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COURSE:BAGF0014 FUNDAMENTALS OF BUSINESS AND MANAGEMENT FACULTY: FACULTY OF BUSINESS and INFORMATION TECHNOLOGY

BAGF0014: FUNDAMENTALS OF BUSINESS AND MANAGEMENT

Course Leader: Khairatun Hisan Idris Shazali

COURSE NOTES

TOPIC 2: Business Ethics and Why Ethics are Important in the Workplace LEARNING OBJECTIVES

At the end of this chapter/module, you will be able to:

Explain what is social responsibility and ethics. Identify organizational stakeholders.

Describe the areas of social responsibility. Explain the importance of ethics in workplace. Differentiate different forms of business organization.

Social Responsibility

Social responsibility refers to the overall way in which a business itself tries to balance its commitments to relevant groups and individuals in its social environment. A. The Stakeholder Model of Responsibility Most companies strive to be responsible to five main groups:

1. Customers. Critical factors include charging fair prices, honoring warranties, and standing behind product quality. 2. Employees. Treating workers fairly, making them a part of the team, and respecting their dignity promotes a companys reputation. 3. Investors. Managers must follow proper accounting procedures, provide appropriate information to shareholders, and manage the organization to protect share holder investments. 4. Suppliers. Partnership arrangements with suppliers can enhance market image and firm reputation. 5. Local and International Communities. Contributing to local and global programs has a positive impact on the community.

B. Contemporary Social Consciousness


Views toward social responsibility continue to evolve as managers work to meet the needs of various stakeholders in their business practices.

1. The concept of social responsibility has been developing since the days of John D. Rockefeller, J.P. Morgan and Cornelius Vanderbilt. 2. Unfortunately, the recent spate of corporate scandals colors the public's perception of business in negative hues.

Areas of Social Responsibility A. Responsibility towards the Environment

1. Air Pollution: Under new laws, many companies must install special devices to limit pollutants they expel into the air. 2. Water Pollution: Increased awareness of chemical and waste dumping and the resulting dangers has led to improved water quality in many areas of the country. 3. Land Pollution: Proper toxic waste disposal and recycling programs are allowing companies to help restore land quality and to prevent further contamination.

B. Responsibility toward Customers

1. Consumer Rights: Consumerism is social activism dedicated to protecting the rights of consumers in their dealings with businesses. 2. Unfair Pricing: Collusion occurs when two or more firms agree to collaborate on wrongful acts, such as price fixing; price gouging occurs when firms respond to increased demand with steep price increases. 3. Ethics in Advertising: Consumers deserve to be given product information that is truthful and can be proven, as well as information that is not morally objectionable.

C. Responsibility toward Employees Legal and Social Commitments: Recruiting, hiring, training, promoting, and compensating are the bases for social responsibility toward employees; a whistle-blower is an employee who discovers and tries to end a companys unethical, illegal, or irresponsible actions by publicizing them. D. Responsibility toward Investors Improper Financial Management: Insider trading occurs when someone uses


confidential information to benefit from the purchase or sale of stocks. Misrepresentation of Finances is where unethical managers project profits that they do not expect to get or hide losses and expenses incurred to boost paper profits. A. Green Marketing Businesses are increasingly recognizing that looking after the environment is good marketing. As a result, businesses are now concerned with a number of environmental factors:

1. Production Processes: The most ethical thing a business can do is use

scarce and valuable resources well. Businesses often Invest in new production technologies so that resources are used more efficiently.

2. Product Modification: Products can be modified to make them more

environmentally friendly. One example is of a business that only uses wood from sustainable managed forests.

3. Carbon Offsets: Many companies are committed to offsetting the CO2

produced buy their products by buying carbon offsets. Consumers now also have the opportunity to buy carbon offsets for the air travel that they take.

4. Packaging Reduction: Reducing and reusing materials is another

important strategy for green marketing. For many years, The Body Shop has been a leader in this area of marketing.

5. Sustainability: Using materials that are sustainable is also a strong

marketing tool of many companies. Whole Foods Market is committed to using agricultural products that are sustainable.

