Introduction to Business Ethics and Corporate Governance Unit I TU BBA MBA

Concept of Ethics

Ethics refers to a system of moral principles that influence how people make decisions and lead their lives. It's about what is right and wrong, just and unjust, fair and unfair. Ethics fundamentally deals with the systematic study of moral principles that dictate what is considered "good" or "bad," "right" or "wrong," "just" or "unjust" in human conduct.

It's a framework for rationalizing moral choices and is distinct from mere legality or social custom, though it often influences both. Ethics guides individuals and groups in discerning how they ought to act, considering the well-being and rights of others, as well as their own integrity.

Example:

Telling the truth even when it might lead to punishment is an ethical action. For instance, a student confessing to a mistake instead of letting someone else take the blame is practicing ethics.

2. Concept of Business Ethics

Business ethics involves applying ethical principles to business situations and activities. It guides how businesses interact with stakeholders like customers, employees, suppliers, and society at large.

• Scope: Business ethics addresses issues ranging from micro-level decisions (e.g., an employee's honesty) to macro-level policies (e.g., corporate environmental impact, global supply chain practices).
• Dynamic Nature: Business ethics is not static; it evolves with societal values, technological advancements, and global challenges. Issues like data privacy, AI ethics, and climate change are constantly reshaping the field.
• Beyond Philanthropy: While philanthropy (donating to charity) is part of CSR, business ethics is embedded in core operations – how a company makes its money, not just how it spends it.

Example: The pharmaceutical company disclosing side effects demonstrates transparency, honesty, and a commitment to customer safety and well-being over short-term sales. This builds long-term trust, which is invaluable in an industry where public confidence is paramount. Conversely, a company that hides side effects might achieve immediate sales but faces severe ethical and legal repercussions (e.g., lawsuits, loss of license, public backlash) in the long run.

                                                   3. Myths about Business Ethics

Addressing common misconceptions about business ethics is crucial to understanding its importance.                                                        

Myth	Reality	Example
Ethics is just common sense	Ethical dilemmas are often complex	A factory manager might think it's "common sense" to fire workers to cut costs, but ethics requires evaluating the human impact too.
Business and ethics don’t mix	Ethics is crucial for long-term success	Companies like Patagonia thrive by prioritizing sustainability and fairness.
Being ethical reduces profits	Ethical firms gain trust and loyalty, boosting performance	Unilever's ethical branding attracts consumers willing to pay more for responsibly-made products.
If it’s legal, it’s ethical	Not all legal actions are moral	Fast fashion brands may legally exploit cheap labor in poor countries, but it is unethical due to poor working conditions.

 

4. Causes and Consequences of Ethical Problems in Business

A. Causes of Ethical Problems

Cause		Example
Profit pressure	Intense pressure to cut costs or boost profits may lead to unethical shortcuts	A car company hides a defect to avoid recalls and protect sales (e.g., Volkswagen emissions scandal).
Weak leadership	Leaders who ignore ethics foster a culture of misconduct	If a CEO ignores workplace harassment, others may do the same.
Ambiguous rules	Vague or missing ethical policies create confusion	An employee might misuse company resources if rules about usage are unclear.
Globalization	Different cultures have different ethical norms	A company might pay bribes abroad where it’s “normal,” though unethical globally.

 

B. Consequences of Ethical Problems

Consequence	Example
Loss of reputation	Facebook (now Meta) faced global backlash over privacy violations (Cambridge Analytica).
Legal action	Wells Fargo was fined billions for creating fake customer accounts.
Employee dissatisfaction	If workers see unethical treatment of peers, morale and loyalty fall.
Financial loss	BP’s Deepwater Horizon oil spill cost billions in fines and reputation damage.

 

5. Major Theories and Frameworks Governing Business Ethics

A. Normative Ethical Theories

These provide moral standards for evaluating right and wrong.

