Making Ethical Decisions

Objective:
In this session, our goal is to help you make ethical decisions. We start by explaining
what we mean by an ethical decision and why there are misunderstandings about
expectations for ethical behavior in business. Then we identify some of the common
ethical mistakes in business and the implications of unethical behavior in business.
Finally, we present the idea of codes of conduct, how to write them, and how to deal with
issues not covered by your code of conduct.

 Ethical Decisions
 Misunderstandings about Ethical Expectations
 Common Ethical Mistakes in Business
 Implications of Unethical Behavior in Business
 Codes of Conduct
 Writing a Code of Conduct for your Business
 Connecting Ethics, Integrity, and Trust

Ethical Decisions
As a business owner, you will face many decisions that impact you, your business, your
customers, and your employees. Nearly all of your decisions will have some kind of
ethical dimension to them. For you to make ethical decisions, you first need to
understand what is meant by ethics.
Ethics is the set of principles that govern behavior. In most cases, we think of ethics as
governing a person’s behavior, but it is common to have a set of principles that governs
the behavior of an organization or the behavior of a community. For example,
professional associations often define codes of conduct that govern the behavior of the
association’s members. Similarly, some communities define ethical principles that
govern behavior in order to create a healthy and safe place for people to live and work.
Of course, religious principles are written to create a common understanding of the
difference between right and wrong among members of the same church.
Business ethics is the set of principles that govern the behavior for people who are
involved with business. Since business involves the exchange of money for products or
services, there are many opportunities for ethical mistakes. Ethical mistakes usually
arise because of a misunderstanding about expectations for behavior. In the next section
we talk about the source of these misunderstandings.

Misunderstandings about Ethical Expectations

Ethical mistakes in business arise because of misunderstandings about appropriate and
inappropriate behavior with customers, employees, coworkers, the community, and the
government. The person responsible for eliminating misunderstandings is you, the
business owner.
When everyone understands the set of principles that governs behavior, there are fewer
ethical problems. Unfortunately, expectations for ethical behavior are not always
understood in the same way by everyone. There are several reasons for this kind of
misunderstanding. Sometimes the principles that govern behavior are unclear because
they are not explicit. The leaders of the community, organization, or family have not
made it clear how they expect people to behave. Sometimes the principles are unclear
because people are doing something new for which standards of behavior have not yet
developed. This case is common when new technology is being developed or when a
new business is being started. Sometimes, the set of principles that govern behavior is
closely related to community and culture. As the community becomes more diverse,
sometimes there are misunderstandings about what is appropriate and what is
inappropriate ethical behavior.
Regardless of the reason for the misunderstanding, it is the responsibility of the business
owner to announce how she or he expects people in the business to behave. In many
cases, this announcement takes the form of a “Code of Conduct” of a “Code of Ethics”
which we discuss below. In addition to making this announcement, the business owner
must demonstrate the importance of ethics by modeling the appropriate behavior
(“walking the walk”).
Here is an example of Code of Ethics for a construction company that clearly announces
the company’s expectations for behavior.

Code of Ethics: ABEL Construction Company

Employees will ensure that:

1. They do not engage in any activity that might create a conflict of interest for the
company or for themselves individually.
2. They do not take advantage of their ABEL position to seek personal gain through the
inappropriate use of ABEL or non-public information or abuse of their position. This
includes not engaging in insider trading.
3. They will follow all restrictions on use and disclosure of information.
4. They observe that fair dealing is the foundation for all of our transactions and
interactions.
5. They will protect all company, customer, and supplier assets and use them only for
appropriate company-approved activities.
6. Without exception, they will comply with all applicable laws, rules, and regulations.
7. They will promptly report any illegal or unethical conduct to management or other
appropriate authorities.

Source: https://www.abelconstruct.com/code-of-ethics, accessed August 29, 2019.

Common Ethical Mistakes in Business

Business is based on commercial transactions. In your business, you exchange
products or services for your customers’ money. You also exchange money for work
from your employees and money for supplies from your vendors. Of course, you also
pay yourself for the effort you put into your business. Over the course of a year, a
business engages in hundreds or thousands of transactions.
Every business transaction involves a buyer, a seller, and the community. Although we
rarely think about it, the community (including the environment and the government) is
involved in every transaction in some way. If you use the public road, pay a business
tax, employ others, borrow money, or use the courts, you are engaging the community in
your business transactions. The community is significantly involved in businesses that
are highly regulated, like food service, and in businesses that use public assets, like
roads.
The most common ethical challenges facing businesses arise from dishonesty and
failure to comply with agreements. Dishonesty isn’t limited to lying. Dishonesty includes
failing to disclose important information to a buyer, seller, employee, or partner. For
example, if you buy insurance from a company but that company does not have the
assets to reimburse you for a claim, then important information has been withheld. If
you sell a product that has a defect that the buyer doesn’t know about, you are
withholding important information from the buyer
Failure to comply with agreements is another common ethical challenge. The details of
every business transaction involves a contract. Sometimes the contract is written down
(explicit) and sometimes the contract is not written down (implicit). Whether the contract
is implicit or explicit, you are obligated to fulfill the contract as you have promised. As
we mentioned above, the community is also a part of your transactions. When you do
business, you make an agreement with the community (and the government) to pay
taxes, comply with environmental regulations, and obtain the licenses and certifications
required by law.
Below we list some of the common ethical dilemmas that face small businesses.
Common Ethical Dilemmas Facing Businesses

