill - directors should be 
knowledgeable about the companies’ business and affairs, continuously update their 
understanding of the company activities and performance, and use reasonable diligence and 
independent judgment in making decisions. 
• Duty to avoid conflicts of interests - potential conflict of interest may occur when director: 
receives a gift from a third party he is doing business with, either directly or indirectly enters into a 
transaction or arrangement with that company, obtains substantial loans from the company, or 
engages in backdated stock options. 
• Fiduciary Duties and Business Judgment Rules - directors operate under a legal doctrine called 
“business judgment rules”. Under that law directors that make decisions in good faith, based on 
rational reasoning, and an informed manner can be protected from liability to the company’s 
shareholders in the ground that they appropriately fulfilled their fiduciary duty of care. 
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A Framework for Thinking Ethically 
This document is designed as an introduction to thinking ethically. We all have an image of our better 
selves-of how we are when we act ethically or are at our best. We probably also have an image of 
what an ethical community, an ethical business, an ethical government, or an ethical society should 
be. Ethics really has to do with all these levels-acting ethically as individuals, creating ethical 
organizations and governments, and making our society as a whole ethical in the way it treats 
everyone. 
What is Ethics? 
Simply stated, ethics refers to standards of behavior that tell us how human beings ought to act in the 
many situations in which they find themselves-as friends, parents, children, citizens, businesspeople, 
teachers, professionals, and so on. 
It is helpful to identify what ethics is NOT: 
• Ethics is not the same as feelings. Feelings provide important information for our ethical 
choices. Some people have highly developed habits that make them feel bad when they do 
something wrong, but many people feel good even though they are doing something wrong. 
And often our feelings will tell us it is uncomfortable to do the right thing if it is hard. 
• Ethics is not religion. Many people are not religious, but ethics applies to everyone. Most 
religions do advocate high ethical standards but sometimes do not address all the types of 
problems we face. 
• Ethics is not following the law. A good system of law does incorporate many ethical standards, 
but law can deviate from what is ethical. Law can become ethically corrupt, as some 
totalitarian regimes have made it. Law can be a function of power alone and designed to 
serve the interests of narrow groups. Law may have a difficult time designing or enforcing 
standards in some important areas, and may be slow to address new problems. 
• Ethics is not following culturally accepted norms. Some cultures are quite ethical, but others 
become corrupt -or blind to certain ethical concerns (as the United States was to slavery 
before the Civil War). When in Rome, do as the Romans do is not a satisfactory ethical 
standard. 
• Ethics is not science. Social and natural science can provide important data to help us make 
better ethical choices. But science alone does not tell us what we ought to do. Science may 
provide an explanation for what humans are like. But ethics provides reasons for how humans 
ought to act. And just because something is scientifically or technologically possible, it may not 
be ethical to do it. 
Why Identifying Ethical Standards is Hard 
There are two fundamental problems in identifying the ethical standards we are to follow: 
1. On what do we base our ethical standards? 
2. How do those standards get applied to specific situations we face? 
If our ethics are not based on feelings, religion, law, accepted social practice, or science, what are 
they based on? Many philosophers and ethicists have helped us answer this critical question. They have 
suggested at least five different sources of ethical standards we should use.
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Five Sources of Ethical Standards 
Some ethicists emphasize that the ethical action is the one that provides the most 
good or does the least harm, or, to put it another way, produces the greatest balance 
of good over harm. The ethical corporate action, then, is the one that produces the 
greatest good and does the least harm for all who are affected-customers, 
employees, shareholders, the community, and the environment. Ethical warfare 
balances the good achieved in ending terrorism with the harm done to all parties 
through death, injuries, and destruction. The utilitarian approach deals with 
consequences; it tries both to increase the good done and to reduce the harm done. 
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1. The Utilitarian Approach 
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2. The Rights Approach 
Other philosophers and ethicists suggest that the ethical action is the one that best 
protects and respects the moral rights of those affected. This approach starts from the 
belief that humans have a dignity based on their human nature per se or on their 
ability to choose freely what they do with their lives. On the basis of such dignity, they 
have a right to be treated as ends and not merely as means to other ends. The list of 
moral rights -including the rights to make one's own choices about what kind of life to 
lead, to be told the truth, not to be injured, to a degree of privacy, and so on-is widely 
debated; some now argue that non-humans have rights, too. Also, it is often said that 
rights imply duties-in particular, the duty to respect others' rights. 
