The Theories of Business Ethics and How Business Ethics Influence the Companys Activities - Case Study Example

BUSINESS ETHICS: BANK MUSCAT By and Business Ethics: Bank Muscat Introduction Business ethics refer to the standards and principles that determine appropriate and acceptable conduct in business organizations (Ferrell & Ferrell 2014, p.30). Ferrell & Ferrell (2014, p.30) further points out that government regulators, customers, interest groups, the public, competitors, and each individual’s moral values and principles determine the acceptability of conduct in business. Many social advocates and consumers business should also consider the social implications of their activities rather than focus solely on making profits (Ferrell & Ferrell 2014, p.30). Social responsibility according to Ferrell & Ferrell 2014, p.30) refers to the obligations of an organization to ensure it positively affects the society while minimizing its negative impacts on the society. It is worthwhile to note that although the terms ethics and social responsibility are often used interchangeably, they do not have a similar meaning. Social responsibility is a general concept that relates to the impact of entire organization’s activities on the society, whereas business ethics is linked to a work group or an individual’s decisions that the society evaluates as right or wrong (Ferrell & Ferrell 2014, p.30). Background of Bank Muscat Bank Muscat is the flagship financial institution in Oman with a proven record of accomplishment of excellence in service. The bank enjoys a 40% market share in Oman. The bank’s head office is in Muscat, Oman and it has an extensive network of branches throughout Oman. Additionally, the bank operates directly and indirectly in all six Gulf Cooperation Countries states, a representative office in Singapore that focuses on trade business and financial institutions, and an associate in a securities company in India. The bank is publicly listed as a joint stock company on the Muscat Securities Market as well as on the Luxembourg Stock Exchange (Bank Muscat 2012, p.14). Bank Muscat is the pioneer bank in Oman to set up a fully functional Corporate Social Responsibility (CSR) department. The organization considers CSR as one of its central values, and the bank’s CSR policy is founded on a strong belief in the positive significance of CSR. The bank’s CSR policy reflects its care and concern for various segments of the society. Bank Muscat does not view social responsibility as mere involvement in charitable activities and organizing voluntary programs, but responsibility for the overall society’s development (Bank Muscat 2011, p.15). The objectives of this paper are to explore the concepts of business ethics and corporate social responsibility. The paper shall explore the main theories of business ethics and how business ethics influence the way an organization conducts its activities. The paper shall also explore the key elements and benefits of corporate social responsibility, with respect to what Bank Muscat is doing in terms of social responsibility, its impact on the organization’s image, and its impact on the Omani society. Theories of Business Ethics Teleological Theories: Utilitarianism The major teleological theories of business ethics are utilitarianism and egoism. Both theories are concerned with an action’s consequences. There is however a distinction between egoism and utilitarianism. \The consequences to other people will define acts as either ethical or unethical in utilitarianism, while in egoism the consequences to one’s self will define acts as either ethical or unethical (Gulcan 2011, p.2). Utilitarianism could be summarized by the phrase, “the greatest good for the greatest number” (Gulcan 2011, p.2).Under utilitarianism, actions are supposed to be evaluated based on their consequences. Such theories are thus called consequentialism. Jeremy Bentham founded classical utilitarianism, and his theory is grounded on his understanding of human nature. People always attempt to seek pleasures and evade pain. This type of moral behaviour is known as hedonism, and it considers good and pleasure as similar. The utility principle is the basis of Bentham’s theory, “the greatest good for the greatest number of individuals” and egoism. Under utilitarianism, an act is considered appropriate from an ethical perspective only if it produces a net utility that is greater than the net utility another act produces (Velasquez 2001, p.8). These utilitarian theories are further divided into two forms. These are rule utilitarianism and act utilitarianism. The two divisions are in terms of the issue of how to judge that a certain act is of relatively minimum disutility or relatively maximum utility (Hull 1979, p.2). Under act utilitarianism, a particular action is morally appropriate only if it can maximize utility (Snoeyenbos & Humber 2002, p.17). The act utilitarian is concerned with the rewards in the long