Ethical decision-making might seem obvious, but it’s not. And you can tell just how difficult many organizations find business ethics when you look at today’s corporate environment.
Business ethics refers to the way a business or company makes choices and runs operations. Sometimes these ethical business practices (or less-than-ethical business practices) are intentional—like when companies choose to be transparent with their employees even when they are not legally obligated to do so.
But unethical business practices can also happen unintentionally—like when leaders prioritize personal or corporate benefit over that of their employees, business partners, consumers or otherwise.
In a recent example of that, a national U.S. bank came under scrutiny for opening accounts in their customer’s names without consent. Senior management blamed the scandal on the average employee.
However, senior management created the culture and business ethics of the organization. In that work environment, employees faced an ethical dilemma of being fired (and not being able to feed their family) if they didn’t achieve their new account goals. Because of that conflict between moral principles and the larger business practices at play, many employees chose to open empty accounts without their customers’ consent.
When this came to light, senior leaders at this bank did not take responsibility for the business operations they created, and instead blamed employee behavior on their employees alone.
Why are business ethics so complicated?
The above example reveals how business executives shape ethical behavior in organizations.
Leaders and employees today have to navigate complex ethical dilemmas when the culture of the business world hasn’t prioritized ethical reasoning or ethical behavior. Good business ethics tend to be an afterthought, rather than part of corporate governance.
This leads to problems because everyone’s ethical beliefs differ. Someone’s upbringing, family, experiences and other factors all dictate what an individual believes to be morally right or wrong.
How do corporate ethics, personal ethics and legality differ?
The principles of business ethics include staying compliant with laws and regulations—but staying within the scope of law is not the same as acting ethically.
Legality is separate from ethics. It is possible to have laws that are unethical. It is also possible to have ethical choices that are illegal. People make laws, rules and policies, and people are flawed, biased and not always ethical.
Personal ethics can shift a great deal over time. When you make decisions for yourself, it's easier to understand the ethical implications of your choice. But when business executives make decisions that will shape the choices of say, several thousand employees, the ethical implications cause much bigger waves.
For example, let's say the higher ups in an organization believe everyone working under their authority should act with respect. That's a pretty common business practice, after all—respectful, professional behavior.
Let's also imagine that one of those executives perceives any challenge to their ideas or decisions as an act of disrespect—and speaks or makes choices about promotions and layoffs accordingly. This will quickly create a culture of "loyal employees avoid conflicts with leadership." How could that overall culture ripple out into ethical problems for the company?
Why are business ethics important? Why should companies care?
If there’s one thing every business leader learns, it’s that their job is to make money. So why should organizations care about ethical principles or practices?
For one, the business landscape is changing.
Unethical corporate behavior is leading to changes in law
There is a societal push to uphold ethical standards of organizational leaders in the U.S.
This is for a plethora of reasons, but some of the most commonly-cited issues coming up in legislation are fair wages (including CEO wages) and benefits, DEI initiatives and efforts, prices and price gouging, and social responsibility from an environmental perspective.
The results of these efforts will likely be more restrictions, sanctions or at least sizable reputation damage to companies who abuse their legal power to act unethically.
Unions could rise to fix what companies will not
In 2023, employees in the private sector demonstrated considerably more interest in unionizing than they have in the past, according to the Economic Policy Institute. Their research suggested that more than 60 million workers wanted to join a union, but could not.
If that number continues to increase along with legislation, will companies be able to tamp down larger unions in the private sector? What might a larger effort to unionize cost companies in comparison to the investment of acting more ethically in the first place?
The employers who act ethically will attract and keep the best workforce
The importance of ethical organizational leadership is also becoming a key factor for new-hire job acceptance.
Job seekers are considering factors like diversity in key roles, trust (flexible job arrangements), fair pay and benefit policies, customer's experiences and a demonstrated commitment to employee retention and development (versus a commitment to solely profits).
Most of this comes down to ethical leadership, though it can include an organization’s documented political stance (through donations or lobbying efforts), their corporate social responsibility (both internal and external) efforts, and the alignment with the potential new hire’s beliefs and values.
What are companies doing to promote integrity?
