Creation of an Ethical Business: The Implementation of Virtuous Behavior and Shared Values and Goals – Article by Jessica L. Kuryn

Creation of an Ethical Business: The Implementation of Virtuous Behavior and Shared Values and Goals – Article by Jessica L. Kuryn

The New Renaissance Hat
Jessica L. Kuryn
May 10, 2012
******************************

IN TODAY’S COMPETITIVE BUSINESS ENVIRONMENT, a growing number of firms will do almost anything to gain sales and customers, as well as to increase profits.  For some of these firms, playing by the rules doesn’t achieve the results they are after.  Firms have the choice to act ethically or unethically.  While misguided managers think that unethical behavior can lead the firm, and ultimately themselves, to greater profits over the long term, it is only for the short term.  It will eventually lead to their downfall in that unethical behavior spirals out of control and can be very difficult to maintain.  Once this occurs, a firm’s reputation becomes tarnished and the company fades into non-existence.  On the contrary, “firms that pursue ethically driven strategies realize a greater profit potential than those firms who currently use profit-driven strategies” (Arjoon 159).

The point is that a firm’s leaders do have a choice in how they conduct business.  Creating an ethical business does not happen overnight.  It takes extensive collaboration and several implementation and evaluation processes, as well as continual reinforcement of and changes to established practices and values.  Perhaps one of the most important aspects to creating an ethical business is that it requires cooperation on multiple organizational levels and the implementation of virtuous behavior and values.

Maintaining ethical practices, once implemented, is an ongoing process.  There are many factors that can affect ethical behavior, such as competition for customers and market share, the need for increased profits, and management incentives.  Some firms, such as BB&T have been able to implement an ethical environment that has led to firm success, while others such as Enron, have succumbed to greed and wrongdoing, and no longer are in existence.  BB&T’s story of success will be discussed later in this paper.

CREATING AN ETHICALLY DRIVEN BUSINESS

Business ethics can be defined as “the applied ethics discipline that addresses the moral features of commercial activity” (Marcoux).  The question we have to ask concerning business ethics is how they can be applied to a business.  One of the most important aspects in creating an ethical business entails the need for new and refined organizationalvalues.  A value, as defined by Ayn Rand in Younkins’s article, is “that which one acts to gain and/or keep” (Younkins 9). Antonio Argandoña suggests a business must first identify its currently existing values and from that develop what values are needed (Argandoña 22).  In identifying these needed values, it is crucial that businesses select values that pertain to both the business’s goals, as well as the employees’ goals.  Congruence between the goals of the business and its employees increase the chances that the valueswill be received well and adhered to.

Once the desired values and goals have been determined, it falls in the hands of management to implement and communicate them.  “At the top level of an organization, it takes effective communicators who are clear about what they champion and who establish the company on virtuous behavior” (Younkins 21).Virtues, which are also defined by Ayn Rand in Younkin’s article, are “the act[s] by which one gains and/or keeps an objective value” (Younkins 11).  It is crucial for each employee and manager to establish virtues within themselves in order to pursue individual and organizational values, as well as keep them once they have been successfully implemented.It is the responsibility of management to ensure that these values are clearly communicated and followed, while established virtuous behavior becomes the mean by which these values flourish and exist.“A culture (or climate) of virtue in a business begins with executives who exhibit virtuous leadership through their personal actions and interpersonal relationships” (Younkins 21).

In displaying virtuous behavior throughout an organization, managers are setting an example for employees.   “Employees are influenced by observing visible and legitimate role models who themselves act as virtuous agents.  Not only should leaders openly discuss virtues and values, they should also live the virtues and values that they advocate” (Younkins 21).  I believe that this is one of the most important aspects in creating and sustaining an ethical business environment.  As explained by Kouzes and Posner in Minkes, Small, and Chatterjee’s article, “…leaders who could not personally adhere to a firm set of values, could not convince others of the worthiness of those values” (Minkes, Small, and Chatterjee 330).  People learn through example.  Therefore, managers should be mindful of this and back up their words with consistent virtuous behaviors that champion the organization’s values.

Once organizational values have been implemented, only half of the work has been done.  The remaining half is a continual and never ending process within the business.  In maintaining an ethical business, ongoing promotion and reinforcement is necessary.  Management must continue to display ethical behavior, while continuing to communicate values to employees.  This also includes communicating what actions are and are not acceptable.  Employee evaluations should also frequently be performed, in which employees are evaluated on values implemented by the organization’s managers.  In addition, management also needs to develop systems that reward value-oriented behaviors and reprimand value-destructive behaviors.