1.      Utilitarianism (Consequentialism) 

This theory is outcome-oriented. The "right" action is the one that produces the greatest good for the greatest number of people. It requires calculating the net benefit (benefits minus costs/harms) of all possible actions for all affected parties. Founder: Jeremy Bentham, John Stuart Mill

 

• Principle:

 Happiness/Utility Maximization: The ultimate goal is to maximize overall happiness, well-being, or utility.

Impartiality: Everyone's happiness or suffering counts equally.

Act vs. Rule Utilitarianism:

Act Utilitarianism: Focuses on the consequences of each individual action.

Rule Utilitarianism: Focuses on the consequences of adopting general rules. A rule is ethical if its widespread adoption would lead to the greatest good (e.g., "always tell the truth” Is a good rule because a world where everyone lies would be chaotic and unproductive).

Example:

A hospital with limited resources gives a ventilator to a younger patient instead of an older one because the younger one has a higher survival chance. The goal is maximum benefit.

In business:

The factory relocation example is a classic utilitarian dilemma. While 50 people lose jobs, the argument is that saving 1,000 jobs (and the company itself) creates a greater overall positive outcome. However, a purely utilitarian approach might overlook the significant suffering of the 50 laid-off workers, or the environmental impact of the new location, unless these are factored into the "greatest good" calculation.

2.      Deontology (Duty-Based Ethics)

Deontology asserts that morality is based on duties and rules, and actions are inherently right or wrong regardless of their consequences. It emphasizes moral obligations and universal principles. (Founder: Immanuel Kant)

• Key Principles: (Do what is morally right, regardless of consequences.)

a.      Categorical Imperative (Immanuel Kant):

                                                  i.      Universalizability: "Act only according to that maxim whereby you can at the same time will that it should become a universal law." If an action cannot be universally applied without contradiction, it's unethical. For example, if everyone broke contracts, the concept of a contract would cease to exist.

                                                ii.      Treat Humanity as an End, Never Merely as a Means: Respect the inherent dignity and autonomy of all individuals. Don't use people as mere tools to achieve your goals. This means avoiding exploitation, deception, or manipulation.

                                              iii.      Autonomy: Rational beings are capable of self-legislation and making their own moral choices.

Business Example: The company recalling a faulty product due to inherent moral obligation, even at a high cost, exemplifies deontology. They have a duty to ensure customer safety and honesty, regardless of the financial impact. This contrasts with a utilitarian approach that might weigh the cost of recall against the cost of potential lawsuits. (Based on rules, duties, and rights.)

3.      Virtue Ethics

Instead of focusing on rules or consequences, virtue ethics centers on the character of the moral agent. It asks: "What kind of person (or company) should I be?" (Founder: Aristotle)

 Key Principles:

• Development of Virtues: Cultivating positive character traits like honesty, integrity, courage, compassion, fairness, and wisdom.
• Practical Wisdom (Phronesis): The ability to discern the right course of action in specific, complex situations through experience and moral insight.
• Eudaimonia (Flourishing): The ultimate goal is human flourishing or living a good life, which is achieved by practicing virtues.
• Business Example: A CEO who prioritizes and rewards honesty, even when under pressure, embodies virtues like integrity and courage. This fosters an organizational culture where ethical behavior is not just a policy but a deeply ingrained characteristic. This leader isn't just following a rule; they are being an ethical person, which inspires others.

• Focuses on developing moral character, not rules or outcomes.
• Emphasizes traits like honesty, integrity, courage, compassion.

1. A leader inspires ethical conduct by example rather than strict rules.

4.      Rights Theory

Rights theory posits that all individuals have fundamental moral rights (e.g., to life, liberty, property, privacy, fair treatment) that should be respected and protected. An action is ethical if it respects these rights.

• Principle: Actions are ethical if they respect the rights of individuals.
• Includes rights to life, freedom, privacy, property, etc.

Example:

A tech company refuses to sell user data because it respects users’ right to privacy, even though it's legal and profitable.

5.      Justice Theory

Justice theory focuses on fairness in the distribution of benefits and burdens, and the fair treatment of individuals within a society or organization. (Founder: John Rawls)

Key Principles (John Rawls' Theory of Justice as Fairness):

Distributive Justice: Fair allocation of resources, opportunities, and outcomes.

