Business 101: Principles of Management

Ethics are something that is easy to give examples of but hard to define. In this lesson, we will discuss ethics and how they apply in the business world, as well as discuss an example of an ethical situation using Enron.

Areas for Ethics in Contemporary Management

Have you ever been asked to define something like the sun or religion? All these areas are easier to describe than define, and we run into the same issue when we look at ethics. Ethics is something that we can talk about, give examples of, but it's hard to define because each person has their own interpretation of what is or is not ethical.

Therefore, if we define ethics, we are indeed giving someone what our definition is, but it is up to the person we are speaking to and their viewpoint on ethics to understand our position. Hence, ethics, though commonplace in society, has a wide range of interpretation. However, the formal definition of ethics is the rules of conduct recognized in respect to a particular class of human actions or a particular group, culture, etc.

If we think about the ethical issues that face managers in contemporary business, we really are looking at some broad topics that, once again, are open to interpretation. Basically, managers deal with ethics in the following areas:

• Employee relations - how the company or manager relates and works with the employees
• Investor relations - the relationship a company has with those that support it financially
• Customer relations - how a company takes care of, relates to and communicates with its customers
• Vendor relations - the relationship a company has with those that supply the products and services it needs

Managers handle these four areas in the same manner with a focus on being fair and communicating honestly. To be fair, it is hard to deal openly and honestly in all four of these areas because there's information that cannot or should not be told to some of these people.

For example, if you are struggling financially, you might not tell your employees because you do not want to create panic. In this case, your personal definition of ethics comes into play. Some people would agree that it is ethical to not tell them because that would prevent panic, but others would say they have every right to know. This supports our theory that ethics is subjective and takes on different meanings from person to person and situation to situation.

A Famous Lapse in Business Ethics

There are examples of blatant, non-ethical behavior, and the most recent one, and probably the most high profile one, is the Enron collapse. Enron was a large, powerful company that grew to staggering size in a very short time. They bought and sold energy and natural gas. Their stock was flying like a rocket. Once their unethical behavior was uncovered and the company collapsed, it was staggering. Their stock went from $70.00 a share to $0.25 a share in just one year. Why you ask? Well, let's take a moment to look at the story of Enron.

As I said, Enron bought and sold energy, and the fact is many companies do that. The problem is that Enron created a new type of accounting system called mark-to-market. While it's a little confusing, mark-to-market allowed Enron to count sales and profits of energy that had not yet occurred on their account books. For example, they would look at a sale they thought would happen in a year but log the profits of the sale now. Can you say unethical? You sure can.

The collapse came when the projected profits did not become realized. The money did not come in, and the company began to collapse. I know what you are thinking: 'Wow, that is some terrible lapse in ethics,' but it gets worse.

As the company was collapsing, the senior executive managers were not allowing their employees to sell off the stock in their company-backed retirement plans (all of which was Enron stock). This was because it would lower the value of the Enron stock if all the employees started selling it off, and the senior managers wanted to keep the price high so they could sell off their stock and make as much money as possible. They made hundreds of millions of dollars, and when the collapse hit, their employees were literally left with nothing. Individuals that had hundreds of thousands of dollars in Enron retirement stock literally had nothing because the stock was worthless.

In the end, the senior executives did go to jail, so there is justice, but the complete lapse of ethics is legendary. There was bold-faced lying, deception and outright criminal acts involved.

Ethics Makes Strange Bedfellows

One of the main reasons this was allowed to happen, or why it happened, was Enron and their accounting firm, Arthur Andersen, worked together to compile their SEC (Security and Exchange Commission) documents. The SEC is the governing body whose main mission is to protect investors and to keep the stock market in order. This was, at the time, incredibly unusual, but no one thought much about it until the collapse. The collapse itself ended Arthur Andersen as a company, and as I said, brought the leaders of Enron to criminal court where they were sent to jail.

Lesson Summary

So, as you can see, ethics is indeed a matter of perspective, but we all seem to have a general, understood limit of how far they can be pushed. Is it ethical to sell a car if you know the engine sometimes does not start? No, and most of us would agree with that position. However, what Enron executives did was the car situation on steroids, and they did it with a complete lack of conscience and disregard for anyone but themselves.

It's important to remember that while we need to act ethically as managers in the four areas of employee, investor, customer and vendor relations, the perception of what is ethical is still subjective, but the guidelines of honesty and fairness are relatively widely accepted.