Implementing Social Responsibility Programs A. Approaches to Social Responsibility

1. Obstructionist Stance: Organizations do as little as possible to solve social or environmental problems. 2. Defensive Stance: Organizations will do everything that is required of them legally but nothing more. 3. Accommodative Stance: The organization meets its legal and ethical requirements but will also go further in certain cases. 4. Proactive Stance: Firms that adopt this approach take to heart the


arguments in favor of social responsibility.

Ethics in the Workplace

Ethics are beliefs about wrong and right or bad and good; ethical behavior conforms to individual beliefs and social norms about what is right and good. Business ethics refers to ethical or unethical behaviors by employees in the context of their jobs. A. Individual Ethics Ethics are based on individual beliefs and social concepts; thus, they vary by person, situation, and culture.

1. Ambiguity, the Law, and the Real World. Societies adopt formal laws that reflect ethical standards; however, real-world situations are sometimes difficult to interpret. 2. Individual Values and Codes. Individuals personal codes of ethics are determined by a combination of factors.

B. Business and Managerial Ethics Managerial ethics are the standards of behavior that guide individual managers in their work.

1. Behavior toward Employees. This category covers hiring and firing, wages and working conditions, and privacy and respect. 2. Behavior toward the Organization. Conflict of interest, confidentiality, and honesty are ethical issues. 3. Behavior toward Other Economic Agents. Ethics also comes into play in the relationship between the firm and a number of primary agents of interests, such as customers, suppliers, competitors, stockholders, dealers, and unions.

C. Assessing Ethical Behavior Ethical norms include:

1. Utility: Does a particular act optimize the benefits to those who are affected by it? 2. Rights: Does it respect the rights of all individuals involved? 3. Justice: Is it consistent with whats fair? 4. Caring: Is it consistent with peoples responsibilities to each other?


D. Company Practices and Business Ethics Many companies set up codes of conduct and develop clear ethical positions on how the firm and its employees will conduct business.

1. Adopting Written Codes. Almost all major corporations have written codes of ethics. 2. Instituting Ethics Programs. Ethical responses can be learned through experience; companies must take the responsibility for educating employees.

Forms of business organizations

What Is a Small Business? A small business is independent (that is, not part of a larger business) and has relatively little influence in its market. A. The Importance of Small Business in the economy Most businesses employ fewer than 20 people, and most workers are employed by small firms. The contribution of small business can be measured through its impact on job creation, innovation, and its importance to big business.

1. Job Creation. Small businesses are an important source of new jobs; in recent years, small businesses have accounted for 38 percent of all new jobs in the high-technology sectors of the economy alone. 2. Innovation. Small business supplies 55 percent of all innovations that reach the marketplace. 3. Contributions to Big Business. Most products made by big businesses are sold to consumers by small ones.

B. Popular Areas of Small-Business Enterprise Major small-business industry groups include the following:

1. Services. This is the fastest-growing segment of small business. 2. Retailing. Retailers account for 13 percent of all firms with fewer than 20 employees; retail businesses let entrepreneurs focus limited resources on narrow market segments. 3. Construction. About 13 percent of businesses with fewer than 20 employees are involved in construction. 4. Wholesaling. Wholesalers buy products from manufacturers and sell them


to retailers; wholesalers are the middlemen. About 6 percent of all firms are in this category 5. Finance and Insurance. These firms account for about 4 percent of all firms with fewer than 20 employees. 6. Manufacturing. More than any other industry, manufacturing lends itself to big business. Still, about 4 percent of firms with fewer than 20 employees are involved in manufacturing. 7. Transportation. About 3 percent of all companies with fewer than 20 employees are in transportation and related businesses. 8. Other. The remaining 7 percent or so of small businesses with fewer than 20 employees are in other areas, including research and development laboratories and independent media companies.

Starting and operating a new business

Entrepreneurs must make a number of decisions when they start their business. They must decide whether to buy an existing business or to start one from scratch. In addition, they must determine sources of financing needed and when to seek advice from others. Another integral part of starting a small business is a well-crafted business plan. A. Crafting a Business Plan A business plan summarizes business strategy for the new venture and shows how it will be implemented.

