Making 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.  

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.

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.

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.

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:

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:

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:

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 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.

For every business (and person) there is a strong connection between ethics, integrity, and trust.  In this chapter, 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.

Download and complete the Making Ethical Decisions Worksheet to develop a Code of Conduct for your business. 

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. 

THE TOP TEN DO'S

1. Understand what is meant by ethics: the set of principles that govern behavior.
2. Define how you expect people in your business to behave and announce these expectations through a “code of conduct” or a “code of ethics” for your business.
3. Consider that adding or doing something new may create the need to also add new standards for behavior.
4. Comply with environmental and safety rules when creating a code of conduct for your business.
5. Necessitate honesty when conducting business such as in operations, accounting, marketing, and sales.
6. Ensure employees are fairly compensated for their time including overtime and extra time.
7. Protect employees, customers, partners, and other stakeholders from any discriminatory practices.
8. Build a good reputation by upholding your code of conduct and honoring your commitments as a business.
9. Mitigate risks through insurance or other practices discussed in the Business Risk & Insurance session.
10. Create a code of conduct that includes three key areas: workplace, business practices, and community.

THE TOP TEN DON'TS

1. Assume everyone has the same understanding and interpretation of ethics.
2. Generalize expectations for ethical behavior for your business, be specific, create a written announcement, and distribute to all employees.
3. Think ethical problems arise from dishonesty, most ethical problems come from a misunderstanding of expected behaviors.
4. Fail to disclose important information to a buyer, seller, employee, or partner, for example, a potential defect in your product.
5. Assume your employees are familiar with the laws and regulations your business must follow.
6. Neglect contract obligations just because they were verbally agreed to (implicit) rather than explicitly stated in writing.
7. Wait until your business is facing an ethical crisis to think about how you want your business, employees, and partners to behave.
8. Require employees to work overtime without fairly compensating them.
9. Ignore the code of conduct just because no one is watching.
10. Underestimate the power of trust in creating the foundation for a successful business.

For a quick reference guide on ways to impact your business from this session, download the Common Ethical Dilemmas Important Takeaways infographic.