1.6 Business Ethics
How businesses encourage ethical behavior and how leaders respond to ethical dilemmas.
The hot trunk
Friday night, and the week's chocolate has spent five days in a hot car. Every bar melted and reset with a pale gray bloom across it: sealed, safe, and clearly inferior, and no buyer would notice until after paying. The cousin's advice is to sell it anyway. Topic 1.6 carries two skills: explaining how and why firms encourage ethical conduct, and explaining how leaders respond once values pull against each other.
Unethical behavior and incentives
Take the conduct first. The course names three families of unethical behavior: hiding or falsifying information, using company property for private benefit, and doing harm to employees or to customers. All three occur at every level of an organization, from a first-week hire up to an owner. Selling bloomed chocolate silently is concealment, because the buyer pays on a belief the seller knows to be false. A helper handing friends free drinks is using property that is not his. A stall leaving a wobbling table until it injures somebody has done harm.
Incentives steer those choices, and scenarios test the mechanism directly. An incentive is anything that rewards a particular action. Pay a helper for each box sold and every hidden defect pays him. Reward a salesperson on commission alone and the reward attaches to closing rather than to honesty. An organization rewarding the wrong conduct has manufactured its own ethics problem.
Redesign the reward and the same force reverses. Pay that helper a flat rate plus a bonus tied to how satisfied families are, and honesty becomes the paying strategy. This was a design choice, which is why leaders work out what an incentive will produce before announcing it.
Four tools
Four tools do the encouraging, and the course expects all four by name.
- A code of conduct, meaning written expectations for behavior. The three values on the cooler lid become rules: defects get disclosed, nobody receives free product, cash is counted twice.
- Training, so staff meet the rule on a quiet Tuesday rather than discovering it on a Friday with money on the table.
- Internal repercussions, because staff judge a rule by what happens to whoever breaks it.
- Modeling, because people copy a leader's conduct long before they memorize a leader's document.
The fourth carries the other three. An owner who quietly sells the bloomed bars himself has revoked his own code.
Why ethics pays
Why bother? Because ethical practice draws customers and staff and builds loyalty, and because how a firm answers an ethical failure shapes its customer relationships, its employee relationships, its reputation, and its earnings.
Run the numbers. Concealment adds roughly forty dollars this weekend. One parent bites a stale bar, photographs it in the team chat, and five topics' worth of accumulated trust drains away in an afternoon. Pre-orders stop, the league remembers, and the table he earned in Topic 1.5 goes elsewhere. Forty dollars now against every remaining Saturday is the comparison to run before calling concealment profitable.
Staff read the same signal. The best helper in the park would rather work somewhere that will never ask him to mislead a buyer, and once this operation hires beyond family, its reputation does half of the recruiting.
The ethical dilemma
Now the harder case. An ethical dilemma arises when a value collides with other values, or with the organization's own goals and practices. The bloomed chocolate hardly qualifies, since honesty points one way and only money argues back. A real dilemma squeezes from both directions at once.
Suppose disclosure means the weekend earns nothing, and the cousin was relying on his share to replace a broken bike lock. Openness toward buyers now runs against fairness toward the person who works for you. A second version: a caterer bound to confidentiality discovers that a supplier is overcharging a fellow small business, so candor toward a peer collides with a promise already given.
A value can also collide with a goal. The fair-price pledge meets a wholesale increase of twenty percent. Holding the price keeps the pledge and surrenders margin, while raising it protects the goal and strains the pledge. Neither route is dishonest, and each costs the business something it cares about.
Stakeholders
Weighing a dilemma requires the full list of people it reaches, and that list has two halves. Internal stakeholders are directly involved in operations, decisions, and outcomes: owners, managers, employees. External stakeholders are not employed by the firm yet hold a genuine interest in what it decides: customers, government bodies, community members.
Map this business. Inside are the owner and his cousin. Outside are the buying families, the league issuing the permit, and the park office hosting play. Suppliers sit outside as well, because the wholesale parent holds a real stake in the order book without ever working a Saturday. Count only the inside column and half of the consequences vanish from the analysis.
How leaders respond
Two methods dominate. The first totals benefits and costs for each stakeholder group and picks whichever action delivers the greatest total benefit or the least total harm. The second picks whichever action best matches the organization's vision and goals.
