What Are Ethical Issues?
Ethical issues are questions about what is considered right or wrong, fair or responsible in business decisions.
→ A business may make a decision that increases profit but has negative effects on employees, suppliers, customers or the environment.
→ Ethical business decisions consider the wider impact of business activities, not only profit.
Ethical Issues That May Affect Businesses
Child Labour
Child labour is the employment of children in work that may harm their health, education or development.
→ Businesses may face ethical concerns if their suppliers employ children.
→ A business may not directly employ children but could still be criticised if its suppliers use child labour.
Example: A clothing business discovers that one of its overseas suppliers employs children. The business must decide whether to continue using that supplier.
Why This Is an Ethical Issue
→ Children may receive very low wages.
→ Working conditions may be unsafe.
→ Employment may prevent children from attending school.
→ The business may face criticism if customers discover the practice.
Paying Fair Wages to Employees
A fair wage is a wage that employees consider reasonable in relation to their work and living costs.
→ Businesses may choose to pay more than the legal minimum wage.
→ Paying fair wages can improve employee motivation and loyalty.
→ Very low wages may increase labour turnover.
Example: A business could increase wages even though this increases its labour costs.
The Ethical Issue
→ Paying higher wages may be fairer to employees.
→ However, higher wages increase business costs and may reduce short-term profit.
Paying Fair Prices to Suppliers
Businesses may have significant bargaining power over smaller suppliers.
→ A large business may pressure suppliers to reduce their prices.
→ Extremely low prices may make it difficult for suppliers to pay workers fairly or maintain their operations.
Example: A large supermarket may negotiate very low prices from a small farmer. The supermarket must consider whether the price provides a fair return to the farmer.
Ethical Decision
→ Paying a fair price can support suppliers.
→ However, paying more increases the business’s costs.
Using Suppliers Who Do Not Damage the Environment
Businesses may choose suppliers that use environmentally responsible methods.
→ A business may avoid suppliers that cause excessive pollution.
→ It may choose suppliers that use sustainable materials or renewable energy.
Example: A furniture business may choose a supplier that obtains timber from responsibly managed forests.
Why This Is an Ethical Issue
→ The business may have lower costs by using a cheaper supplier.
→ However, the cheaper supplier may cause greater environmental damage.
→ The business must decide whether lower costs justify the environmental impact.
Other Ethical Issues
Working Conditions
→ Employees should have safe and reasonable working conditions.
→ Businesses may face criticism if workers are exposed to unsafe conditions.
Discrimination
→ Businesses should provide equal opportunities to employees.
→ Discrimination based on characteristics such as gender, age or disability can create ethical concerns and may also be illegal.
Honest Marketing
→ Businesses should avoid deliberately misleading customers.
→ False claims about products can damage customer trust.
Responsible Use of Resources
→ Businesses may need to consider whether their use of natural resources is sustainable.
How Businesses May Respond to Ethical Issues
Create an Ethical Code of Conduct
A business can establish rules describing the behaviour expected from employees and suppliers.
→ Employees know what standards they are expected to follow.
→ Suppliers can be required to meet ethical standards.
Check Suppliers
→ Businesses can investigate suppliers before entering contracts.
→ Regular inspections or audits can check working conditions and environmental practices.
Change Suppliers
→ A business may stop purchasing from suppliers that fail to meet its ethical standards.
→ It may choose a supplier that provides better working conditions or environmental practices.
Pay Fair Wages
→ Businesses can increase employee wages.
→ They may also provide benefits such as healthcare, paid leave or improved working conditions.
Pay Fair Prices to Suppliers
→ Businesses can negotiate prices that allow suppliers to remain financially sustainable.
→ Long-term contracts may provide suppliers with greater security.
Use Ethical Sourcing
Ethical sourcing means obtaining materials and products from suppliers that meet specified ethical standards.
→ Businesses may require suppliers to avoid child labour.
→ Suppliers may have to meet environmental standards.
→ Suppliers may have to provide safe working conditions.
Use Environmentally Responsible Suppliers
→ Businesses can select suppliers that reduce pollution, waste and resource depletion.
Communicate Ethical Policies
→ Businesses can explain their ethical standards to employees, customers and suppliers.
→ This can demonstrate commitment to responsible business practices.
Advantages of Being an Ethical Business
Improved Reputation
→ Customers may view the business more positively.
→ A good reputation can strengthen the brand.
Increased Sales
→ Some customers prefer to buy from businesses that treat employees, suppliers and the environment responsibly.
→ This may increase sales and market share.
Customer Loyalty
→ Customers who trust a business may continue buying from it.
→ Ethical behaviour can help build long-term relationships.
Employee Motivation
→ Employees may feel more valued when they receive fair wages and good working conditions.
→ Motivation and productivity may increase.
Lower Labour Turnover
→ Fair treatment can encourage employees to remain with the business.
→ This reduces recruitment and training costs.
Better Supplier Relationships
→ Paying fair prices and treating suppliers fairly can create stronger long-term relationships.
→ Reliable suppliers can improve the continuity of production.
Attracting Employees
→ People may prefer to work for businesses that have responsible employment practices.
Reduced Risk of Negative Publicity
→ Ethical behaviour can reduce the risk of criticism from customers, employees and the media.
Disadvantages of Being an Ethical Business
Higher Costs
→ Paying higher wages increases labour costs.
→ Paying fair prices to suppliers increases purchasing costs.
→ Environmentally responsible suppliers may charge higher prices.
Lower Short-Term Profit
→ Higher costs may reduce profit if selling prices cannot be increased.
Higher Product Prices
→ Businesses may pass higher ethical costs on to customers.
→ Higher prices may reduce demand.
Difficulty Finding Suppliers
→ It may be difficult to find suppliers that meet all the required ethical standards.
→ Changing suppliers can cause delays or increase costs.
Competitive Disadvantage
→ Competitors that do not follow the same ethical standards may have lower costs.
→ They may be able to charge lower prices.
Cost of Monitoring
→ Auditing suppliers and checking working conditions can be expensive.
→ Businesses operating internationally may need to monitor suppliers in many countries.
Ethical Business Decisions: The Trade-Off
Businesses often face a conflict between ethical objectives and financial objectives.
Example: Paying fair wages
→ Higher wages
→ Higher labour costs
→ Possible reduction in short-term profit
But:
→ Better employee satisfaction
→ Lower labour turnover
→ Higher motivation
→ Possible improvement in productivity
→ Possible improvement in reputation
Therefore, the effect of an ethical decision should be considered in both the short term and long term.
Should a Business Become More Ethical?
The decision depends on several factors:
→ Cost: How much will the ethical change increase costs?
→ Customers: Are customers willing to pay more for ethical products?
→ Competition: Are competitors already using ethical practices?
→ Reputation: Could ethical behaviour strengthen the brand?
→ Employees: Could better treatment improve motivation and reduce labour turnover?
→ Suppliers: Can suitable ethical suppliers be found?
→ Business objectives: Does the decision support the business’s long-term objectives?
Example
A clothing business discovers that its cheapest supplier uses poor working conditions.
Option 1: Continue using the supplier
→ Lower costs
→ Lower prices may be possible
→ Short-term profit may be higher
→ Risk of reputational damage
Option 2: Change to an ethical supplier
→ Higher purchasing costs
→ Possible increase in selling price
→ Improved reputation
→ Greater customer loyalty
→ Lower ethical risk
The most appropriate decision depends on the importance of ethical standards to the business, the additional cost, customer expectations and the likely long-term effects on sales and reputation.