In regards to a reward system, “employees should be objectively appraised and compensated based on their contribution toward achieving a firm’s mission, values, and goals” (Younkins 19).  Employees may receive monetary or recognition awards for their display of virtuous and ethical behavior.  In establishing such incentives, there is an encouragement that exists among employees to accept and display the organization’s values and goals.  In addition, such incentives create a pathway in which individuals can fulfill their own self-interests and goals simultaneously.  “The good manager tries to shape employees’ ideas about self-interest by instituting incentives rewarding cooperation and reinforcing the pleasure people take in collaborating with each other” (Koehn 498). When employees act ethically, the business is also handsomely rewarded in that it gains a good reputation as being an ethically driven business.  This can lead to higher profits in that consumers will be more likely to choose that particular business over competitors because of its reputation.  “Many companies are now realizing that ethically driven strategies are resulting in a sustainable competitive advantage” (Arjoon 168).  In addition, “companies that have seriously adopted ethically driven or people-centered strategies have seen clear gains in productivity, sales and profits, customer service, retention rates, reduction in absenteeism, positive impact on employee morale, [and] increased and timely launching of products” (Arjoon 169).

Adversely, a disciplinary system is also necessary in order to maintain organization values and ethically driven behavior that have already been established.  Employees should be aware of the possible repercussions of their actions in advance, and management needs to ensure disciplinary actions are followed through with when dealing with value-destructive behaviors.  This sends a message to employees that unethical behavior will not be tolerated and it should be avoided at all costs.

The acts of Enron and WorldCom have increased consumer demands for ethically driven organizations.  Therefore, the businesses that make ethics a priority will likely obtain a sustainable competitive advantage because more consumers will choose to do business with them.  In today’s economy and business world, businesses must place a large focus on ethics in order to be successful.

FACTORS THAT AFFECT ETHICAL BEHAVIOR

Implementing a form of virtue ethics and values throughout a business can be very challenging, but maintaining it can be just as difficult.  There are many factors that can affect ethical behavior and lead a manager or employee to act unethically.  Competition for customers and increased market share, as well as the need for more profit are common issues that can lead to unethical behavior.  In addition, management incentives, such as bonuses, pay increases, promotions, and stock options can open the gateway for unethical behavior.

With a specific focus on profit, businesses that have an urgency to increase profits are likely to engage in false reporting.  Reporting false financial information makes a business’s financial statements look more appealing to investors and gives a false pretense that the business is in better financial health than it really is.  In addition, management may inflate earnings if they receive bonuses, pay increases, or promotions for increasing profits.  These monetary compensations can prove beneficial for businesses in that management will be more driven to make sales and increase wealth in the business.  Adversely, these monetary compensations can be dangerous if a manager works in his or her own interest and does not act ethically.  It could put the business in a financial position that is difficult to correct.

Stock options are another form of management compensation.  “Stock options allow employees to purchase a particular number of common shares of company stock at a specified price over a specified time period” (Brooks and Dunn 172).  Stock options can be beneficial in that they serve as a motivational devise.  When managers have an interest in the company they work for, they are more willing to strive towards an increase in stock prices.  Shareholders, as well as the managers, enjoy higher returns when stock prices increase.  In addition, stock options enable management to adopt the investor’s perspective in that theyenable both the interests of investors and management to be aligned.

One of the biggest problems with this is that unethical managers can work out of their own self-interest to falsely raise stock prices in order to earn more money.  With the incentive to earn more money comes the high possibility for unethical behavior and false reporting.  Managers that get used to these increasing stock prices are also the ones who will likely forego ethical standards and correct reporting procedures.  The concept of stock options can be extremely dangerous to a firm, especially when stock prices are truly in decline and these types of managers are present.  Reporting false income to increase these prices will eventually catch up to the firm and will result in the company’s non-existence.  Another problem with stock options is that management has the option to exercise their stock options and then sell them immediately.  This does not align with investor interests in that managers are only maintaining a short term perspective.  Making decisions based on the short term only hurts the long term investors.

BB&T – A TRUE ETHICALLY DRIVEN BUSINESS

BB&T is a fine example of a business that has been led to success through the values-driven approach adopted by one its leaders.  John Allison, former CEO of BB&T, now serves as the chairman of the board of directors.  During Allison’s time as CEO, the company has grown from approximately $5 billion in assets to $165 billion in assets.  This substantial growth has placed the company as the eighth largest financial institute in the United States.  Just a few of the issues BB&T has made a bold stand on are a municipality’s right to seize property by eminent domain for the purpose of economic development, and negative amortization loans.  Allison received national attention is his decision to “not provide loans for any economic development projects in which the land for the project had been taken in this manner” (Parnell and Dent 587).  This decision was not initially favored by many mortgage producers.

