Chapter: Business and Ethical Issues

Welcome! In this chapter, we are exploring the "moral compass" of a business. In the past, many people thought the only goal of a business was to make as much profit as possible. Today, however, society expects more. We are going to look at ethics—which basically means doing what is "right" rather than just what is legal.

This topic is part of the External Influences section. This means that factors outside of the business (like what customers think is right or wrong) can change how a business chooses to act.

What is "Ethical Behaviour"?

Ethical behaviour means following a set of moral rules. It is about being fair to employees, suppliers, and the community. While a law tells a business what it must do, ethics tells a business what it should do to be a "good" member of society.

Key Ethical Issues in Business

The syllabus identifies four main ethical areas that modern businesses must consider. Let’s break them down:

1. Child Labour

This involves using children to work in factories or farms. While this might be legal in some countries or poorly regulated, it is widely considered unethical. Children should be in school, and using them as cheap workers can damage a business's reputation permanently.

2. Paying Fair Wages

Even if a country has a low legal minimum wage, an ethical business might choose to pay a "living wage." This ensures that employees can actually afford basic needs like food, housing, and healthcare. If workers are paid too little, they may be demoted or unhappy, which lowers productivity.

3. Paying Fair Prices to Suppliers

Large businesses often have a lot of power over small suppliers (like farmers). An ethical business does not "squeeze" these suppliers by demanding prices so low that the supplier cannot make a profit. By paying a fair price, the business helps the supplier stay in business, which secures the supply chain for the future.

4. Using Ethical Suppliers

A business isn't just responsible for its own actions; it is also judged by who it buys from. An ethical business will check if its suppliers damage the environment or use unfair labour practices. If your supplier is doing something "wrong," customers will often blame you!

Quick Tip: Don't confuse "Ethics" with "Environment." While they are related, ethics focuses more on fairness and human treatment, whereas "Business and the Environment" (Chapter 6.3) focuses on things like pollution and recycling.

How Do Businesses Respond to Ethical Issues?

Businesses don't just sit and wait; they take active steps to show they are ethical. They might:

  • Create a Code of Conduct: A document that tells all employees and suppliers exactly how they are expected to behave.
  • Change Suppliers: Stopping contracts with any supplier found to be using child labour or underpaying workers.
  • Apply for Ethical Labels: Using symbols on packaging (like "Fair Trade" symbols) to prove to customers that they have acted fairly.

The Pros and Cons of Being Ethical

In the exam, you will often be asked to evaluate whether a business should behave ethically. This means looking at both sides!

The Advantages (The "Pros")

1. Improved Reputation: Customers are more likely to buy from a brand they trust. This can lead to higher sales and a larger market share.

2. Customer Loyalty: People often feel good about buying ethical products and will keep coming back, even if prices are a bit higher.

3. Attracting Employees: Many people (especially talented ones!) want to work for a company that does good in the world. This makes recruitment easier.

4. Attracting Investors: Many "green" or "ethical" investors only put their money into businesses that have high ethical standards.

The Disadvantages (The "Cons")

1. Higher Costs: Paying fair wages and fair prices to suppliers costs more money. This increases the total costs of the business.

2. Higher Prices for Customers: To keep making a profit, the business might have to increase the selling price. If customers are very price-sensitive, they might switch to a cheaper, less ethical competitor.

3. Lower Profits (Short-term): Because costs are higher, the profit margin might be lower in the short term. \( \text{Profit} = \text{Revenue} - \text{Total Costs} \). If costs go up, profit usually goes down unless sales increase significantly.

Example: Imagine a clothing brand. If they stop using a cheap factory that uses child labour and move to a more expensive factory that pays fair wages, their cost per shirt might rise from \( \$5 \) to \( \$8 \). They must now decide whether to accept lower profits or charge customers more.

Pressure Groups

A Pressure Group is a group of people who join together to try to change the way a business or government acts. If a business acts unethically, pressure groups might:

  • Organise a boycott (telling everyone to stop buying from that business).
  • Start a social media campaign to damage the business's reputation.
  • Hold protests or talk to the news media.

(Note: You will learn more about this in Chapter 6.5!)

Common Mistakes to Avoid

  • "Ethical means the same as Legal": WRONG. Something can be legal (like paying a very low wage in some countries) but still be unethical.
  • "Profit is not important for ethical businesses": WRONG. Even ethical businesses need profit to survive; they just choose to make profit in a "fair" way.
  • "Being ethical always leads to more profit": NOT NECESSARILY. While it helps reputation, the high costs can sometimes lead to lower profits if the business cannot manage its expenses well.
Key Takeaway Summary

Ethical business is about doing the right thing regarding child labour, wages, and suppliers. While it increases reputation and loyalty, it often comes with higher costs. Successful businesses try to find a balance where they can be both "good" and "profitable" at the same time.