3. The Fairness or Justice Approach 
Aristotle and other Greek philosophers have contributed the idea that all equals should 
be treated equally. Today we use this idea to say that ethical actions treat all human 
beings equally-or if unequally, then fairly based on some standard that is defensible. 
We pay people more based on their harder work or the greater amount that they 
contribute to an organization, and say that is fair. But there is a debate over CEO 
salaries that are hundreds of times larger than the pay of others; many ask whether the 
huge disparity is based on a defensible standard or whether it is the result of an 
imbalance of power and hence is unfair. 
4. The Common Good Approach 
The Greek philosophers have also contributed the notion that life in community is a 
good in itself and our actions should contribute to that life. This approach suggests that 
the interlocking relationships of society are the basis of ethical reasoning and that 
respect and compassion for all others-especially the vulnerable-are requirements of 
such reasoning. This approach also calls attention to the common conditions that are 
important to the welfare of everyone. This may be a system of laws, effective police 
and fire departments, health care, a public educational system, or even public 
recreational areas. 
5. The Virtue Approach 
A very ancient approach to ethics is that ethical actions ought to be consistent with 
certain ideal virtues that provide for the full development of our humanity. These virtues 
are dispositions and habits that enable us to act according to the highest potential of 
our character and on behalf of values like truth and beauty. Honesty, courage, 
compassion, generosity, tolerance, love, fidelity, integrity, fairness, self-control, and 
prudence are all examples of virtues. Virtue ethics asks of any action, What kind of 
person will I become if I do this? or Is this action consistent with my acting at my best? 
Putting the Approaches Together 
Each of the approaches helps us determine what standards of behavior can be considered ethical. 
There are still problems to be solved, however. 
The first problem is that we may not agree on the content of some of these specific approaches. We 
may not all agree to the same set of human and civil rights. 
We may not agree on what constitutes the common good. We may not even agree on what is a good 
and what is a harm.
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The second problem is that the different approaches may not all answer the question What is ethical? 
in the same way. Nonetheless, each approach gives us important information with which to determine 
what is ethical in a particular circumstance. And much more often than not, the different approaches 
do lead to similar answers. 
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Making Decisions 
Making good ethical decisions requires a trained sensitivity to ethical issues and a practiced method for 
exploring the ethical aspects of a decision and weighing the considerations that should impact our 
choice of a course of action. Having a method for ethical decision making is absolutely essential. When 
practiced regularly, the method becomes so familiar that we work through it automatically without 
consulting the specific steps. 
The more novel and difficult the ethical choice we face, the more we need to rely on discussion and 
dialogue with others about the dilemma. Only by careful exploration of the problem, aided by the 
insights and different perspectives of others, can we make good ethical choices in such situations. 
We have found the following framework for ethical decision making a useful method for exploring 
ethical dilemmas and identifying ethical courses of action. 
A Framework for Ethical Decision Making 
Recognize an Ethical Issue 
1. Could this decision or situation be damaging to someone or to some group? Does this decision 
involve a choice between a good and bad alternative, or perhaps between two goods or 
between two bads? 
2. Is this issue about more than what is legal or what is most efficient? If so, how? 
Get the Facts 
3. What are the relevant facts of the case? What facts are not known? Can I learn more about 
the situation? Do I know enough to make a decision? 
4. What individuals and groups have an important stake in the outcome? Are some concerns 
more important? Why? 
5. What are the options for acting? Have all the relevant persons and groups been consulted? 
Have I identified creative options? 
Evaluate Alternative Actions 
6. Evaluate the options by asking the following questions: 
• Which option will produce the most good and do the least harm? (The Utilitarian Approach) 
• Which option best respects the rights of all who have a stake? (The Rights Approach) 
• Which option treats people equally or proportionately? (The Justice Approach) 
• Which option best serves the community 
as a whole, not just some members? 
(The Common Good Approach) 
• Which option leads me to act as the sort of person I want to be? (The Virtue Approach) 
Make a Decision and Test It 
7. Considering all these approaches, which option best addresses the situation? 
8. If I told someone I respect-or told a television audience-which option I have chosen, what 
would they say? 
Act and Reflect on the Outcome
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all stakeholders? 
