1.6 Business Ethics

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

Transcript (159 lines)

0:00 Friday night before game day, and the candy seller opens the garage to pack the
0:04 coolers. The week's chocolate order sat in a hot car trunk for five days,
0:09 and every bar has melted and hardened again with a pale gray bloom across the
0:13 surface. Still safe to eat, still sealed, and noticeably worse:
0:18 dull, crumbly, stale at the edges.
0:21 Nobody would know until after they paid.
0:24 His cousin shrugs and says sell it, nobody checks a chocolate bar.
0:28 Tomorrow's families would hand over real money for a product he knows is damaged,
0:32 and the only person who can decide what happens next is the owner.
0:36 This is Topic 1.6 of AP Business with Personal Finance.
0:41 Two skills by the end: explain how and why businesses encourage ethical behavior,
0:46 and explain how business leaders respond to ethical dilemmas.
0:50 Practice questions for this topic are in the next video.
0:52 Let's go.
0:55 Start with the behavior itself.
0:58 Unethical behavior in business includes falsifying or concealing information,
1:03 misusing company property, and causing harm to employees or customers.
1:08 Selling the bloomed chocolate without a word is concealing information,
1:12 because the customer pays believing something the seller knows is false.
1:17 A cousin who hands free drinks to his friends from the cooler is misusing
1:21 company property.
1:23 A stand that ignores a wobbling table until it collapses on a customer has
1:28 caused harm.
1:29 And unethical behavior can occur at every level of a business,
1:33 from the newest employee to the owner.
1:36 Incentive structures can influence people toward unethical choices that benefit
1:40 themselves, and scenarios test exactly this mechanism.
1:45 An incentive is a reward or motivation that encourages a particular action.
1:50 Pay the cousin per box sold, and every damaged bar he hides earns him money.
1:55 Pay a salesperson only on commission, and the incentive rewards the sale and ignores
2:01 the honesty.
2:02 A business that rewards the wrong behavior manufactures its own ethics problems,
2:07 so leaders design incentives with the behavior they will produce in mind.
2:12 And the same force pushes the other way when the design is right:
2:16 pay the cousin a flat rate plus a small bonus tied to families' satisfaction
2:21 instead of boxes moved, and the incentive now rewards the honesty.
2:26 The difference was a design choice the owner controlled.
2:31 Four tools do that work.
2:33 First, a code of conduct: a formal, written set of expectations and guidelines
2:38 for behavior inside the organization.
2:41 The three values on his cooler lid grow up into written rules:
2:45 damaged stock gets disclosed, free product goes to nobody,
2:49 cash gets counted twice.
2:51 Second, training: employees learn the ethical guidelines and practice what to do
2:56 before the situation is live, so the cousin hears the damaged-stock rule on a
3:00 calm Tuesday instead of learning it live on a Friday night with money on the table.
3:05 Third, internal repercussions: consequences inside the business for
3:10 crossing the line, because employees measure a rule by what happens when
3:14 someone breaks it.
3:16 Fourth, modeling: leaders demonstrate the behavior themselves,
3:21 because employees copy what the owner does long before they memorize what the owner
3:25 wrote.
3:26 If he sells the bloomed bars, no code of conduct will convince his cousin that
3:30 honesty matters here.
3:34 Why invest in all four tools?
3:36 Because ethical practices can attract customers and employees and contribute to
3:41 brand loyalty, and a business's response to an ethical failure can shape its
3:46 customer and employee relationships, its public perception,
3:50 and its profitability.
3:52 Run the hallway arithmetic.
3:53 Selling the damaged chocolate earns roughly forty extra dollars this weekend.
3:58 One parent bites a stale bar, posts a photo in the team group chat,
4:02 and the trust built across three topics of this course drains out of the business in
4:06 an afternoon.
4:08 The customers stop pre-ordering, the league remembers,
4:11 and the far-field table he earned in Topic 1.5 goes to somebody else.
4:16 Forty dollars today against every Saturday that follows:
4:20 run that comparison before calling the concealment profitable.
4:24 A seller known for pulling damaged stock without being asked earns repeat
4:28 pre-orders, and the pull works on workers too, because ethical businesses can
4:33 attract employees along with customers.
4:36 The best helper at the park wants to work somewhere that will never ask him to lie
4:40 to a customer, and when the snack box eventually hires beyond family,
4:45 its reputation will do half the recruiting.
4:49 Now the harder case.
4:51 An ethical dilemma exists when a core value conflicts with other core values,
4:56 or with the business's goals and practices.
4:59 The bloomed chocolate is barely a dilemma, because honesty points one direction and
5:04 only profit argues back.
5:06 Real dilemmas pinch from both sides.
5:14 Suppose disclosing the damage means the weekend earns nothing,
5:18 and the cousin was counting on his share to replace a broken bike lock:
5:22 transparency toward customers now collides with empathy toward the person who works
5:26 for you.
5:27 Or take a different collision: a caterer promised confidentiality by a supplier
5:33 discovers the supplier's prices gouge a fellow small business,
5:37 and honesty toward a peer now pulls against a promise already made.
5:41 Two values, both real, pulling opposite directions.
5:46 That conflict is the dilemma, and the exam expects you to name both values before
5:51 judging any response to one.
5:53 A dilemma can also pit a value against a business goal or practice.
5:57 His fair-prices pledge meets a cost spike: the wholesale price of chocolate jumps
6:02 twenty percent, and holding prices honors the pledge while eating the margin,
6:07 while raising prices protects the profit goal and strains the pledge.
6:12 Neither option is dishonest, and both cost something the business cares about,
6:16 which is what separates a dilemma from a temptation.
6:20 When a scenario shows a choice with a clean right answer and a profitable wrong
6:24 one, that is a test of ethical behavior.
6:28 When every option on the table wounds something the business values,
6:32 that is a dilemma, and the question will ask how leaders respond.
6:38 Before a leader can weigh a dilemma, they need the full list of people it touches,
6:42 and that list splits in two.
6:44 Internal stakeholders are individuals or groups with direct involvement in the
6:48 business's operations, decisions, and outcomes: owners,
6:53 managers, and employees.
6:56 External stakeholders are individuals or groups not directly employed by the
7:00 business who still hold a vested interest in its decisions:
7:04 customers, government agencies, and community members.
7:08 Map the snack box. Internal: the candy seller and his cousin.
7:12 External: the families who buy, the league that grants the permit,
7:16 and the park office that hosts the games.
7:19 Suppliers sit outside too, because the wholesale parent holds a real stake in the
7:24 snack box's orders without working a single Saturday inside it.
7:28 Every option on the table this Friday night lands somewhere on that map,
7:32 and a decision that only counts the internal column misses half its
7:36 consequences.
7:39 Leaders often use one of two methods to choose.
7:42 Method one: evaluate the benefits and costs of each option for each stakeholder
7:47 group, then choose the action with the greatest total benefit or the least total
7:51 harm.
7:53 Run the bloomed chocolate through it.
7:55 Selling concealed: the owner gains forty dollars, the cousin keeps his share,
8:00 and the families collectively overpay for damaged goods while the business risks a
8:04 trust collapse worth far more than forty dollars.
8:07 Disclosing and discounting: the owner keeps maybe fifteen dollars selling melt
8:12 bars at half price, the families get a fair deal and a reason to trust the menu,
8:17 and the cousin learns the rule by watching it cost something.
8:20 Total the columns and the discount wins, because the harm avoided outweighs the
8:24 profit surrendered.
8:26 Method two: choose the action most consistent with the business's vision and
8:30 goals.
8:31 His vision from Topic 1.5 promises game days families can trust,
8:36 so the same answer falls out without any arithmetic.
8:39 Here the two methods land on the same choice, and when a scenario splits them,
8:44 apply whichever method the question names, list the stakeholders,
8:47 and show the reasoning.
8:49 One more layer: leaders also weigh the impact on reputation and company culture.
8:54 Reputation is how outsiders remember the business's choices,
8:58 and company culture is what insiders learn to repeat,
9:01 because every employee who watches a leader resolve a dilemma learns what this
9:05 business actually rewards.
9:11 Saturday morning, the melt bars sell at half price with a hand-written sign,
9:15 and by Sunday three parents have mentioned the sign in the group chat.
9:19 Two tells before the practice video, because scenarios blur these on purpose.
9:25 A leader acting is modeling, while a leader punishing is a repercussion,
9:29 so watch what the leader actually does.
9:32 And when a response question offers arithmetic, count every stakeholder group
9:36 before totaling, because a half-counted table produces a confident wrong answer.
9:42 That's Topic 1.6.
9:44 When values collide, leaders count the benefits and costs across every
9:48 stakeholder group, or let the vision break the tie.
9:52 The snack box now has rules, two workers, real money,
9:56 and a reputation worth protecting.
9:58 That raises a paperwork question nobody has asked yet:
10:02 who actually owns this business, who is responsible if something goes wrong,
10:06 and whose job is which?
10:08 That's Topic 1.7, Organization, Roles, and Responsibilities.
10:13 The 1.6 practice video and the full Unit 1 playlist are linked on screen.
10:17 See you next time.