run to harm ratios. It is attractive to people in business because it offers the cost-benefit analysis. Under act utilitarianism, subscribing certain rules in one society has utility, but it has disutility in another society. For instance, conforming to a rule like “never bribe” may have utility for a certain society. However, failure to conform to this rule will have utility in other societies. This implies that, it is ethical for act utilitarianism when maximizing utility requires breaking certain rules (Gulcan 2011, p.3). The other form is rule utilitarianism. Rules and maximization of utility have a key role to play under rule utilitarianism. Under rule utilitarianism, acts are considered appropriate or inappropriate on grounds that the rules will result in the greatest rewards. Rule utilitarianism differs from act utilitarianism because act utilitarianism focuses on the action’s consequences. On the contrary, rule utilitarianism focuses on conformance to the rules of the act. The belief of rule utilitarians is that whenever a rule results in the greatest benefit/reward/good, then it is appropriate. Therefore, under rule utilitarianism, acts should be evaluated by rules, while these rules should be tested by their consequences (Gulcan 2011, p.3). Deontological Theories Deontological theories of ethics differ from utilitarian theories. Under deontological theories, some acts are always wrong even though the consequences of the act are good. Acts are evaluated as unethical or ethical on the grounds of the duties or intentions of the person committing the act. Deontological theories of ethics place a great deal of emphasis on universal morality. The tenets of deontological theories of ethics can be summarized by the phrase, “do unto others as you would want them to do unto you” (Gulcan 211, p.4). Deontological theories distinguish between two forms of imperatives, hypothetical imperatives and categorical imperatives. The grounds of a hypothetical imperative will be the conditions. For example, “if someone wants to achieve Y, he/she should do X”. Conversely, a categorical imperative is not based on conditions and people have to obey them under whatever conditions. For instance, “you should do X”. Categorical imperatives rule out certain practices like coercion, theft and fraud in business. Ethical dilemmas can be eliminated in the business arena if the maxims of deontological theories of business ethics are widely accepted (Gulcan 211, p. 4-5). Evaluation of Business Ethics to Bank Muscat’s Stakeholders According to Ferrell & Ferrell (2014, p.31.) it is not only altruism that motivates organizations to make ethical decisions and implement social responsibility, but also a careful consideration of the “bottom line”. Good reasons exist for businesses to have a strong commitment to ethics. Firstly, organizations that act in ethical ways are known to realize higher profitability. Secondly, making ethical decisions or decisions leads to lower stress for lower levels of stress for corporate managers and employees. Thirdly, the organization’s reputation endures regardless of whether it is good or bad. Fourthly, ethical behaviour and ethical choices enhance leadership in an organization. Finally, the alternative option to voluntary ethical behaviour is costly and demanding regulation (Ferrell & Ferrell 2014, p.31). Bank Muscat has a strong commitment to ethical values for the sake of all its stakeholders. According to Bank Muscat Annual Report 2011, strong corporate reputation is an invaluable asset to any corporation and in case it is ever diminished, it is the most challenging to restore among the other assets of the corporation. Reputation has a critical influence on the organization’s long-term prosperity. A deteriorating reputation can have a negative impact on the growth of the business, its earnings, ability to raise capital, and its day-to-day management. In most cases, the risk exposes the company to costly litigation as well as financial losses. Bank Muscat acknowledges the fact that it is exposed to reputation risk in all aspects of the organization and this requires the responsibility to exercise great caution when dealing with its stakeholders (Bank Muscat 2011, p.65). Bank Muscat aspires to the highest possible standards in protecting its reputation while maintaining high ethical standards in all its business operations and dealings. The organization is aware of the fact that the responsibility for reputation risk has to spread across the entire organization and the banks takes measures to continuously reinforce this attitude and message throughout its network. The Bank’s Disclosure Committee is responsible for ensuring that all major developments within the organization that have the potential to affect investor confidence are reported to the general public and regulatory agencies promptly. The bank has designed and adopted a framework that aligns with the highest corporate governance standards. The