“When we made the decision not to do these loans, we got beat up in the market.  We also lost a number of mortgage producers who could make more money working for Countrywide – of course a number of these producers would now like to come back to BB&T.  We believe that doing our best to help our clients make the right financial decisions is good for BB&T.  I believe that while there may be short-term trade-offs by sticking to your values, you are never making a sacrifice in the long run, if your values are rational” (Parnell and Dent 589).

“Allison is known for, and attributes BB&T’s success to, operating by a set of principles that are embodied in BB&T’s Values Statement.  These ten values – Reality (Fact-Based), Reason (Objectivity), Independent Thinking, Productivity, Honesty, Integrity, Justice (Fairness), Pride, Self-Esteem (Self-Motivation), and Teamwork/Mutual (Supportiveness) – are not simply platitudes at BB&T but drive the decision-making process of the bank” (Parnell and Dent 588).  These values serve as the foundation that BB&T was built on.  As part of the evaluation process, employees are evaluated on their performance in accordance with the 10 values.  Those employees that perform in accordance with the values are rewarded.

Allison attributes Rand’s philosophy of Objectivism as the framework for these 10 values.  The main aspect of Objectivism is that it relies on truth and blocks out all emotions in the decision making process.  “The purpose of the process is to help you think rationally.  It is about not letting your emotions make decisions that are bad for you.  It is the ability to make logical decisions based on the facts and to pursue our purposes that makes us happy” (Parnell and Dent 591).

In addition, BB&T has also been viewed as being socially responsible.  Milton Friedman, who is referenced to in Parnell and Dent’s article, argues that there are two reasons as to why a firm should act socially responsible.  “First, not doing so can increase the likelihood of more costly government regulation.  A number of regulations over business operations were enacted because some firms refused to be socially responsible” (Parnell and Dent 593).  The second reason as to why a firm should act socially responsible is that “stakeholders affected by a firm’s social responsibility stance – most notably customers – are also those who must choose whether to transact business with the firm” (Parnell and Dent 593).  The point here is that if consumers do not think a firm is socially responsible, they have the option to do business with another company, and they will more than likely do so.  As discussed in Parnell and Dent’s article, studies have shown that consumers will be willing to pay more for products and services that are responsibly produced.  Simply, consumers favor ethically driven and responsible businesses, and will purchase products and services from them considering this factor.  This is why it is crucial for businesses in today’s economy and environment to be ethically driven and socially responsible.  With the events as seen in Enron and WorldCom, it has made consumers extra sensitive to firms and what approach they take in formulating profit.  Consumers want to be valued for their choice to do business with a particular firm, and they take enjoyment in purchasing products from these firms when they display ethically driven strategies.

From a market and environmental perspective, we could argue that BB&T is doing exceptionally well.  “From a market perspective, BB&T has delivered strong growth and financial performance since Allison’s appointment as CEO in 1989.  From a broad environmental perspective, BB&T’s business decisions defending eminent domain rights and eschewing negative amortization loans reflect support for a sustained society that respects personal property rights and responsible mortgage loan practices” (Parnell and Dent 594).  In respect to this, BB&T speaks on behalf of individuals and what they want.  While BB&T suffered somewhat in the short term, they were able to come out on top in the long run.  In my personal opinion, I have much more respect for companies like BB&T because they are willing to forgo potential profits and take a stand, even when it is not the popular decision.  Companies, like BB&T, will be around for years longer than the companies that jump on the popularity bandwagon.  They will also see considerably larger profits because they stand out among their competitors – just as BB&T has come to do

CONCLUSION

In conclusion, it is easy to see how BB&T has come to be a top competitor in the financial institution sector of business.  BB&T is a classic example of an ethically driven firm that has realized greater profits than the firms that have adopted a profit-driven strategy.  The implementation of ethics throughout an organization is a very difficult thing to do.  It requires substantial acceptance from employees and managers alike to be successful.  Most importantly, managers are the driving forces in implementing such a strategy throughout an organization.  They must be effective in communicating the values of an organization to employees, as well as lead by example.  Management cannot expect to preach values that they do not live by themselves.  After all, people learn through example.  A leader that lives by the values it communicates to employees has the best shot at having an ethically driven business.