1. Setting Goals and Objectives: A business plan should discuss the entrepreneurs goals and objectives, the strategies used to obtain them, and how these strategies will be implemented. 2. Sales Forecasting: The sales forecast requires that the entrepreneur demonstrate an understanding of the market, the strengths and weaknesses of existing firms, and the means by which the new venture will compete. 3. Financial Planning: This is the entrepreneurs plan for turning all activities into dollars.

B. Starting the Small Business Small-business people begin by understanding the true nature of their businesses.

1. Buying an Existing Business: Existing businesses have already proven their ability to attract consumers and to establish rapport with lenders, buyers and suppliers, and the community. Most consultants recommend that


entrepreneurs buy existing businesses because the odds of success are greater. 2. Franchising: A franchise agreement involves two parties, a franchisee (the local owner) and a franchiser (the parent company). 3. Starting from Scratch: Risks with this approach are greater than with buying an existing business. However, starting from scratch does allow the entrepreneur to operate without the commitments, policies, errors, etc. of a predecessor.

C. Financing the Small Business Many sources for business financing are available. Personal resources account for more than two-thirds of all money invested; smaller portions of funding come from banks, independent investors, and government loans.

1. Other Sources of Investment: Venture capital companies are groups of investors seeking to profit on companies with growth potential; money is invested in return for partial ownership. Small business investment companies are licensed to borrow money from the SBA and invest it in or loan it to small businesses. 2. SBA Financial Programs: Under the SBAs guaranteed loans program, small businesses may borrow from commercial lenders with the SBA guaranteeing to repay 75 to 85 percent of the loan. The SBAs special purpose loans target businesses with special needs, such as those meeting international demands. For loans under $35,000, the SBA offers a micro-loan program. 3. Other SBA Programs: Aside from its financing role, the SBA offers management counseling programs at virtually no cost. One of the SBAs management counseling projects is its Small Business Development Center (SBDC) program.

Trends, Successes, and Failures in New Ventures A. Trends in Small-Business Start-Ups Several factors account for the thousands of new business start-ups each year.

1. Emergence of E-Commerce: The rapid emergence of electronic commerce is the most significant recent trend. 2. Crossovers from Big Business: Many businesses are started by individuals who leave positions in large corporations to put their experience to work for themselves.


3. Opportunities for Minorities and Women: The number of businesses started by minorities and women is growing rapidly. 4. Global Opportunities: Many entrepreneurs are finding business opportunities throughout the world. 5. Better Survival Rates: New businesses now have a better chance of survival than ever before; the SBA estimates that at least 40 percent of all new businesses can expect to survive for six years.

B. Reasons for Failure Four general factors contribute to small-business failure:

1. Managerial Incompetence or Inexperience

2. Neglect

3. Weak Control Systems

4. Insufficient Capital

C. Reasons for Success Four general factors contribute to small-business success:

1. Hard Work, Drive, and Dedication

2. Market Demand


3. Managerial Competence

4. Luck

Noncorporate Business Ownership A. Sole Proprietorships A sole proprietorship is owned and usually operated by one person; about 73 percent of all U.S. businesses are sole proprietorships.

1. Advantages of Sole Proprietorships: Freedom, ease in forming, low start-up costs, and tax benefits are the advantages of this form of ownership. 2. Disadvantages of Sole Proprietorships: Unlimited liability, lack of continuity, and a possible lack of resources from the single individual are the major drawbacks of this form of organization.

B. Partnerships A general partnership, the most common type, is a sole proprietorship multiplied by the number of partner-owners.

1. Advantages of Partnerships: The ability to grow with the addition of new talent and money, few legal requirements, and tax advantages are benefits of this form of ownership. 2. Disadvantages of Partnerships: Unlimited liability in that each partner may be liable for the debts incurred in the name of the partnership, lack of continuity, difficulty of transferring ownership, and little or no guidance for conflict resolution are the major drawbacks of this form of ownership.