Apply the first. Conceal: the owner gains about forty dollars, the cousin keeps a share, families pay full price for damaged goods, and both the permit and the order book are exposed. Disclose and discount: about fifteen dollars comes in from half-price melt bars, families get a fair deal and a reason to believe the menu, and the cousin watches a rule cost something real. Totaled, the discount wins, because the harm avoided exceeds the money surrendered.
The second method lands identically here, since the vision promises game days families can trust. Where the two diverge, apply whichever the question names, list the groups, and show the reasoning rather than asserting a conclusion.
Reputation and culture belong in the weighing too. Reputation is what outsiders remember. Culture is what insiders repeat, because everyone who watches a dilemma get settled learns what this organization actually rewards. The melt bars sell at half price under a handwritten sign, and by Sunday several parents have mentioned it.
Recap and essential knowledge
Codes, training, consequences, and example encourage ethical conduct, and firms invest in all four because trust outlasts any single weekend. Where values collide, leaders count costs and benefits across every group, or let the vision decide. Topic 1.7 asks who owns this operation and who pays when something goes wrong.
| Section | Essential knowledge |
|---|---|
| Unethical behavior and incentives | 1.6.A.1 |
| Four tools | 1.6.A.2 |
| Why ethics pays | 1.6.A.3 |
| The ethical dilemma | 1.6.B.1 |
| Stakeholders | 1.6.B.2, 1.6.B.2.i, 1.6.B.2.ii |
| How leaders respond | 1.6.B.3 |
Worked Examples
Weighing two responses to an ethical dilemma
Total the benefits and costs of two responses across every stakeholder group.
The chocolate is safe but visibly damaged. Concealing the damage and selling at full price earns about forty dollars this weekend. Disclosing the damage and selling at half price earns about fifteen dollars. Set out the stakeholder groups and total both options.
- Weekend revenue from concealing the damage
- about $40
- Weekend revenue from disclosing and discounting
- about $15
- Internal stakeholder groups
- owner, helper
- External stakeholder groups
- families, league, park office
1. List the stakeholder groups before totaling anything
Inside sit the owner and the helper. Outside sit the buying families, the league issuing his permit, and the park office where play happens. A total that counts only the owner has already lost the question.
2. Compute the short-run money difference
Forty dollars from concealment against fifteen dollars from disclosure leaves a twenty-five dollar gap in favor of concealing, and that gap is the entire benefit on that side of the table.
3. Enter the costs the money column leaves out
Concealment transfers that twenty-five dollars from the families, who pay full price for damaged goods, and puts the permit and the pre-order book at risk with the league and the park office. Disclosure costs the owner and the helper twenty-five dollars and costs nobody else anything.
4. Total the columns and choose
Concealing produces twenty-five dollars of benefit for two people and harm spread across three external groups plus the business's own reputation. Disclosing produces a twenty-five dollar cost to two people and benefit to everybody else. The least total harm sits with disclosure.
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Answer
Disclose and discount. The twenty-five dollar advantage of concealing is captured by two internal stakeholders and paid for by three external groups, so disclosure produces the least total harm.
Why it matters
The second method reaches the same place without arithmetic, because the business's stated vision promises game days families can trust. When a question names a method, use that method and show the stakeholder list rather than asserting the conclusion.
Pricing the cost of lost trust
Compare a one-off gain against the repeat business it puts at risk.
A bakery can pass off day-old loaves as fresh and earn thirty dollars extra today. Suppose four of its sixty regular customers notice and stop coming, and a regular customer spends six dollars a week for the remaining twenty weeks of the year. Work out whether the thirty dollars was worth it.
- One-off gain from mislabeling
- $30
- Regular customers lost
- 4
- Weekly spend per regular customer
- $6
- Weeks remaining in the year
- 20
1. Compute what one lost customer costs
Six dollars a week across twenty remaining weeks is one hundred twenty dollars of revenue that will not arrive.
2. Scale it to every customer lost
Four customers at one hundred twenty dollars each is four hundred eighty dollars of forgone revenue.
3. Compare with the one-off gain
Thirty dollars earned today against four hundred eighty dollars lost across the rest of the year leaves the bakery four hundred fifty dollars worse off, before counting anything the four customers tell their neighbors.
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Answer
A $450 net loss. The thirty dollar gain is wiped out sixteen times over by four hundred eighty dollars of lost repeat business.