In addition to the communication process, managers must provide incentives for desirable behavior.  A rewards system based on monetary or recognition awards are great ways to encourage cooperation and motivate employees.  This also encourages the creation of a pathway in which individuals can fulfill their self-interests.  These same values must also be a part of the evaluation process.  Just as there are rewards systems, management must also design a disciplinary system.  It is important that employees are aware in advance what they could encounter by not behaving in accordance with a firm’s values and policies.  Managers must also follow through with any disciplinary action to reinforce their importance on having a values-based business.

The benefits of implementing an ethically driven business strategy can be great, but it can be a difficult thing to do.  Competition for customers and increased market share, as well as the need for more profit are common issues that can lead to unethical behavior.  In addition, management incentives, such as bonuses, pay increases, promotions, and stock options can open the gateway for unethical behavior. However, if a firm is able to successfully implement an ethics-driven approach, these issues can be minimized and the interests of the firm and employees will be satisfied and aligned.  When a firm is able to align individual self-interests with its own interests, happiness and flourishing are more likely to occur for both.

Jessica Kuryn is a student in Wheeling Jesuit University’s Master of Science in Accountancy (MSA) program.

SOURCES

Argandoña, Antonio. (2003).  Fostering values in organizations.  Journal of Business Ethics 45:

            15-28.

Arjoon, Surendra (2000).  Virtue theory as a dynamic theory of business.  Journal of Business

            Ethics, no. 28:159-78.

Brooks, L. J., and P. Dunn. Business & Professional Ethics for Directors, Executives &

Accountants. 5. South-Western Pub, 2011. 172.

Koehn, Daryl. (1998).  Virtue ethics, the firm, and moral psychology.  Business Ethics Quarterly

            8 (3): 497-513.

Marcoux, Alexei, “Business Ethics”, The Stanford Encyclopedia of Philosophy (Fall 2008

Edition), Edward N. Zalta (ed.), URL

<http://plato.stanford.edu/archives/fall2008/entries/ethics-business/>.

Minkes, A.L., M.W. Small, and S.R. Chatterjee. (1999).  Leadership and business ethics: Does it

            Matter? Implications for management.Journal of Business Ethics 20: 327-35.

Parnell, John A., and Eric B. Dent. (2009).  Philosophy, Ethics, and Capitalism: An Interview

            With BB&T Chairman John Allison.Academy of Management Learning & Education

            8 (4): 587-96.

Younkins, Edward W. “Morality, Success, and Individual Happiness in Business: The Virtuous

            Pursuit of Values and Goals,” Libertarian Papers 3, 26 (2011).

2 thoughts on “Creation of an Ethical Business: The Implementation of Virtuous Behavior and Shared Values and Goals – Article by Jessica L. Kuryn