10. How did my decision turn out and what have I learned from this specific situation? 
Manager's Decision Checklist 
1. What are the best economic alternatives? 
2. What are the legal alternatives? 
3. Does a given decision result in greater benefits than damages for society as a whole, not just 
for our organization as part of that society? 
4. Is the decision self-serving, or would we be willing to have everyone else take the same action 
when faced with the same circumstances? 
5. We understand the need for social cooperation; will our decision increase or decrease the 
willingness of others to contribute? 
6. We recognize the importance of personal freedom; will our decision increase or decrease the 
libery of others to act? 
7. Lastly, we know that the universe is large and infinite, while we are small and our lives are short; 
is our personal improvement that important, measured against the immensity of that other 
scale? 
The Nature of Ethics in Management 
Right and proper and fair are ethical terms. They express a judgement about our behavior towards 
other people that is felt to be just. We believe that there are right and wrong ways to behave towards 
others, proper and improper actions, fair and unfair decisions. These beliefs are our moral standards of 
behavior. They reflect our sense of obligation to other people, our sense that it is better to help rather 
than to harm other people. 
Moral problems are truly managerial dilemmas. They represent a conflict between an organization's 
economic performance (measured by revenues, costs and profits) and its social performance (stated 
in terms of obligations to persons both within and outside the organization). 
Characteristics of Moral Problems in Management 
1. Most ethical decisions have extended consequences. 
2. Most ethical decisions have multiple alternatives. 
3. Most ethical decisions have mixed outcomes. 
4. Most ethical decisions have uncertain consequences. 
5. Most ethical decisions have personal implications.
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3.5.1 Personal traits 
3.5.1.1 Values: Types of values and Personal values Moderators 
Basic Ethical Values for Business 
 Trust 
 Honesty 
 Fairness 
 Dignity and Respect for Humanity 
 Respect for Legitimate Law 
 Respect for Property 
 Autonomy and Freedom 
 Impartiality/Objectivity 
 Compassion 
Morals 
 Morals are a set of guiding principles or rules that help differentiate our behavioral choices 
between right and wrong or good and bad and are exhibited through our intentions, 
decisions, practices and actions. 
 Morals have a greater social element to values and tend to have a very broad acceptance. 
Morals are far more about good and bad than other values. We thus judge others more 
strongly on morals than values. A person can be described as immoral, yet there is no word for 
them not following values. 
Values 
 Values are ideals that we believe are important as individuals. They are subjective, and vary as 
a result of our culture, beliefs, and experiences. 
 Values are the rules by which we make decisions about right and wrong, should and 
shouldn't, good and bad. They also tell us which are more or less important, which is useful 
when we have to trade off meeting one value over another. 
 Values and morals are different from one person to the next because they are the 
essential building blocks that shape who we are, what we choose to stand for and 
believe in, and influence the decisions we make. They not only give meaning to who we 
are but also who we want to be. 
 Morals and values are a part of the behavioral aspect of a person. There is not much 
difference between morals and values but both are correlated to each other. Morals are 
formed from the inborn values. Moral is a system of beliefs that is taught for deciding good or 
bad whereas values are personal beliefs or something that comes from within. These are 
emotionally related for deciding right or wrong. Morals have more social value and 
acceptance than values, therefore a person is judged more for his moral character than the 
values. One is said to be immoral for a person without morals but no such term is there for the 
person without values. 
 Another difference between the morals and values is that moral is a motivation or a key for 
leading a good life in right direction whereas value is imbibed within a person, it can be bad or 
good depending on the person’s choice. It can also be called as intuition or the call of the 
heart. Morals do not determine the values but are formed because of the values. Morals 
contribute to the system of beliefs and are the values which we get from the society.
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 Morals can be related to ones religion, political system or a business society. Business morals 
include prompt service, excellence, quality and safety. One practices all the morals while 
running a business, but the values may not coincide with them. Therefore these morals do not 
come from within a person but are taught by the social group and has to be followed. On the 
other hand values are the standards to judge the right or wrong, good or bad, just or unjust. 
They are the fundamental principles that give guidance to a person to evaluate the merits and 
demerits of a thing. Values include courage, respect, patriotism, honesty, honor, compassion 
etc. All these are not mandatory by society but depend on individual’s choice. 
 Lastly the difference between the morals and values is that morals are like commandments 
set by the elders and to be followed by the descendants. They can be set by ones elders or 
religious teachers or leaders of society who want to lead people away from immoral thoughts. 