Why it matters
This is why the course treats ethical practice as a way of attracting and keeping customers rather than as a cost. The gain from a concealment is immediate and small; the loss is delayed, larger, and spreads through word of mouth.
Key Terms
Practice Questions
6 questions. Nothing here is recorded or scored.
- Question 11.6.A.1
Osei Printworks
Marcus Osei owns Osei Printworks, a small print shop with two employees. The shop's posted core values are quality and honesty. A rush order of five hundred event programs comes back with a printing flaw visible only under bright light. Reprinting costs three hundred dollars and misses the customer's deadline. A new employee suggests shipping the programs without mentioning the flaw. Marcus is also drafting the shop's first code of conduct, and he is considering a bonus that pays employees for each rush order completed on schedule.
The employee's suggestion to ship the programs without mentioning the flaw is best described as which of the following?
- A.Concealment of product information from a buyer.
- B.Misuse of company property for a personal purpose.
- C.An ethical dilemma between two of the core values.
- D.A legal factor acting on the local print market.
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Answer: A
- A.
- Correct. Shipping a product with a known flaw and saying nothing means the customer pays believing something the seller knows is false, and concealing information is a named form of unethical behavior.
- B.
- Misusing company property means using the business's assets for personal purposes, like running personal errands in a company van. Nothing here involves property; the wrong is in what the customer is not told.
- C.
- Marcus faces a genuine decision with hard tradeoffs, and an ethical dilemma exists when a core value conflicts with another core value or with a business goal, like honesty pulling against the deadline promise. The employee's specific suggestion is silence for gain, and that is unethical behavior rather than the dilemma itself.
- D.
- A legal factor is an external rule the business must comply with, borrowed here from Topic 1.3. The suggestion is a choice inside the shop, not a law or regulation acting on the print market.
- Question 21.6.A.1, 1.6.A.2
The proposed bonus for each rush order completed on schedule is best described as which of the following?
- A.A provision of the code of conduct being drafted.
- B.An internal repercussion imposed after unethical behavior.
- C.A demonstration of ethical behavior for the employees.
- D.An incentive structure that could reward cutting corners.
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Answer: D
- A.
- A code of conduct is a written statement of expected behavior, and Marcus is drafting his separately. A bonus is a payment structure; it rewards outcomes rather than stating standards.
- B.
- Points the concept backward. A repercussion is a consequence imposed after unethical behavior to discourage it. The bonus arrives before any behavior and rewards output, so it shapes choices going in. Sort these tools by direction: incentives pull toward behavior, repercussions push back after it.
- C.
- Modeling is a leader demonstrating ethical behavior for employees to see. A bonus demonstrates nothing; it pays for speed, and pay structures are incentives.
- D.
- Correct. An incentive is a reward that encourages a particular action, and incentive structures can influence individuals toward unethical choices that benefit themselves. A bonus tied only to on-schedule completion rewards speed, and it pays the same whether the flaw is disclosed or hidden, so it quietly leans on employees to ship and stay silent.
- Question 31.6.A.2
Marcus reprints the order at the shop's expense, tells both employees why, and shows them the note he sent the customer. This action best represents which of the following?
- A.An external repercussion aimed at an employee.
- B.Modeling of ethical behavior for the staff.
- C.Outsourcing of an ethical decision to others.
- D.A conflict of interest inside the shop.
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Answer: B
- A.
- A repercussion is a consequence aimed at someone who behaved unethically, and nobody here is being punished. Marcus absorbed a cost to demonstrate a value, and demonstration is the modeling tool.
- B.
- Correct. Modeling means leaders demonstrate the ethical behavior themselves so employees learn the standard by watching it, and Marcus performed the standard in front of his staff at real cost. When a question shows a leader acting rather than rewarding or punishing, look for modeling.
- C.
- Nothing was outsourced; Marcus made the call himself and carried it out in his own shop. Outsourcing, from Topic 1.7, means hiring another business to handle a function.
- D.
- A conflict of interest arises when a personal interest pulls against a duty, like an employee steering work to a relative's firm. Marcus's personal cost ran with his duty to the customer, not against it.
- Question 41.6.B.2.i, 1.6.B.2.ii
Which of the following best identifies a correct classification of stakeholders in a business?
