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Why Business Ethics is Important

There are many reasons why ethic is important in business. Organizations that are committed to behaving ethically know that committing to ethical behaviour is not only the right thing to do but that ethics is good for business.

To answer the question of why business ethics is important, there is need to understand what “business ethics” really means.

At the basic level, business ethics is simply the code of values and principles that govern the actions of an individual, or a group of people, regarding what is right as against what is wrong in business.

An individual’s sense of ethics has an impact on his/her behaviour or the type of conduct the individual will exhibit. When people are able to tell the difference between right and wrong and they choose to do what is right, then they are acting in an ethical manner. Business ethics is not just about the difference between right and wrong; it is the actual application of that knowledge to business.

There are several reasons why ethics is important in business. These reasons include the following:

i. It Builds Integrity, Culture and Common Good in Leaders and Employees:
While many businesses have codes of ethics, the words written in a formal code are valuable only if their intent is reflected in the actions of the leaders who represent the organisation. A business cannot be any more or less ethical than the people who run it and who work for it. Within a company, employees take their cues from behaviours that are acceptable based on what they see their leaders do and observed behaviours that are rewarded amongst their peers. Businesses that are managed by leaders who conduct themselves in an ethical manner and who reward employees for doing what is right are much more likely to be entrenched as an ethical culture. If an organisations’ corporate culture is characterised by positive ethical behaviours, then the decisions that are made by the leaders and other employees are likely to be such that are socially responsible rather than motivated solely by a profit-seeking intention. Ethical business decisions are ones that are made from a stakeholder’s perspective when the emphases are on issues that take into account the needs of everyone who has the potential to be impacted either negatively or positively by the organisations’ actions.

ii. Long Term Sustenance of the Organisation:
The degree to which managers and employees display ethical conducts in their operations will in no small measure depict the sustainability of the business. Individuals who work for businesses make decisions every day, and their actions can impact the lives of many other people. When managers make decisions that are not ethical, a lot of people can be hurt, such as employees, customers, suppliers, host community and members of the general public, as well as the business itself. When managers focus on the impact which an action can have on stakeholders rather than on the bottom line only, it will be easy for them to avoid making decisions that will be detrimental to the organisation. Organisations that are managed by unethically managers do not survive for a long term. In other words, making business decisions that are not in consonance with what is right may result in short term profit but may lead to an eventual demise of the organisation.

iii. Corporate Reputation:
Every serious organisation strives to gain a good competitive advantage in order to keep the business going. Therefore, an organisation’s reputation can in no small measure help an organisation achieve this because the reputation is built on its relationship with staff, customers, suppliers, investors and the community they operate. Of course, the importance of business ethics goes beyond the direct relationship between its employees and management team, it extends to how the organisation deals with the local community in terms of its social responsibilities. A business that behaves in an ethical way will often find that the community offers its support in return, which can also be invaluable to the success of the business. Altruistic activities can boost corporate image and build the organisation’s reputation with its host community. This may be exhibited through assisting with community events, donating funds in support of charities, or simply behaving honestly in dealings with all stakeholders. A change in reputation can lead to a number of negative impacts such as a reduction in market share, decrease in profitability because customers and staff loyalty will be affected, decrease in business opportunities, decrease in new investment, inability to obtain loans from banks as the business is seen as a greater risk as well as increased insurance premiums.

iv. Ability to attract and retain talents:
The greatest and most important asset of any organisation is its human capital. Therefore, organisations or corporations that harm society or the environment are actually harming their own employees, including those who are making the decisions. Ultimately, a business relies on its human resources. If a company cannot attract highly qualified personnel because it has a poor public image based on previous unethical behaviour, it will fold up. When organisations behave ethically it attracts more employees to work for the organisation, make employees want to stay with the organisation, reduce labour turnover as well as increase productivity. It can also reduce recruitment costs and enable the business to get the most talented employees.

v. It Enhances Shareholders’ Trust:
Naturally, any successful business will remain focused on earning a profit which is the main objective of business except for not-for-profit businesses. With no profit, the organisation loses value and the employees eventually might also lose their jobs. However, when an organisation is ethical, they are careful to do whatever is necessary to maximise profit. Investors can be attracted and it can help keep the business share price high, thereby protecting the business from takeover. Ethics also require that organisations provide accurate financial data to stockholders/shareholders and avoid advertising their products and services to consumers under false pretences. A business that does not behave with integrity may have difficulty conducting business, as vendors who supply the materials it needs might not be willing to extend credit, while shareholders might no longer be willing to invest their money. Although the initial profits might be high, the appearance of ethical problems within the business can make investors uncomfortable and unwilling to risk their money.

vi. It Builds Customer Loyalty:
The value of strong ethical business practices can be found in a business reputation and product brand. Customers must believe in the organization’s brand to make repeated purchases. That is because they can easily buy a similar product or service from a competitor. An organisation’s business ethics should help the business stay ahead of competitors. Customers’ loyalty is inevitable when an organisation behaves ethically, when this happen; it leads to customers’ repeat patronage and referrals of others to the organisation over time. Customers’ trust can be maintained through transparency. For a business to achieve long-term profits, customer relationship is of utmost importance. To gain a long-term relationship with customers and achieve customer returns for the business, the business must be ethical. The trustworthiness of a business, its customer service, its customer care, and its urge to retain old customers, is part of ethics in business. Business ethics leave a long-lasting impression on the customers and the impression on their minds builds trust, enough to increase market share while retaining old ones.

vii. Partnerships:
In the business world, joint ventures happen all the time. This is because they are ultimately of great importance to the bottom lines of businesses. A business can be made or marred in just one joint venture and part of the reason that joint ventures are successful is that they combine the forces of two extremely powerful companies. If an organisation must thrive in joint ventures, then the partners must be good. The only way to get good partners is to have a good reputation both in terms of a track record and in terms of the overall business. And of course, the best way to get a good reputation is to ensure that organisations have a strong tradition of ethical business behaviour.

A number of perspectives dealing with ethics were discussed that have important implications for global entrepreneurs and modern organisations. Suffice it to say that the global entrepreneurs and international organisations of today not only have an obligation to abide by sound ethical practices, but also to preserve the ecological well-being of the planet, respect the host culture, and discharge their social responsibility consistent with ethical standards. Organisations are expected to operate their business adhering to specified behaviours that are deemed as appropriate for the conduct of businesses globally. Businesses that are able to do this will in no doubt be successful.