One always treasures the morals throughout his life and they never change with time or 
conditions. While on the other hand values are not set by the society or teachers, but are 
governed by an individual. Values do not mean that it is always right to do so. Whatever is 
valuable for one person may not be the same for the other. Hence it is personal aspect and 
changes according to different situations with time and needs 
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RIGHTS 
Rights are legal, social, or ethical principles of freedom or entitlement; that is, rights are the 
fundamental normative rules about what is allowed of people or owed to people, according to some 
legal system, social convention, or ethical theory. Rights are of essential importance in such disciplines 
as law and ethics, especially theories of justice and deontology. 
Right (ethics) 
Ethics, also known as moral philosophy, is a branch of philosophy that involves systematizing, 
defending, and recommending concepts of right and wrong conduct. The term comes from the Greek 
word ethos, which means character. Ethics is a complement to Aesthetics in the philosophy field of 
Axiology. In philosophy, ethics studies the moral behavior in humans, and how one should act. Ethics 
may be divided into four major areas of study: 
• Meta-ethics, about the theoretical meaning and reference of moral propositions and how their 
truth values (if any) may be determined; 
• Normative ethics, about the practical means of determining a moral course of action; 
• Applied ethics, about how moral outcomes can be achieved in specific situations; 
• Descriptive ethics, also known as comparative ethics, is the study of people's beliefs about 
morality; 
RIGHTS AND DUTIES 
The concept of right and the notion of duty lie at the heart of much of our moral discourses. 
The concept of right: 
In general, a right is an individual’s entitlement to something. A person has a right when that person is 
entitled to act in a certain way or is entitled to have others acts in a certain way toward him or her. It 
may be a legal right or a moral right. Rights are powerful devices whose main purpose is to enable the 
individual to choose freely whether to pursue certain interests or activities and to protect those choices. 
Moral rights have got the following features: 
1. They are tightly correlated with duties because to have moral rights necessarily implies that 
others have certain duties towards the bearer of the right.
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2. Moral rights provide individuals with autonomy and equality in the free pursuit of their interest. 
3. Moral right provides a basis for justifying one’s actions and for invoking the protection or aid of 
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others. 
JUSTICE AND FAIRNESS 
Disputes among individuals are often interlaced with reference to justice and fairness. Justice and 
fairness are essentially comparative. They are concerned with the comparative treatment given to 
members of a group when benefits and burdens are distributed. Standards of justice are generally 
taken to be more important than utilitarian considerations. It the society is unjust, we normally 
condemn that society, even if the injustice secure more utilitarian benefits for everyone. 
Issues involving justice and fairness are usually divided into three categories: i.e. Distributive justice, 
retributive justice and compensatory justice. 
THE ETHICS OF CARE 
According to this care view of ethics, the moral task is not to follow universal and impartial moral 
principles, but instead to attend and respond to the good of particular concrete persons with which we 
are in valuable close relationship, - compassion, concern, love, friendship and kindness are all 
sentiments or virtues that normally manifest this dimension of morality. Thus, an ethic of care 
emphasizes two moral demands: 
1. We each exist in a web of relationships and should preserve and nurture those concrete and 
valuable relationships we have with specific persons. 
2. We each should exercise special care for those with whom we are concretely related by 
attending to their particular needs, values, desires, and concrete well-being as seen from their 
own personal perspective, and by responding positively to these needs, values, desires and 
concrete well-being, particularly of those who are vulnerable and dependent on our care. 
INTERGRATING UTILITY, RIGHTS, JUSTICE AND CARING 
Each of the four moral considerations does not capture all the factors that must be taken in 
consideration in making moral judgments. This suggests that moral reasoning should incorporate all the 
four kinds of moral considerations although only one or the other may turnout to be relevant or decisive 
in a particular situation. 
An alternative to moral principles: 
Virtue Ethics: A moral virtue is an acquired disposition that is valued as part of the character of a 
morally good human being and that is exhibited in the; person’s habitual behavior. E.g. honestly, a 
moral virtue which is praise worth 
Aristotle argues that a moral virtue is a habit that enables a human being to act in accordance with 
the specific purpose of human beings. 
Relationship between virtues and principles: 
Some virtues enable people to do what moral principles requires, e.g. 