- A.Customers are internal stakeholders, and owners are external ones.
- B.Managers are external stakeholders, and neighbors are internal ones.
- C.Owners are internal stakeholders, and employees are external ones.
- D.Employees are internal stakeholders, and regulators are external ones.
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Answer: D
- A.
- Both halves are reversed. Owners sit at the center of the business's decisions and outcomes, and customers, however loyal, stand outside its operations.
- B.
- Managers run daily operations from inside the business, and neighboring residents hold their stake from outside it. Both labels are flipped: seniority and importance play no part, only direct involvement.
- C.
- Gets owners right and then exports the employees. The sorting rule is direct involvement, and an employee works inside daily operations, so employees classify as internal alongside owners and managers.
- D.
- Correct. Internal stakeholders have direct involvement in the business's operations, decisions, and outcomes: owners, managers, and employees. External stakeholders hold a vested interest without being employed by or directly involved in the business, and the government agencies that regulate an industry sit in that group alongside customers and community members.
- Question 51.6.B.3, 1.6.B.2
A furniture maker must decide whether to switch to a cheaper overseas supplier whose delivery delays would reach customers. Estimated effects: keeping the current supplier costs internal stakeholders ninety thousand dollars in higher input prices and benefits external stakeholders seventy thousand in reliable deliveries; switching benefits internal stakeholders ninety thousand in savings and costs external stakeholders one hundred fifty thousand in late and canceled orders. Using the approach of choosing the greatest total benefit or least total harm across all stakeholders, which decision do the estimates support?
- A.Switching, since it saves internal stakeholders ninety thousand dollars.
- B.Switching, since customer losses are not costs to the company.
- C.Keeping the supplier, since its net cost is the smaller of the two.
- D.Keeping the supplier, since its price stability protects margins.
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Answer: C
- A.
- Totals one column and stops. The method exists precisely to count every stakeholder group, and an option that pays insiders by costing outsiders more is exactly what the arithmetic is built to catch.
- B.
- The method counts costs to every stakeholder group, and customers are external stakeholders whose losses sit at the center of the calculation. Excluding them is not a version of the approach; it is the refusal of it.
- C.
- Correct. Work each option across all stakeholders. Keeping the supplier: seventy thousand in benefits minus ninety thousand in costs is a net cost of twenty thousand. Switching: ninety thousand in benefits minus one hundred fifty thousand in costs is a net cost of sixty thousand. Both options hurt, so the method picks the least total harm, and twenty thousand is the smaller loss.
- D.
- Lands on the right decision through reasoning the estimates do not contain. Nothing in the figures reports margins or price stability; they report benefits and costs by stakeholder group, and the method compares those totals. A correct verdict reached from absent evidence is still the wrong answer.
- Question 61.6.A.3
Which of the following best explains how a business's response to an ethical lapse can affect its profitability?
- A.Profitability is unaffected unless an actual law has been broken.
- B.The response moves customer and employee trust, which shapes revenue.
- C.A sincere apology returns customers to their previous spending.
- D.Ethical responses matter only for corporations with public brands.
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Answer: B
- A.
- Borrows legal thinking from Topic 1.3. Legal consequences are one risk, and reputational consequences can arrive whether or not any law is involved, because customers rarely wait for a court ruling before they stop buying.
- B.
- Correct. The chain runs response, then relationships and perception, then profitability. Customers tend to reward trust with loyalty and to leave after deception, employees weigh employers the same way, and both movements land on the revenue and cost lines.
- C.
- An apology changes what customers believe rather than settling it. Some return, some do not, and what the business does afterward, such as repairing the harm at its own expense, carries as much weight as the words.
- D.
- Small businesses live and die on trust at least as much as large ones; a neighborhood shop's reputation travels through the same customers it serves every day. Nothing about the response-to-profitability chain requires a public brand.
In a class? These questions are not recorded.
Take the same questions as a scored quiz and your teacher will see that you have finished this section.
Take the scored quiz →6 common mistakes on 1.6
The wrong moves students actually make on these questions, why each one is wrong, and what to do instead. Part of the practice tier.
See what is includedEssential knowledge covered
1.6.A.1 · 1.6.A.2 · 1.6.A.3 · 1.6.B.1 · 1.6.B.2 · 1.6.B.2.i · 1.6.B.2.ii · 1.6.B.3