bank’s communication department is responsible for measuring, monitoring, and continuously improving the image of the bank (Bank Muscat 2011, p.65). Development and Sustainability of Business Ethics A fundamental element of understanding ethics in business is learning how to recognize ethical issues. Ethical issues refer to recognizable opportunities, situations, or problems that need an individual to make a choice from among several actions that can be evaluated as wrong or right, unethical or ethical. Such a choice in business usually entails assessing monetary profits against what an individual judges as appropriate conduct. The best manner of judging a decision’s ethics is to see the situation from a competitor or customer’s viewpoint (Ferrell & Ferrell 2014, p.32). The establishment of ethics policies and standards ensures the sustainability of ethical conduct in business and within an organization. Understanding what prompts an individual to act in an unethical manner and how individuals make ethical choices can reverse the current trend of unethical business practices (Ferrell & Ferrell 2014, p.38). Three major factors influence ethical decisions within an organization: the opportunity to act unethically, the influence of co-workers and managers, and individual moral standing. While a person may have control over individual ethics out of the workplace, his/her colleagues and managers will place significant influence on the choices he/she will make in the form of authority. Actually, the examples and activities colleagues set, and the policies and rules the organization establishes are crucial for achieving consistent compliance with ethics in the organization (Ferrell & Ferrell 2014, p.39). It is not easy for workers to decide appropriate conduct in an organization if ethics policies and standards do not exist. Without such standards and policies, people might base their decisions on the conduct or behaviour of superiors and peers. Professional ethics codes are formalized standards and rules that define an organization’s expectations from its workers. Ethics policies, ethics training programs, and codes of ethics advance ethical behaviour by prescribing the kind of activities that are acceptable and unacceptable. They limit opportunities for misconduct by offering penalties for violating the rules, policies and standards. Enforcing such policies and codes through penalties and rewards promotes the acceptance of standards of ethics by workers. Elements of Corporate Social Responsibility Archie (1991, n. p) suggested four components that constitute corporate social responsibility (CSR). These include economic, legal, ethical and philanthropic responsibilities. In business history, firms were established as economic entities meant to offer products and services to the society. Generating profits was the key business motivation and incentive, and business organizations were the basic economic units of society. Its primary role as such was to produce goods and services needed or wanted by consumers and in the process make acceptable profits. At a later stage, the profit motive was transformed into a maximum profits notion, which has been an enduring value since that point in time. The rest of the business’s responsibilities are based on its economic responsibilities because without it other responsibilities are just moot considerations (Archie 1991, n. p). Evidence of how Bank Muscat is performing its economic responsibilities is evident in the encouraging financial results that the bank achieved in 2011. “Amid the challenging global economic and financial situation, the key business lines of the bank recorded healthy performance on expected lines” (Bank Muscat 2011, p.13). the bank achieved a net profit of 117.5 million Oman Riyals for the year 2011 against a net profit of 101.6 million Omani Riyals in 2010, a 15.6% increase (Bank Muscat 2011, p.13). Legal Responsibilities: Not only has the society placed sanctions on businesses to operate in line with the profit motive, but also expects them to comply with the regulations and laws promulgated by the government as the basis of which businesses should operate. Organizations are expected to strive to achieve their economic missions within the legal framework as a partial honour of the social contract between society and business. Legal responsibilities mirror a view of coded ethics since they surround the primary ideas of fair practice as set up by the legislature (Archie 1991, n. p). Bank Muscat performs its legal responsibilities by conforming to the laws, regulations, and standards that govern business practices and the banking sector. The bank demonstrates professionalism, vision, integrity and transparency in the conduct of its business and service. The bank is always working toward the successful implementation of the government’s objectives that are applicable to the bank (Bank Muscat 2012, p.20). Ethical responsibilities: ethical