Courage enables us to stick to our moral principles even when fear of the consequences tempts us to 
do otherwise. 
Some virtues consist of readiness to act on moral principles. E.g. justice is a virtue of being disposed to 
follow principles of justice. 
Some virtues are dispositions that our moral principles require to develop. E.g. Utilitarianism requires us 
to develop dispositions like kindness and generosity that will help us to enhance other people’s 
happiness.
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• Moral rights are rights which are natural in the sense of not artificial, not man-made, as in 
rights deriving from deontic logic, from human nature, or from the edicts of a god. They are 
universal; that is, they apply to all people, and do not derive from the laws of any specific 
society. They exist necessarily, inhere in every individual, and can't be taken away. For 
example, it has been argued that humans have a natural right to life. They're sometimes called 
natural rights or inalienable rights. 
• Moral rights are what you do because it's the right thing to do. it's based on values and 
principals shaped by our upbringing or guided by our belief and faith. it's what we know in our 
hearts to be good and true. 
• Legal rights, in contrast, are based on a society's customs, laws, statutes or actions by 
legislatures. An example of a legal right is the right to vote of citizens. Citizenship, itself, is often 
considered as the basis for having legal rights, and has been defined as the right to have 
rights. Legal rights are sometimes called civil rights or statutory rights and are culturally and 
politically relative since they depend on a specific societal context to have meaning. 
• Legal rights are that which is mandated by law. Legal rights are basically created for egregious 
wrongs that are so horribly bad that we as a society are pushed to the limits of making a law to 
ban it. Murder is so very very morally wrong that we must create a law to make it legally wrong 
because it is that important. But we don't create laws that prevent you from letting the door 
slam in the face of the person behind you. That is just morally wrong, but not so horrible that 
anybody pushes us all into make a law to prevent it. 
3.5.1.2 Stages of moral Development 
Moral development is a prerequisite to ethical behavior. 
Have you ever asked yourself: “What is my stage of Moral Development?” 
Kohlberg offers a handy framework for delineating the stage each of us has reached with respect to 
personal moral development. 
In a nutshell, the six stages of Moral Development may be summarized as follows: 
As you will infer, this concept seems to be linked with various theories of motivation like Maslow’s Need 
Hierarchy, Herzberg’s Hygiene Theory etc. 
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1. FEAR – Stage 1 
2. NEEDS – Stage 2 
3. CONFORMANCE – Stage 3 
4. COMPLIANCE – Stage4 
5. CONSENSUS – Stage 5 
6. CONSCIENCE  FREE WILL – Stage 6 
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STAGE 1 
Physical consequences determine moral behavior. 
At this stage of personal moral development, the individual’s ethical behavior is driven by the decision 
to avoid punishment or by deference to power. Punishment is an automatic response of physical 
retaliation. The immediate physical consequences of an action determine its goodness or badness. 
Such moral behaviour is seen in boarding schools, military training academies etc. where physical
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punishment techniques are prevalent with a view to inculcate the attributes of obedience and 
deference to power. The individual behaves in a manner akin to the Pavlovian dog. 
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STAGE 2 
Individual needs dictate moral behaviour. 
At this stage, a person’s needs are the person’s primary ethical concern. The right action consists of 
what instrumentally satisfies your own needs. People are valued in terms of their utility. Example: “I will 
help him because he may help me in return – you scratch my back, I will scratch yours.” 
STAGE 3 
Approval of others determines moral behaviour. 
This stage is characterized by decision where the approval of others determines the person’s behaviour. 
Good behaviour is that which pleases or helps others within the group. The good person satisfies family, 
friends and associates. “Everybody is doing it, so it must be okay.” One earns approval by being 
conventionally “respectable” and “nice.” Sin is a breach of the expectations of the social order – “log 
kya kahenge?” is the leitmotif, and conformance with prevailing ‘stereotypes’ the order of the day. 
STAGE 4 
Compliance with authority and upholding social order are a person’s primary ethical concerns. 
“Doing one’s duty” is the primary ethical concern. Consistency and precedence must be maintained. 
Example: “I comply with my superior’s instructions because it is wrong to disobey my senior”. Authority is 
seldom questioned. “Even if I feel that something may be unethical, I will unquestioningly obey all 
orders and comply with everything my boss says because I believe that the boss is always right.” 