C. Cooperatives Cooperatives combine the freedom of sole proprietorships with the financial power of corporations. These groups of sole proprietorships or partnerships agree to work together for their common benefit. Corporations Both large and small corporations account for 19 percent of all businesses, but generate about 90 percent of all sales revenues in the United States. A. The Corporate Entity Characteristics of corporations include legal status as separate entities, property rights and obligations, and indefinite life spans. Corporations may sue and be sued; buy, hold, and sell property; make and sell products to consumers; commit crimes and be tried and punished for them.


1. Advantages of Incorporation. These include limited liability, continuity, and the ability to raise money. 2. Disadvantages of Incorporation. Difficulty in ease of transferring ownership, control, and cost are drawbacks of incorporation. In addition, double taxation plagues a corporation, since a regular corporation must pay income taxes on profits and stockholders must pay taxes on income returned by their investments.

B. Types of Corporations Stock is held by only a few people and is not available for sale to the public in a closely held (or private) corporation. When shares are publicly issued, the firm becomes a publicly held (or public) corporation. The S corporation is a hybrid of a private corporation and partnership. In a limited liability corporation, owners are taxed like partners, with each paying personal taxes only. Professional corporations are most likely comprised of doctors, lawyers, accountants, or other professionals. A multinational (or transnational) corporation spans national boundaries. C. Managing a Corporation. Once the corporate entity comes into existence, it must be managed by people who understand the principles of corporate governance.

1. Corporate Governance. Defined by the firms bylaws, corporate governance involves stockholders, the board of directors, and corporate officers.

a. Stockholders are the owners of a corporation.

b. The board of directors is the governing body of the corporation.

c. Appointed by the board of directors, officers oversee the day-to-day operations of the corporation. The chief executive officer, or CEO, oversees overall operations.

D. Special Issues in Corporate Ownership

1. Joint Ventures and Strategic Alliances: In a strategic alliance, two or more organizations collaborate on a project for mutual gain; when partners share ownership of what is essentially a new enterprise, it is called a joint venture. 2. Employee Stock Ownership Plans (ESOPs): ESOPs allow employees to own a significant share of the corporation through trusts established on their behalf.


3. Institutional Ownership: Institutional investors include mutual funds and pensions that buy enormous blocks of stock. 4. Mergers, Acquisitions, Divestitures, and Spin-Offs: A merger occurs when two firms combine to create a new company; in an acquisition, one firm buys another outright. A divestiture occurs when a firm sells off unrelated and/or underperforming businesses. When a firm sells part of itself to raise capital, the strategy is known as a spin-off.

Sample Examination Questions

1. Suppose a manager cheats on an expense account. Into which of the following areas of managerial ethics does this behavior fall? (a) organizational behavior toward other economic agents (b) employee behavior toward the organization (c) organizational behavior toward the employee (d) other economic agents behavior toward the organization

2. Which of the following is not one of the norms for assessing ethical behavior discussed in this section? (a) utility (b) rights (c) justice (d) regulation

3. The stakeholder model of social responsibility generally includes which of the following? (a) customers (b) employees (c) suppliers (d) All of these

4. Contemporary social consciousness toward business currently reflects which of the following? (a) universal admiration (b) calls for higher taxes (c) growing skepticism and concern regarding responsible corporate governance (d) a laissez-faire philosophy

5. Which of the following is not an area of social responsibility?

(a) responsibility toward the board of directors (b) responsibility toward the environment (c) responsibility toward customers (d) responsibility toward employees

7. General approaches to social responsibility include which of the following?


(a) obstructionist (b) defensive (c) accommodative (d) All of these

True / False Questions 1. Every business is legally required to develop and publish a corporate code of

ethics.

2. Though closely related, ethics and social responsibility do not mean the same thing.

3. Because of their size and limited financial resources, small businesses do not need to be concerned with social responsibility.

Short Answer Questions 1. What is meant by business ethics? 2. How can companies promote ethical behavior? 3. How do issues of social responsibility and ethics affect small business?

4. Describe the three-step model for applying ethical judgments.

5. Describe the four approaches to social responsibility.

6. Why might an entrepreneur wish to purchase an existing business rather than

starting one from scratch?

7. Describe three advantages of operating a business as a sole proprietorship.

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