1. Compliance with environmental and safety rules. Business owners and employees are
tempted to shirk rules regarding the environment or the safety of workers. The usual
justification is that the impact of one unethical decision on the environment is small,
while the cost of compliance can be relatively high for a small businesses.
2. Paying workers for overtime and extra time. Sometimes, business owners must ask
employees and colleagues to work long hours to finish big jobs or meet customer
expectations. It is tempting to ask for the extra work without paying for it.
3. Honesty in operations, accounting, or marketing. Business owners will be tempted to
exaggerate efficiency, productivity, profitability, and sales -- and conceal losses,
mistakes, risks, and disputes.
4. Discrimination with customers or employees. In the US, refusal to do business with a
person for reasons related to race, color, national origin, religion, sex (including
pregnancy, childbirth, and related conditions), disability, age, citizenship status, and
genetic information is prohibited by law. In California, a number of categories are
added to this list including sexual orientation, gender identity, political affiliations,
and veteran status. When you refuse to do business with someone who is represented
on this list, you are imposing your own set of principles and values on someone else.
5. Honesty about hidden attributes. In many transactions, the products or services have
attributes that cannot be immediately observed or verified. Examples include
production attributes like organic or fair trade coffee, safety attributes related to
contamination, certifications of service providers, and indemnification against risk
(insurance). It will be tempting to tell a potential customer that these attributes exist
when they do not.

Implications of Unethical Business Behavior

Now that we have discussed some of the ethical challenges facing small business, we
can address the implications of unethical business behavior. Many will argue that acting
ethically is its own reward. This may be true, but there are two additional reasons that
you should act ethically if you own a small business. These business reasons are
related to reputation and risk.
Reputation. If your business has a good reputation, you will attract more customers
and attract good employees. Building a good reputation takes a lot of effort over many
years. Losing a good reputation happens very quickly, especially in a world where
customers can check your reputation on social media outlets, like Yelp.
The quickest ways to ruin your business reputation is to fail to fulfill your contracts and
other obligations. Examples of this kind of failure are discriminating against customers
or employees, lying about hidden attributes of your product or service, and asking for
extra work without paying for it. In each case you have made a commitment to comply
with law, or deliver a certain quality, or pay for a service, and failed to fulfill your
obligation.
Risk. Every business faces risk and one of the responsibilities of a business owner is
managing risk. Depending on the kind of risk, there are different ways of managing it.
Unavoidable risks are usually managed by insurance. For example, if part of your
business includes operating a motor vehicle, your company can purchase automobile
insurance to protect you from the cost of collisions.
Ethical mistakes are avoidable risks. The best way to protect you business from ethical
mistakes is to operate your business in a way that is consistent with ethical behavior. As
the business owner, this means announcing your expectations regarding the behavior
for your employees and partners, and modeling ethical behavior.
Ethics impacts your reputation and your risk and, therefore, the success of your
business. One of the ways to ensure that your expectations about ethics are clear is to
create a “code of conduct” for your business. The code announces to your employees
and your customers how you will do business. In the next section we talk about these
codes.

Codes of Conduct
A code of conduct is a set of rules for the behavior of the people in your business,
including you. It is an expression of your ethics and the way that you want to do
business. Many large organizations and companies have detailed codes of conduct. For
example, the National Education Association publishes a “Code of Ethics” that governs
the behavior of teachers. Similarly, the Coca-Cola Company has a 48 page “Code of
Business Conduct” for its employees, managers, and partners.
Even if it you are only a one-person business, you should have a written code of
conduct. Writing out a code of conduct will give you a chance to think about what
behavior is acceptable to you and what behavior is unacceptable to you. Having a
written code of conduct prepares you for the ethical challenges you will face and helps
you to make better decisions. You can use your code of conduct to show customers and
potential employees that your take ethics seriously and that you will be a good business
partner.
Your code of conduct should cover at least three areas:
1. Workplace. Your code of conduct should indicate how people who work in the
business treat one another, how they treat customers, and the importance of
 health and safety for everyone involved in the business. Here is an example from
the General Motors Code of Conduct:
“Safety in the Workplace: We want to provide a safe work environment for everyone at GM,
including employees, contractors, and visitors. We take our commitment to ensuring a safe
and healthy workplace seriously and believe it’s everyone’s responsibility.”

General Motors Code of Conduct: Winning with Integrity.

