Ethics is the study of morality, to understand and justify it through reflection and examination.

By Robert A. Scott, President, Adelphi University

Ethics is in the news. Corporate fraud allegations at Olympus and Satyam, following the example of Enron, plus new cases of insider trading, have brought renewed attention to corporate codes of ethics. Colleges and universities are also updating their codes, following revelations at Penn State and elsewhere. But what do we mean by ethics? How do we distinguish between and among ethics, morality, and law?

Morality is about knowing right from wrong, good from evil, with standards often grounded in some religious or theological tradition. By law, we mean legal standards codified by the public’s representatives and interpreted by the courts. However, as we have seen, laws are often honored in the breach, as we note banks paying fines for disobeying laws they earlier promised to obey.

Ethics is the study of morality, an attempt to understand and justify morality through reflection and examination.

The terms ethics and morality are often used interchangeably. However, the term morality refers to behavior, right or wrong, or a person, good or bad. Ethics is about the examination of morality. Therefore, business ethics or corporate ethics is about understanding what an enterprise considers to be right and wrong behavior.

One can note in corporate codes of ethics a frequent reference to the terms “fairness” and “fair”. Fairness, by most definitions, represents a state, condition, or quality of being fair; free from bias or injustice; even-handedness; impartial; free from discrimination and dishonesty; free from favoritism, self-interest, or personal preferences in judgment.

Some actions may be legal and meet contemporary standards of morality, yet not withstand ethical analysis. This was the case with slavery. It was legal; most religious institutions and theologians did not speak out against it as wrong; yet it did not stand up under ethical inquiry.

While morality is about right and wrong, ethics is often concerned with one “right” or correct action compared to another one. Those who favored slavery argued that they had a right to personal property and defined certain human beings as property. Fortunately, this logic was overturned for the most part, although we still see evidence of its application. In either case, cries for ethical consideration can be a harbinger of changes in moral and legal standards, because ethics tests the justness of moral standards. As such, it is neither conservative nor liberal; its lens is that of fairness and equity in its assessment of what contemporary arbiters call right and wrong, good and bad.

Other examples of rights in tension with other rights might be represented by animal rights advocates who think that fox hunts, hunting in general, and eating meat are immoral and do not meet ethical tests. This is a more difficult argument to make, but is a good example of how customs, culture, and the continuity of traditions can affect the setting of standards for behavior.

Corporate codes of ethics are applied to actual and apparent conflicts of interest. Such conflicts are permissible if they pass the “smell test” and do not seem to be giving special advantage to one party. However, potential conflicts are not confined to financial matters, but may have to do with other forms of relationship. For example, the interrelatedness of directors is subject to ethical scrutiny. Off-line agreements, or acting together without the knowledge of other directors, can undermine director obligations for proper behavior.

Perhaps the area where the role ethics can be highlighted most clearly in the corporate setting are in the following examples. Take a company with a large amount of excess cash. It has the opportunity to invest in research and development for new products; hire additional staff in order to increase productivity and volume or relieve worker stress; invest in equipment to increase productivity; improve compensation through enhanced salary and benefits; contribute to the community through charitable contributions; invest in equipment and systems that will reduce its impact on the environment; increase the dividend for shareholders of record; use the extra cash to buy back stock; or award bonuses to senior executives without regard to the achievement of corporate goals. All choices are legal and moral, but the last two give unequal advantage to corporate officers who are likely to own more stock options than others, including employees and other shareholders, and stand to benefit more than others. This is not necessarily bad, as buying back stock, for example, can have positive effects, but the choices available should be discussed and the corporate code of ethics referenced in spirit as well as in word.

Another example is for the executives to seek the sale of the company structured in a manner that benefits management more than shareholders. Or, consider the product sales urged by investment executives which required great risk and debt, but which ultimately were protected by federal policy for all but the buyers.

These are examples of management actions which are legal, or at least not illegal, and most would say are not immoral; yet they raise questions because they seem to give unfair advantage to some parties over others without adequate notification or justification. They may fail the “fairness” test, the test of “fair dealing”, which the corporate code says is paramount.

Boards of directors are under great scrutiny and must develop a culture of conscience, not just a culture of compliance, if they are to retain the confidence of the public which grants them their charter.

Based on an invited presentation at a Continuing Legal Education Seminar hosted by Ruskin Moscou Faltischek, Uniondale, New York, November 9, 2011. This is a revised version of the essay published in “Garden City Patch” (the AOL News Service) on December 19, 2011.

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