AP® Business with Personal Finance review sheet from Aim for Five (aimforfive.com/business-finance/units/1/1-6)
Unit 1 · Topic 1.6
1.6 Business Ethics
Unethical behavior can happen anywhere in a business, especially when incentives reward it. Businesses use rules, training, consequences and good examples to encourage ethical choices, and leaders handle ethical dilemmas by weighing how each option affects every stakeholder.
Key terms
- business ethics
- code of conduct
- ethical dilemma
- internal stakeholders
- external stakeholders
- reputation
What unethical behavior looks like, and why it happens
Unethical behavior in business includes faking or hiding information, using company property for personal gain, and harming employees or customers. It can happen at every level, from a new cashier to the CEO.
Incentives often explain it. An incentive is a reward or penalty that pushes people to act a certain way. If a salesperson earns a bonus only for hitting a sales number, they might be tempted to pressure customers or misstate what a product can do.
How businesses encourage ethical behavior
Ethics isn't only about avoiding trouble. A reputation for doing the right thing can attract customers and employees and build brand loyalty. How a business responds when something goes wrong affects its relationships with workers and customers, how the public sees it, and in the end its profits.
- A code of conduct: written rules about how employees should act.
- Training so employees know the rules and how to handle tricky situations.
- Consequences inside the business, like warnings or firing, when someone breaks the rules.
- Leaders who model ethical behavior, since employees copy what leaders do more than what they say.
Ethical dilemmas and stakeholders
An ethical dilemma is a situation where doing one right thing conflicts with another right thing, or with a business goal. Suppose a company values transparency (being open and honest) and also wants to protect jobs. If it discovers a minor safety flaw, announcing a recall is transparent but costly, and the cost might mean layoffs.
Stakeholders are the people and groups affected by a business's choices.
| Type | Who they are | Examples |
|---|---|---|
| Internal stakeholders | People directly involved in running the business | Owners, managers, employees |
| External stakeholders | People outside the business who are affected by it | Customers, government agencies, the local community |
Two ways leaders decide
One approach is to list the possible responses, weigh the benefits and costs of each for every stakeholder group, and choose the one with the greatest total benefit or the least total harm. Leaders also think about the effect on the company's reputation and culture.
The other approach is to choose the response that best fits the business's vision, mission and values, even if it isn't the cheapest. Either way, a strong answer names specific stakeholders and specific effects.
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Weighing an ethical dilemma
A bakery's top-selling cookie is labeled nut-free, but the owner learns that a supplier's oats may be processed on equipment shared with nuts. Fixing the label means fewer sales to families with allergies; switching suppliers raises costs. Explain how the owner could decide, using stakeholders.
Show the solutionHide the solution
- Step 1: Name the clash: honesty and customer safety against the goal of keeping sales and costs steady.
- Step 2: List the options: keep selling as is, change the label, or switch to a certified nut-free supplier.
- Step 3: Weigh effects on stakeholders. Customers with allergies (external) face serious harm if the label is wrong. Employees and the owner (internal) face lower profit from a label change or higher costs from a new supplier. The community and regulators (external) would react badly to a hidden allergy risk.
- Step 4: Keeping the current label risks the greatest harm, a customer's health, and could destroy the bakery's reputation. Changing the label right away, then looking for a certified supplier, causes the least total harm and fits a value of honesty.
Answer: Using a stakeholder cost-benefit approach, the owner should fix the label immediately and then decide whether a certified nut-free supplier is worth the higher cost, because the harm to allergic customers outweighs the short-term loss in sales.
Common mistakes
- Calling any hard business choice an ethical dilemma. A dilemma involves a clash with a core value, such as honesty or fairness.
- Listing customers or the government as internal stakeholders. They're external; owners, managers and employees are internal.
- Explaining an ethical decision without naming who is affected and how.
On the exam
- Expect questions that ask which action would best encourage ethical behavior, or which stakeholder group a choice would affect most.
- When you explain a response to a dilemma, use the language of benefits and costs for specific stakeholders, or tie the choice to the business's stated values.
Connected topics
Videos
Check yourself: 1.6 Business Ethics
4 questions on 1.6 Business Ethics. Pick an answer to see if you got it, and why.
Brightline Solar sells home solar panels. Its salespeople earn a bonus for every contract signed before the end of each quarter.
Near the end of one quarter, a sales manager learned that several salespeople had told customers that a government rebate was "guaranteed," even though customers had to apply for it and might not qualify.
Brightline's code of conduct requires salespeople to describe rebates accurately. If Brightline lets the affected customers cancel, it will miss its quarterly sales goal, and some salespeople will lose their bonuses.
Hypothetical business scenario
Which of the following best explains why the salespeople may have acted unethically?
The sales manager faces an ethical dilemma mainly because
Which of the following is an external stakeholder in this situation?
Which response best fits a leader who chooses the option causing the least total harm while following the company's code of conduct?
0 of 4 answered