1.6 Business Ethics

How businesses encourage ethical behavior and how leaders respond to ethical dilemmas.

Part 1 of 4 Unethical Behavior and Incentives

The course names three kinds of unethical behavior: falsifying or concealing information, misusing company property, and harming employees or customers. All three happen at every level, from a first-week hire to the owner.

Three kinds, one Saturday

Behavior	In the park
Concealing information	Selling bloomed, heat-damaged chocolate without saying so
Misusing property	A helper handing friends free drinks
Causing harm	Leaving a wobbling table up until it injures someone

An incentive is anything that rewards a particular action. Incentives steer whether people choose ethical or unethical behavior. Pay a helper per box sold and every hidden defect earns him money. An organization that rewards the wrong conduct has created its own ethics problem. Pay a flat rate plus a bonus tied to how happy the families are, and the helper earns more by being honest.

Part 2 of 4 How Businesses Encourage Ethical Behavior

Four tools

Tool	What it is	On the cooler lid
Code of conduct	Written expectations for behavior	Defects get disclosed, nobody gets free product, cash is counted twice
Training	Staff learn the rules before they face a real decision	The cousin learns the rules before his first Friday handling cash
Internal repercussions	What happens to whoever breaks a rule	Free drinks cost the helper his shift
Modeling	Leaders behaving as the code says	The owner never sells a bloomed bar himself

Staff copy a leader's conduct long before they memorize the code of conduct.

Ethical practice draws customers and staff and builds loyalty. Concealing the damage would add about forty dollars to this weekend's sales. If one parent then posts a photograph of a heat-damaged bar in the team chat, the business loses weeks of built-up trust in an afternoon. How a business answers a failure shapes its customer and employee relationships, its reputation and its profits.

Part 3 of 4 The Ethical Dilemma

An ethical dilemma exists when a core value collides with another value, or with the business's own goals or practices. The bloomed chocolate is a test of ethical behavior: honesty requires disclosing the damage, and the only reason to hide the damage is money. In an ethical dilemma, every option goes against a value or a goal the business holds.

Three dilemmas

Values in conflict	The conflict
Transparency and fairness	Disclosing the damage means the weekend earns nothing, and the cousin was counting on his share
Candor and a promise	A caterer bound to confidentiality sees a supplier overcharging a fellow small business
A value and a goal	The fair-price pledge meets a 20% wholesale increase: hold the price and lose margin, or raise it and strain the pledge

Part 4 of 4 Stakeholders and the Decision

Two rings: an inner ring of internal stakeholders, the owners, managers and employees, and an outer ring of external stakeholders: customers (the families), government (the park office), and community members and suppliers (the league, the wholesale parent). — An analysis that counts only the inner ring misses half of the consequences.

Who the decision reaches

	Internal stakeholders	External stakeholders
Who	Directly involved in operations, decisions and outcomes	Not employed by the business, with a real stake in what it decides
Examples	Owners, managers, employees	Customers, government agencies, community members
In the park	The owner and his cousin	The families, the park office that issues the permit, the league that hosts the games, the wholesale parent

Leaders respond in one of two ways. The first way is to total the benefits and costs for each stakeholder group, then choose the option with the greatest total benefit or the least total harm. The second way is to choose the action most consistent with the business's vision and goals. Leaders also weigh reputation and culture. Reputation is what external stakeholders remember about the business. Culture is the behavior that internal stakeholders repeat.

The heat-damaged bars sell at half price under a handwritten sign that explains the damage, and by Sunday several parents have mentioned the sign.

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.
$short-run gap = concealed revenue - disclosed revenue$
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.

Check answer

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.
$loss per customer = weekly spend \times weeks remaining$
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.
$net position = one-off gain - forgone revenue$

Check answer

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.
Check answerHide answer
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.
Check answerHide answer
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.
Check answerHide answer
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.
Check answerHide answer
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.
Check answerHide answer
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.
Check answerHide answer
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.

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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.

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CED Codes

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