2. Business Practices. Your code of conduct should talk about your commitment
to honesty in sales practices, to meeting your obligations, and to fair dealing with
suppliers and vendors. It should also address the fair compensation of your
workers, employees, and owners. Here is an example from the Starbucks
Standards of Business Conduct:
“Our communications with our customers or potential customers must be truthful and
accurate. When we say something about our products and services, we must be able to
substantiate it.”

Starbucks Business Ethics and Compliance: Standards of Business Conduct

3. Community. Your code should address your commitment to complying with

laws and regulations, especially with respect to diversity, licensing, taxes, and the
environment. Here is an example from the Waste Management Code of
Conduct:
“Waste Management is committed to conducting business in a manner that respects,
preserves, and improves the environment.”

Waste Management Code of Conduct

As the business owner, your ethics guide the business’s code of conduct. Don’t wait
until your business is facing an ethical crisis to think about these issues and how you
want your business, employees, and partners to behave.

Writing a Code of Conduct

Writing a code of conduct may seem like a difficult task, but it is actually straightforward.
There are three steps in the process of writing a code.
1. Decide on the areas that need to be covered. Depending on the size of your
business and the type of business, you might be able to restrict your attention to
just a few areas. For example, a one-person business doesn’t need to spend
time on employee issues like workplace harassment. The list below shows
“Common Provisions of Codes of Conduct and Ethics” from the Ethics &
Compliance Initiative.
2. Make a list of ethical challenges and your expectations for your own
behavior. Based on your experience, make a list of ethical dilemmas and
challenges that will face businesses like yours. Along with the dilemma, decide
how you want to behave, and how you want your business to behave when these
 challenges arise. For example, if many of your transactions are in cash, you
might be tempted to hide your income from the government. What is your policy
about declaring income and paying taxes? You might be able to get a better
price from suppliers if you bribe the salesperson. What is your policy regarding
bribes? Perhaps some of your customers belong to a religion or ethnic group
that you dislike. What is your policy about discriminating among your customers
on the basis of race or religion?
3. Write out the rules (and revisit every six months). Based on your list of
challenges, write out your rules for behavior. Every six months you should revisit
the rules and make sure they cover all the issues you face as a business owner.
Add rules when needed.

Common Provisions of Codes of Conduct and Ethics

Compliance, Integrity and Environmental Issues
Anticorruption  Commitment to the sustainability
 Accuracy of corporate  Employee health and safety
finances and financial Ethics and Compliance Resources
reporting  Ethics advice helpline
 Employee records and  Reporting procedures
expense reports  Anonymous/confidential reporting hotline
 Bribes  Summary of investigations process
 Political contributions  Anti-retaliation policy and protections for
Conflicts of Interest reporters
 Gifts and gratuities  Accountability and discipline for violators
 Political activity  Ombuds program
 Outside employment Internet, social networking and social media
 Family members
 Internet and social network use at work
 Disclosure of financial
 Prohibited sites and content
interests
 Policies regarding posts about company, work
Employee, Client and Vendor products or coworkers
Information  Online relationships between managers and their
 Maintaining records and reports
information Relationships with third parties
 Privacy and confidentiality
 Procurement
 Disclosure of information
 Negotiating contracts
Employment Practices
 Workplace harassment
 Equal opportunity Source: Ethics and Compliance Initiative:
 Diversity https://www.ethics.org/resources/free-toolkit/code-
 Fair treatment of staff provisions/ accessed August 29, 2019.
 Work-family balance
 Discrimination
 Fair labor practices
 Illegal drugs and alcohol
 Use of organization
property and resources
 Proper exercise of
authority
  Employee volunteer
activities
 Romantic relationships
with coworkers
 Incentives and recognition
systems

Connecting Ethics, Integrity, and Trust

For every business (and person) there is a strong connection between ethics, integrity,
and trust. In this session, we discussed ethics and how to create a code of conduct for
yourself and your business. Integrity is a word that means firm adherence to your code
of conduct. People of integrity follow the code of conduct, even when other people are
not watching.
Integrity leads to trust. If others believe that you follow your code of conduct, they will
believe that you are trustworthy. Even if they do not agree with everything in your code
of conduct, they will trust you if they believe YOU will follow your code.
Trust leads to strong relationships and strong relationships are the foundation of
successful business. A strong relationship with a customer leads to repeat sales from
that customer and new sales from customers who hear about your business. A strong
relationship with a vendor means consistent delivery and quality even when supplies are
short. A strong relationship with a partner means aligned goals, quick decisions, and
increased profit.

Summary
In this session, we discussed ethical decision making in your new small business. We
talked about the definition of ethics and the reasons that there are misunderstandings
about ethics in many businesses. We also identified some of the most common ethical
mistakes in business and the implications of making ethical mistakes. To help avoid
these mistakes, we presented the idea of a code of conduct and some advice on how to
write your code. Finally, we discussed the relationship between ethics, integrity, and
trust and how trust is connected to business success.