• Equality: Treating everyone the same (e.g., equal voting rights).
• Equity: Distribution based on relevant differences like need, merit, or contribution (e.g., progressive taxation, performance-based bonuses).

Procedural Justice: Fairness of the processes used to make decisions. Were the rules applied consistently? Was there an opportunity for input?

Interactional Justice: Fairness in the interpersonal treatment of individuals. Were people treated with respect, dignity, and honesty during interactions?

Example:

A company gives equal pay for equal work regardless of gender or race. It ensures fairness in promotions and hiring practices. (Fair treatment, equality, and equitable distribution of resources.)

B. Applied Ethical Frameworks in Business

These are practical tools used by companies to maintain ethical behavior.

1)     Stakeholder Theory

Developed by R. Edward Freeman, this theory argues that a business should create value for all its stakeholders, not just shareholders. It recognizes the legitimate interests of employees, customers, suppliers, the community, and the environment.

Principle: A business must consider all parties affected by its actions (not just shareholders).

Stakeholders include employees, customers, suppliers, community, environment.

Example:

Tesla's focus on designing eco-friendly cars considers multiple stakeholders. It appeals to environmentally conscious consumers (customer value), contributes to reducing carbon emissions (environmental impact), and potentially attracts employees passionate about sustainability (employee value), alongside generating profit for shareholders. This holistic approach ensures long-term viability and social license to operate.

2)     Triple Bottom Line (TBL)

Coined by John Elkington, TBL extends the traditional focus on financial profit to include social and environmental performance. It measures a company's success not just by "Profit" but also by "People" (social responsibility) and "Planet" (environmental sustainability).

• Focus on People, Planet, and Profit.
• Encourages sustainable and socially responsible practices.

Example:

The coffee company using fair-trade beans (ensuring fair wages and working conditions for farmers – "People"), biodegradable packaging (reducing waste and pollution – "Planet"), while also being profitable ("Profit") perfectly encapsulates TBL. This integrated approach ensures sustainability in its broadest sense.

3)     Corporate Social Responsibility (CSR)

CSR encompasses a company's voluntary actions to operate in an economically, socially, and environmentally sustainable manner, going beyond legal requirements. It's about a company's commitment to contribute to sustainable development by working with employees, their families, the local community, and society at large.

• Companies voluntarily go beyond legal requirements to benefit society and environment.

Example:

Tata Group, a major Indian conglomerate, has a long history of CSR embedded in its ethos, predating the modern concept. Their investments in education, healthcare (e.g., Tata Memorial Centre, a major cancer hospital), and community welfare are not just about charity; they are seen as integral to their responsibility as corporate citizens, building social capital and a strong reputation that supports their diverse businesses.

4)     Code of Ethics / Conduct

These are formal documents that articulate an organization's values, ethical principles, and expected behaviors. They serve as internal guidelines, clarify acceptable and unacceptable conduct, and provide a reference point for employees facing ethical dilemmas.

A document outlining a company’s values, expected behaviors, and rules.

 

Purpose: To prevent misconduct, promote a consistent ethical culture, and provide a basis for disciplinary action if violated.

Example: Google's (now Alphabet's) famous motto "Don't be evil" (later changed to "Do the right thing") served as a powerful, concise ethical guide. While broad, it encouraged employees to question decisions that might prioritize profit over user trust or societal good. It symbolized a commitment to ethical innovation and user focus, distinguishing them from competitors. Effective codes are living documents, regularly reviewed and integrated into training.

1. Concept of Corporate Governance

Corporate Governance refers to the system by which companies are directed and controlled. It involves the mechanisms, processes, and relations used to ensure that a corporation acts in the best interest of its stakeholders — including shareholders, employees, customers, and society.

It encompasses the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with its stakeholders.

Example:

In the Enron scandal, poor corporate governance allowed executives to hide debt off the balance sheet and mislead investors. This lack of oversight led to the company's collapse, harming employees, shareholders, and the economy.