  1. Hi Jessica,
    I found your blog insightful, interesting and thought provoking, however I felt compelled to make what I believe are some pertinent remarks regarding your point that ‘studies have shown that consumers will be willing to pay more for products and services that are socially produced’ and your further point that ‘consumers simply favour ethically driven and responsible businesses, and will purchase products and services from them considering this factor.’ I have several concerns with theses points and will elaborate further below.
    Firstly, there is almost no factual evidence to back up your claims. You cite studies but produce no actual statistics. Secondly if your claims were true why are the shoes and clothing available in many western countries, like many other products, manufactured in primarily developing countries? Most of us are aware that working conditions in these countries are often abhorrent, hours horrendous and environmental outcomes of production are generally a non-issue. Costly alternatives produced under better conditions with better environmental outcomes are available and would be more widely available if genuinely desired. Perhaps people just don’t want them and for the majority price is predominantly king and ethics goes out the window?
    At this point we should consider how important ethics really is most people’s lives which may indicate why social costs of production of goods appear so irrelevant for a large sector of society. (Larry Colero, n.d.) of the UBC Centre for Applied Ethics states “concern for the well-being of others” and “preventing harm” as two of the principles of personal ethics. (para. 10). We often drive to the corner store when many of us could walk, some of us could grow our own vegetables but we buy them mass produced with toxic chemicals and oil based fertilisers driving the same carbon/toxic chemical emitting car to purchase them. We could do some voluntary/community work, but it would be less time for watching our favourite soap operas or going on Facebook. Just how important is socially responsibility to most of us?
    Food is another case in point. We could reduce the worldwide obesity epidemic and reduce greenhouse gas emissions, land degradation and pollution just to name a few by purely eating less. Approximately 80% of males in the US alone are classified as overweight or obese (WHO, 2010, para. 2). If ethical eating was that important, just reducing our intake, regardless of how it was produced would surely be more socially responsible. Maybe we just enjoy over eating more than we care for the environment.
    Livestock agriculture produces more greenhouse gas emissions than all global transportation. 18% of total emissions a UN Report concludes (Green Planet Awards, 2009, para. 1). Many of us, including me could eat less food produced by livestock agriculture as today there are many more socially responsible options. Meat and dairy products for example are often considerably more expensive than other sources of protein. (McGrath & Diaz, 2010) state that in a study undertaken by market research firm StrategyOne of US grocery shoppers, 66% agree “the foods I eat make a statement about my personal values” (p. 1) This statement adds weight to my argument that most people just don’t care about social responsibility, whereby your argument that people will pay more for products produced ethically seems weak.
    Utilitarian ethics requires us to maximise good and minimise harm, deontological ethical theory views morality as our duty to do or not to certain types of action, regardless of consequences with the principle of the action respecting rational humanity as a basis for moral actions. The development and expression of excellent character traits is how virtue ethics views morality. This being the case which of these do you believe consumers as business stakeholders are utilising in their purchasing decisions to encourage businesses to produce more expensive, but ethically produced goods and services? If they are using any at all why are we not seeing vast numbers of everyday goods and services being advertised as ethically produced and more expensive, touting social costs of production as explanation? If these products were in demand would manufacturing not increase in developed countries where most consumption takes place, with more stringent employment and environmental laws providing local employment and some ethical peace of mind? Everything we buy would then better reflect the total social cost of production, rather than the mere private cost that most products reflect today.
    If governments imposed more taxes and regulations to encourage the business community to better use resources and improve environmental outcomes and better reflect social costs in pricing can we really be sure the public will stomach it without a whimper? History suggests not and if not will business be expected to reduce profits for the benefit of the rest of society? If so why? Because the marginal gain of one firm’s activities is insignificant, there is no motivation for anyone to incur the cost of non-pollution of clean-up (Freeman, 2004, p. 58). Does a businessperson’s social responsibility mean that he must generate costs on pollution reduction beyond that which is in the best interests of the corporation or the law requires to support environmental improvement as a social objective (Friedman, 2005, p. 250).
    When discussing green food production and its adoption by consumers Harry Balzer vice president of the NPD Group, a Port Washington, N.Y. based consumer research firm says “consumers are driven by time and money.” Ease and convenience are the wheels of permanent change, and it appears organic doesn’t offer these over nonorganic products. Price is the other factor, and organics will remain a niche if price doesn’t come down (Bloomberg Businessweek, 2006, para. 5).
    In conclusion then it seems that indeed some members of society do demand and receive products that are ethically produced. It appears however, collectively as a society we are getting what we desire at the price we desire; low priced goods produced without the added burden of true social cost at private cost only; products that are therefore produced at the expense of social responsibility. The lack of social responsibility in many of our other daily decisions seems mirrored in our purchasing decisions

  2. Hi Jessica,

    The reference list that accompanies the in-text referencing from my reply to your blog can be found below.

    Thanks.

    Regards,

    Dale

    Reference List

    Bloomberg Businessweek. (2006). Do you need to be green? Retrieved from http://www.businessweek.com/magazine/content/06_25/b3989601.htm

    Colero, L. (n.d.). A framework for universal principles of ethics. Retrieved from http://www.ethics.ubc.ca/papers/invited/colero.html

    Freeman, R. (2004). A stakeholder theory of the modern corporation. In T.L. Beauchamp & N.E. Bowie (Eds.), Ethical theory and business (7th ed., pp. 55-64). Upper Saddle River, NJ: Pearson Education.

    Friedman, M. (2005). The social responsibility of business is to increase its profits. In G. D. Chryssides & J. H. Kaler (Eds.), An introduction to business ethics (pp. 249-254). London: Thomson Learning.

    Green Planet Awards. (2009). Livestock industry and global warming. Retrieved from http://www.greenplanetawards.org/livestock.html

    McGrath, J., & Diaz, T. (2010). We are what we eat: Personal Values and Social Responsibility. Retrieved from http://www.strategyone.com/documents/We%20Are%20What%20We%20Eat.pdf

    World Health Organisation. (2010). Stop the global epidemic of chronic disease. Retrieved from https://apps.who.int/infobase/?id=1

Leave a Reply

Your email address will not be published.