STAGE 5 
Tolerance for rational dissent and acceptance of rule by the majority becomes the primary ethical 
concern. 
Example: “Although I disagree with her views. I will uphold her right to have them.” The right action 
tends to be defined in terms of general individual rights, and in terms of standards that have been 
critically examined and agreed upon by the whole society. (eg) the Constitution, various norms, codes 
of conduct and laws. The freedom of the individual should be limited by society only when it infringes 
upon someone else’s freedom. 
STAGE 6 
What is right is viewed as a matter of individual conscience, free choice and personal responsibility for 
the consequences. 
Example: “There is no external threat that can force me to make a decision that I consider morally 
wrong.” An individual who reaches this stage acts out of universal ethical principles. 
What is your stage of personal moral development? 
Be honest with yourself and recall the decisions you made in recent ethical situations. 
The six stages of moral development are valuable landmarks as they tell you approximately where you 
are and what changes you will have to make in yourself to move to a higher level of moral 
development. The ultimate goal is to engage in ethical decision making at stage 6. 
Your stage of moral development will determine your ethical susceptibility and ethical vulnerability.
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Ethical Susceptibility is your inability to avoid ethical dilemmas. 
Ethical Susceptibility is environment dependent (on external factors) like, for example, your job, your 
boss, colleagues and subordinates, or the persons around you, or even the ‘prevalent organizational 
culture’. 
Ethical Vulnerability is your inability to withstand succumbing in the given ethical dilemmas /situations. It 
is dependent on your internal stage of moral development in the given ethical situation. 
Whereas being in an ethical dilemma is 
situation is certainly in your control. 
not in your control, to act in an ethical manner in the prevailing 
Whenever two individuals at different stages of moral development interact with each other, both of 
them try to force or manoeuvre the other into 
their own appreciation of the ethical situation, thus 
leading to conflict. 
In a formal hierarchical setup, various employees in the chain may not be at similar stages of moral 
development thereby leading to ethical dissonance in the system. 
Factors That Affect Ethical and Unethical Behavior 
Factors That Affect Employee Ethics 
1. Stages of moral development 
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Stage of moral development interacts with: 
 Individual characteristics 
 The organization’s structural design 
 The organization’s culture 
 The intensity of the ethical issue 
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2. Individual characteristics 
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 Values 
Basic convictions about what is right or wrong on a broad range of issues 
Ø Ego strength 
A personality measure of the strength of a person’s convictions 
Ø Locus of Control 
A personality attribute that measures the degree to which people believe they 
control their own life 
-Internal locus: the belief that you control your destiny 
-External locus: the belief that what happens to you is due to luck or 
Chance 
3. Structural variables 
Organizational characteristics and mechanisms that guide and influence individual ethics: 
o Performance appraisal systems 
o Reward allocation systems 
o Behaviors (ethical) of managers 
o An organization’s culture 
o Intensity of the ethical issue 
Good structural design minimizes ambiguity and uncertainty and fosters ethical 
behavior 
4. Organizational culture 
The organization’s culture is another factor that influences ethical behavior. 
a. An organizational culture most likely to encourage high ethical standards is one that’s 
high in risk tolerance, control, and conflict tolerance. 
b. In addition, a strong culture will exert more influence on managers than a weak one. 
c. However, in organizations with weak cultures, work groups and departmental 
standards will strongly influence ethical behavior. 
5. Issue intensity 
Finally, the intensity of an issue can affect ethical decisions. There are six characteristics 
that determine issue intensity (see Below Figure). 
a. Greatness of harm 
b. Consensus of wrong 
c. Probability of harm 
d. Immediacy of consequences
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e. Proximity to victim 
f. Concentration of effect 
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How Managers Can Improve Ethical Behavior in an Organization 
• Hire individuals with high ethical standards. 
st 
• Establish codes of ethics and decision rules 
rules. 
• Lead by example. 
• Delineate job goals and performance appraisal mechanisms 
• Provide ethics training. 
• Conduct independent social audits 
audits. 
• Provide support for individuals facing ethical dilemmas 
3.5.1.3 Moral Approbation 
mechanisms. 
dilemmas. 