The climate around upholding ethical standards in U.S. organizations is poor and has been for decades. The attention on this topic peeked around the time of the Enron and WorldCom scandals in the early 2000s.
Since then, organizations have implemented annual ethics training and other measures toward gaining more ethical leaders and preventing scandals.
One key approach is by creating a “Code of Ethics” designed to clarify the expected actions and behaviors of employees. It's one thing to say you care about integrity. But it's another thing to actually act with integrity.
Why aren’t those efforts working?
Trust in U.S. organizational leaders’ ability to act with ethical principles is still not much improved according to a 2023 Gallup® poll.
A stated “code” often does little to change the business ethics of the organization because people are more likely to act in unison with business leaders’ actions and behaviors (and how they feel they are treated by leaders) than to be guided by an ambiguous list of traits, characteristics or behaviors.
Organizational ethics extend beyond big accounting misrepresentations or insider trading. It is also about how you treat your people, the community and stakeholders in totality.
And it doesn't take incredible critical thinking skills for people to notice when a company doesn't live up to its own ethical code.
Recent mass layoffs (for arbitrary reasons) have damaged trust in U.S. corporate leadership.
Rising CEO pay with a reduction in the average employee pay is another major factor in the distrust people feel toward senior leader’s values and ethics.
How to improve business ethics in a company
There are several ways that organizational management can encourage trust in the ethical aspects of their organizations.
1. Keep a balanced scorecard for C-suite leaders
CEOs are often compensated based on profitability. This encourages CEOs to keep employee pay low, and it also leads to layoffs, because if the CEO isn’t hitting their profitability targets by revenue, they can backhandedly do it by laying people off.
Thus, a balanced scorecard that requires CEOs to meet employee retention targets and ties CEO pay to average worker pay would encourage trust and better business ethics.
2. Increase organizational transparency
Employees need to trust organizational leaders at all levels, not just their direct supervisor. This is why communication is such an essential skill.
Communication on corporate decisions must be open and honest. There are ways to have difficult conversations while maintaining values of trust, respect and honesty.
This includes information around layoffs. There is no rule that says layoffs must be same-day announcements that put employees in stressful situations of ruin. Employers should give their employees 6 months to 1-year notice, to allow them to make transition plans for themselves and their work at the company. They should also be offered severance packages like most senior leaders.
3. Increase accountability for managers, not individual performers
Ultimately, managers should take responsibility for what happens in their organization.
Many organizations operate as single winner goal-setting environments where only one person can really win. That model creates an unhealthy and unethical climate. Some organizations also create goals that are difficult or impossible to obtain, and tie them to each individual’s job or continued employment.
This practice alone could be considered unethical. But it also leads to larger problems.
4. Put your actions where your words are
Senior management should demonstrate real empathy when making organizational and business strategy decisions.
Saying you “feel bad” for decisions that negatively impact employees, like in the case of mass layoffs, isn’t demonstrating empathy. Instead, giving employees time and advanced notice of a pending layoff will better exemplify ethical values for people you have called “family” for years.
5. Standardize your decision-making framework
Using a decision-making framework can help remove unconscious bias from decision-making and ethical principles.
Often what we think is a “gut decision” is just bias entering our decision-making process. The SPADE decision-making process is one example of a potential framework, which encourages you to consider the Setting, People, Alternatives, Decide and Explain.
Improve trust by empowering employees
If your company has a reputation problem, can’t retain employees and is consistently in a state of panic as leadership dodges accountability, they probably struggle with ethics.
If you are the kind of person who cares about what is ethical, not merely what is legal—you might have what it takes to be a powerful leader.
Learn just how important leadership can be to a professional team’s retention and check out Empowering Teams Should Be a Manager’s Top Priority: Here’s How to Do It.
Gallup® is a registered trademark of Gallup, Inc.
McLain, D., & Pendell, R. (2023, April 17). Why trust in leaders is faltering and how to gain it back. Gallup. https://www.gallup.com/workplace/473738/why-trust-leaders-faltering-gain-back.aspx
Shierholz, H., McNicholas, C., Poydock, M., & Sherer, J. (2024, January 23). Workers want unions, but the latest data point to obstacles in their path. Economic Policy Institute. https://www.epi.org/publication/union-membership-data/