2. Essential Elements of Good Corporate Governance

Components/ Elements	Explanation	Example
Transparency	Open disclosure of financial and operational information	Infosys regularly publishes detailed annual reports and holds investor meetings.
Accountability	Clear roles and responsibilities; holding management accountable	Tata Group holds its leadership responsible for ethical lapses and performance.
Fairness	Equal treatment of all stakeholders, especially minority shareholders	Global IME Bank ensures that all shareholders receive equal information access.
Responsibility	Ethical and responsible decision-making	Unilever’s sustainability initiatives reflect responsibility toward society.
Independence	Independent board and audit committee to reduce conflicts of interest	Wipro has independent directors to ensure objective decision-making.
Ethical Conduct	Adherence to moral principles and company values	Patagonia’s operations reflect strong ethical commitments to the environment.

3. Evolution of Corporate Governance

Corporate governance has undergone significant transformation, largely in response to major corporate scandals.

• Pre-1990s: Primarily focused on financial compliance and shareholder value. Regulations were less stringent, and the board's role was often seen as less critical for oversight.
• 1990s: A period marked by increasing globalization and a series of high-profile corporate frauds and collapses (e.g., Enron, WorldCom, Tyco). These scandals exposed critical weaknesses in existing governance structures, particularly regarding executive compensation, accounting transparency, and board independence.
• 2002: Sarbanes-Oxley Act (SOX): A landmark U.S. federal law passed in response to the major accounting scandals of the early 2000s. SOX significantly tightened regulations for public companies, mandating greater financial transparency, enhanced auditor independence, stricter corporate accountability (e.g., CEOs and CFOs personally certifying financial statements), and increased penalties for fraud. It had a global ripple effect on governance standards.
• 2000s–Present:
• Rise of CSR: Companies increasingly recognized the importance of their broader societal role.
• Stakeholder-Centric Models: Moving beyond pure shareholder primacy to consider all stakeholders.
• ESG (Environmental, Social, Governance) Principles: A framework gaining immense traction, where investors and stakeholders increasingly evaluate companies not just on financial returns but also on their environmental impact, social responsibility, and quality of governance. This has led to the integration of sustainability reporting and performance into governance metrics.
• Digital Governance: Addressing new challenges related to data security, AI ethics, and cybersecurity risks.

Phase	Description
Pre-1990s	Focused primarily on financial performance; limited regulations.
1990s	Rising corporate fraud and scandals (e.g., Enron, WorldCom) led to reforms.
2002	Sarbanes-Oxley Act (SOX) passed in the U.S. to increase transparency and accountability.
2000s–Present	Rise of CSR (Corporate Social Responsibility), stakeholder-centric models, ESG (Environmental, Social, Governance) principles.

 

4. Similarities and Dissimilarities Between Business Ethics and Corporate Governance

ü  Similarities Between Business Ethics and Corporate Governance

	Overview	Example
1. Promote Accountability and Responsibility	Both frameworks aim to hold individuals and organizations accountable for their actions.	A CEO resigning due to a breach in governance or ethical misconduct reflects shared accountability.
2. Enhance Trust and Reputation	Ethical behavior and strong governance improve public perception and stakeholder trust.	Tata Group is respected globally due to ethical leadership and transparent governance.
3. Encourage Compliance and Integrity	Both stress the importance of following rules, whether internal codes (ethics) or external regulations (governance).	Infosys adheres to strict compliance with financial regulations and ethical standards.
4. Protect Stakeholder Interests	Both aim to protect the interests of stakeholders — including shareholders, employees, customers, and society.	Unilever’s sustainability initiatives consider both ethical responsibility and governance standards.
5. Drive Sustainable Business Practices	Long-term value creation is at the core of both. Ethical governance supports sustainability and business continuity.	Nestlé combines ethical sourcing and strong internal controls to maintain global sustainability.
6. Form the Basis of Corporate Culture	Both influences how a company’s culture is shaped — by promoting fairness, transparency, and moral behavior.	Ethics training and governance policies create a unified culture at companies like Google.
7. Interdependent in Practice	Good corporate governance often relies on ethical principles, and ethical behavior is sustained by governance systems.	Ethical lapses like in Satyam show how weak governance and poor ethics lead to collapse.

