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

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




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

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




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 CO
2

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

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




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?


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




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

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




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

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




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.

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FACULTY: FACULTY OF BUSINESS and INFORMATION TECHNOLOGY





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

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




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.

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





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.


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




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?

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




(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.