responsibilities embody the practices and activities that members of society prohibit or expect although not coded into laws. Ethical responsibilities embrace the norms, expectations and standards that mirror considerations for whatever employees, consumers, shareholders and the community consider as fair or in maintaining the respect and safeguarding of the stakeholders’ moral rights (Archie 1991, n. p). An example of how Bank Muscat exercises its ethical responsibilities is the launching of a major Health, Safety and Environmental (HSE) initiative in conjunction with the International Organization for Safety and Health (IOSH). In so doing, the bank became the first organization to create a safety management system in Oman’s banking sector (Bank Muscat 2011, p.15). Philanthropic responsibilities: Philanthropy covers corporate actions that respond to society’s expectations that organizations should be good corporate citizens. It includes active engagement in programs or acts of promoting human welfare. Some forms of philanthropy include contributions of financial resources or corporate time by organizations toward education, the arts, or the community (Archie 1991, n. p). An example of philanthropic activities that Bank Muscat engages in is providing higher education opportunities for Omanis. In collaboration with Oman Charitable Organization Bank Muscat offers scholarships for 26 students from low-income families to pursue higher education at various universities and colleges in Oman (Bank Muscat 2011, p.81). Rewards of Corporate Social Responsibility (CSR) to the Organization One of the rewards for organizations implementing social responsibility is better management and anticipation of a growing range of risks. Effectively managing the legal, governance, environmental, economic and social risks in a dynamic intricate environment, with more stakeholder scrutiny and oversight of corporate activities, can enhance the overall market stability and security of supply. Putting into consideration the interests of various stakeholders about an organization’s impact is one aspect of effective risk anticipation and management (Hohnen 2007, p.10). Another benefit of implementing CSR is improved management of reputation. Firms that have a good performance with respect to CSR are better positioned to develop their reputation, but organizations that have a poor performance may damage company and brand value when they are exposed. Brand equity or reputation has its foundation on values like trust, reliability, credibility, consistency, and quality (p.11). Firms that implement CSR have an enhanced capacity when it comes to recruiting, developing, and retaining employees. This may be an immediate consequence of pride in the organization’s practices and products, or of instituting better human resource practices. It may as well be a consequence of programs that boost the loyalty and morale of workers (Hohnen 2007, p.11). Companies that implement CSR benefit from improved competitiveness, marketing position, and innovation. Corporate social responsibility is as much about capturing opportunities as avoiding risks. Collecting feedback from a wide range of stakeholders is a valuable source of ideas for new markets, products and processes, which leads to increased competitive advantage. For example, an organization can get certification for social and environmental standards in order to qualify for supply of its products to specific retailers (Hohnen 2007, p.11). Besides these benefits, there are many other rewards of implementing CSR. These include: enhanced cost savings and operational efficiencies, enhanced capacity to attract and develop efficient and effective supply chain relations, increased capacity to adapt to change, enhanced social acceptance, access to capital, and enhanced relationships with regulators (Hohnen 2007, p.11-12). List of References Bank Muscat. 2011. Strength in Numbers: Strength in People, Bank Muscat Annual Report 2011, Web 20 May 2014. Pp. 11-81. Available at: Ferrell O.C. & Ferrell, J.F., 2014. Business Ethics: Ethical Decision Making & Cases, New York, McGraw Hill, Pp. 30-39. Hohnen, P., 2007. Corporate Social Responsibility: An Implementation Guide for Business, International Institute for Sustainable Development, Web 20 May 2014. Pp. 10-12. Available at: Bank Muscat., 2012. Bank Muscat Sustainability Report 2012, Web 20 May 2012. Pp. 14-15. Available at Archie, C., 1991. The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholder, Business Horizons, n. p. Gulcan N.Y., 2011. Some Ethical Approaches in Business, Kastamonu University Faculty of Arts and Sciences Department of Philosophy, Web 20 May 2014. Pp. 1-5. Available at Velasquez, M. G. 2001. Business Ethics Concepts & Cases, Business Ethics, Anderson University DBA. Pp. 8-9. Snoeyenbos M. & Humber, J., 2002. Utilitarianism and Business Ethics, in Robert Frederick, ed. A Companion to Business Ethics, UK: Blackwell. Pp. 17-23. Read More