 

ü  Dissimilarities Between Business Ethics and Corporate Governance

Basis	Business Ethics	Corporate Governance
1. Nature	Based on moral values and conscience.	Based on laws, regulations, and structured policies.
2. Focus	Focuses on individual and organizational behavior — "doing the right thing."	Focuses on the system and structure of directing and controlling a company.
3. Source	Rooted in philosophy, religion, and social values.	Derived from legal mandates, corporate codes, and board guidelines.
4. Enforcement	Voluntary or self-imposed; relies on internal values.	Mandatory and enforceable through rules, audits, and legal actions.
5. Applicability	Applies to all levels — employees, managers, and leaders.	Mostly applies to board members, top executives, and key decision-making structures.
6. Measurement	Hard to measure directly — subjective and qualitative.	Easier to audit through checklists, reports, and compliance metrics.
7. Objective	Ensures morally sound decision-making regardless of profit.	Ensures company is governed in a way that protects stakeholder value and legal compliance.

 

5. Significance of Business Ethics

Significance	Explanation	Example
Trust and Reputation	Ethical behavior builds public trust and enhances brand image.	Tata Group is known for integrity and is respected globally.
Customer Loyalty	Customers support ethical brands.	The Body Shop gained loyal customers for opposing animal testing.
Attracts Employees	Talented individuals prefer ethical workplaces.	Google’s code of conduct encourages innovation and honesty.
Reduces Legal Risks	Ethical firms avoid fines and litigation.	Volkswagen’s emission scandal led to billions in fines.
Sustainable Growth	Ethics ensure long-term business survival.	Ben & Jerry’s integrates social missions into business strategy.

 

6. Significance of Corporate Governance

Significance	Explanation	Example
Investor Confidence	Transparent governance attracts investors.	Infosys is valued for its corporate governance, drawing foreign investment.
Risk Management	Reduces chances of fraud, mismanagement.	Laxmi Sunrise Bank introduced checks after governance-related challenges.
Compliance and Legal Safety	Ensures adherence to laws and regulations.	Failure at Satyam highlighted the need for governance reforms (in India).
Long-Term Value Creation	Sound governance leads to stable performance.	Unilever Limited’s board structures focus on consistent returns.
Stakeholder Satisfaction	Balances interests of all groups, not just shareholders.	Mahindra & Mahindra involves employee and community development.

So, ethics and corporate governance are integral pillars for building responsible, sustainable, and trustworthy businesses. While ethics guides individuals and organizations in making morally sound decisions, corporate governance ensures that companies are managed with accountability, transparency, and fairness. Together, they foster a culture of integrity, protect stakeholder interests, and enable long-term value creation.

Ethical behavior enhances trust, loyalty, and reputation, whereas strong governance minimizes risks, ensures compliance, and attracts investors. The evolution of these concepts—driven by scandals, legal reforms, and rising stakeholder expectations—reflects their growing relevance in today’s globalized, interconnected world.

Frameworks like stakeholder theory, the triple bottom line, and rights-based approaches help companies align profit-making with social responsibility. As businesses face complex ethical dilemmas in areas like AI, data privacy, and environmental impact, integrating ethics with robust governance is not just desirable but essential. Ultimately, companies that uphold both ethics and governance are better positioned to thrive and lead with purpose.

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Case Analysis

GreenHarvest AgroTech Ltd. is an India-based agri-business company that specializes in developing organic fertilizers and eco-friendly farming technologies. Established in 2015, it has become a respected brand among farmers for its ethical practices, commitment to sustainability, and its mantra: "Feeding the future, ethically.

In 2023, GreenHarvest was awarded by the Ministry of Agriculture for its sustainable farming innovation. The company also gained recognition from international NGOs for empowering rural women through employment and training programs. As a result, it enjoys a strong brand reputation, consumer trust, and investor confidence.