Moral approbation is the judgment formed of characters and actions, as being excellent or just 
The act of approving; an assenting to the propriety of a thing with some degree of pleasure or 
satisfaction; approval, sanction, commendation or official recognition 
Existing models of ethical decision making cannot yet explain the disparity between what organization 
members decide is “right” to do in a given situation and what they actually do. The current paper 
advances these models els with the development of a new idea called 
moral approbation, defined as 
moral approval from oneself or others. By arguing that people rely on the opinions of their 
groups when deciding how to behave, the paper also explains how organizational 
factors can affect individuals' ethical behavior. 
This theory proposes that individuals consider four factors when determining their own or someone else's 
level of moral responsibility in a given situation: the severity of the act's conse 
that the act is moral or immoral, the actor's degree of complicity in the act, and the extent of pressure 
the actor feels to behave unethically. 
A moral agent in an organizational predicament uses these four factors to determine the 
responsibility that his or her referent group will attribute to him or her. Based on that perceived level of 
responsibility, he or she will plan a certain course of action and estimate how much moral approbation 
can be expected from that referent group based on that behavior. The agent then compares this 
anticipated level of moral approbation to the minimum that he or she can tolerate. If the anticipated 
moral approbation meets that threshold, the agent is likely to establish a formal 
according to the projected plan, and is more likely to 
hand, if the comparison shows that the threshold will not be met, the actor is likely to rethink his or her 
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or environmental 
consequences, the certainty 
ferent intention 
act in accordance with that plan. On the other 
98 
just. 
, referent 
quences, level of moral 
of behaving
BUSINESS ETHICS unedited version 
course of action and continue to go through the moral approbation process until a plan is developed 
that will lead to the necessary level of approbation. 
The moral approbation model begins to fill the theoretical gap between moral judgment and moral 
action in organizations, with some explicit observations about the effect of organizational influences. 
These issues are of both scholarly interest and practical concern. 
3.5.2 Organizational culture 
What Are the Different Dimensions of Organizational Culture? 
The organizational culture of an organization refers to the type of climate and values that influence the 
patterns of behavior within an organization. It determines how the people within that organization 
behave in specific situations, interact with other members of the organization, and behave toward 
those outside of the organization. There are several dimensions of organizational culture that include 
things like leadership structure, rewards, welfare package, formality and degree of autonomy. 
One of the obvious dimensions of organizational culture is the leadership structure. Companies may 
differ on how accessible the CEO is to other members of the staff. The degree of accessibility of a top 
manager, leader or chairman of an organization is a factor that contributes to its cultural identity. When 
it comes to how they are addressed by the junior members of the staff, some employers are less rigid 
than others. Some managers might insist on being referred to by their first name, while others will expect 
to be referred to in a more formal manner. 
Organizations have different methods of rewarding their employees for loyalty and exceptional 
performance. An organization might do this by promoting employees more rapidly, increasing their 
bonuses, or giving them gifts. Some companies may also encourage their employees to be individual 
achievers, while others prefer that their employees act as team players. These are also dimensions of 
organizational culture within an organization. 
Another one of the dimensions of organizational culture is the type of welfare package that the 
organization has put in place for its employees. Some organizations have a more robust welfare culture 
than others. For instance, some organizations might include features like transport allowance in the 
salary of their workers. They might also provide breakfast and lunch for their employees, while another 
organization in the same category will not offer the same concessions toward its workers. 
The degree of autonomy refers to the approach that an organization takes to the adherence to 
formality. This aspect of organizational culture includes such things like the acceptable dress code 
expected of the employees and the accessibility of the top management to the junior staff. Some 
organizations take a more laid back approach to the way employees are expected to dress. Other 
organizations are by their very nature more strict in their requirements. For instance, the employees at a 
surf paraphernalia store might be allowed to wear shorts and t-shirts to work, while an employee in a 
financial organization would be expected to wear more formal attire. 
What Are the Different Types of Organizational Culture? 
Organizational culture reflects the tone of an entity more than it does any policies or procedures. 
Nonetheless, there are different types of organizational culture that are prevalent throughout 
corporations and small businesses. Companies adopt a particular style based on the needs and 
expectations of that business. Some of the prominent types of organizational culture include a 
controlled approach, a competing nature, a collaborative environment, and a creative style, all 
according to a report issued by Haworth Inc. The less formal that any organizational structure is, the 
more effective it is likely to be. 
A controlled approach is included among the types of organizational culture. In this style, the company 
looks at the resources within the organization to succeed, and at the very least, there are often middle 
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