However, in 2024, the company faced declining profits due to rising raw material costs, inflation, and increasing competition from cheaper chemical-based fertilizer companies. In response, the board began to push for aggressive growth strategies and tighter cost control.

In January 2025, GreenHarvest’s procurement team discovered a new low-cost supplier of organic inputs — BioGrow International, based in Southeast Asia. The supplier offers raw materials at 40% less cost than the current Indiai supplier, which could reduce production costs substantially and help the company regain profitability.

At first glance, BioGrow seems legitimate: it has legal permits, ISO certifications, and good financial statements. However, an internal audit team member found a report by an environmental watchdog stating that BioGrow operates near a protected forest and may be involved in illegal deforestation and groundwater depletion. Moreover, human rights organizations have raised concerns that the company allegedly pays below minimum wage and hires children seasonally during harvest periods.

No legal charges have been filed against BioGrow — and the supplier strongly denies the allegations, calling them “competitor propaganda.” Their website and documentation appear clean. Nonetheless, the reputational risk is real.

At the executive meeting, the leadership team is divided.

CFO’s Position:

"We need to save the business. We’re not breaking any laws, and nothing has been proven. If we keep relying on expensive domestic suppliers, we’ll lose market share. Cost-cutting is ethical if it helps keep the company alive and saves jobs."

COO’s View:

"BioGrow can fulfill bulk orders on time — something our local suppliers can’t guarantee during the rainy season. Operational efficiency should be prioritized."

Head of Sustainability’s Warning:

"Working with BioGrow undermines everything we’ve built. Our brand is based on sustainability and ethics. If even one news outlet picks up this controversy, our image is ruined."

HR Director’s Concern:

"If reports of labor abuse are true and we knowingly contract with them, we become complicit. Our employees joined us because they believed in our values. How will they feel?"

Board Members (Mixed View):

Some board members favor caution and reputational protection; others argue that survival must come first — “We can’t do good if we go bankrupt.”

Additional Complexity:

Investors are pressuring for a return to profitability within two quarters. A delayed decision may result in the loss of a key foreign investor who supports rapid expansion.

Farmers’ cooperatives, who depend on GreenHarvest’s subsidized fertilizer programs, will be affected if costs are not reduced. Thousands of smallholder farmers rely on GreenHarvest’s products.

Government agencies are unaware of BioGrow’s controversy, but the Ministry of Environment has recently increased scrutiny of companies involved in cross-border sourcing.

GreenHarvest's Code of Ethics explicitly states:

"We will not knowingly engage with partners whose actions harm the environment or violate human dignity."

Yet, the legal team points out that the clause allows room for interpretation unless “harm” is clearly defined.

As part of the strategic management committee, you have been asked to evaluate and advise the board on whether to:

Proceed with BioGrow, citing cost advantages and legal safety;

Pause and investigate further, risking delay and potential loss of investor confidence;

Reject the supplier, upholding ethical values, but absorbing financial strain.

Meanwhile, an anonymous email arrives in the company’s ethics inbox claiming to be from a former BioGrow employee. The message alleges that the company hides its environmental violations using bribes and intimidates whistleblowers. However, the source cannot be verified.

Questions for Students:

i.            Is it ethical to engage with BioGrow if they’re legally clean but ethically questionable?

ii.            How do the major ethical theories (Utilitarianism, Deontology, Virtue Ethics, Rights, Justice) guide your decision?

iii.            What should the role of GreenHarvest’s Board of Directors be in this scenario?

iv.            How should the company’s code of ethics influence governance and strategic decisions?

v.            Which stakeholders are affected and how should their interests be balanced?

vi.            Can you justify a trade-off between short-term gains and long-term values?

vii.            Should the company prioritize profit or principle? What are the long-term consequences of either choice?

viii.            How do frameworks like CSR, Triple Bottom Line, and Stakeholder Theory apply?

ix.            Can a company like GreenHarvest recover from ethical damage if exposed?

x.            Is “staying in business” a sufficient justification for ethically gray decisions?

xi.            Should the company disclose this dilemma to stakeholders?

xii.            What governance mechanisms should be strengthened to avoid similar situations in the future?