The hot trunk

Friday night, and the week's chocolate has spent five days in a hot car. Every bar melted and reset with a pale gray bloom across it: sealed, safe, and clearly inferior, and no buyer would notice until after paying. The cousin's advice is to sell it anyway. Topic 1.6 carries two skills: explaining how and why firms encourage ethical conduct, and explaining how leaders respond once values pull against each other.

Unethical behavior and incentives

Take the conduct first. The course names three families of unethical behavior: hiding or falsifying information, using company property for private benefit, and doing harm to employees or to customers. All three occur at every level of an organization, from a first-week hire up to an owner. Selling bloomed chocolate silently is concealment, because the buyer pays on a belief the seller knows to be false. A helper handing friends free drinks is using property that is not his. A stall leaving a wobbling table until it injures somebody has done harm.

Incentives steer those choices, and scenarios test the mechanism directly. An incentive is anything that rewards a particular action. Pay a helper for each box sold and every hidden defect pays him. Reward a salesperson on commission alone and the reward attaches to closing rather than to honesty. An organization rewarding the wrong conduct has manufactured its own ethics problem.

Redesign the reward and the same force reverses. Pay that helper a flat rate plus a bonus tied to how satisfied families are, and honesty becomes the paying strategy. This was a design choice, which is why leaders work out what an incentive will produce before announcing it.

Four tools

Four tools do the encouraging, and the course expects all four by name.

A code of conduct, meaning written expectations for behavior. The three values on the cooler lid become rules: defects get disclosed, nobody receives free product, cash is counted twice.
Training, so staff meet the rule on a quiet Tuesday rather than discovering it on a Friday with money on the table.
Internal repercussions, because staff judge a rule by what happens to whoever breaks it.
Modeling, because people copy a leader's conduct long before they memorize a leader's document.

The fourth carries the other three. An owner who quietly sells the bloomed bars himself has revoked his own code.

Why ethics pays

Why bother? Because ethical practice draws customers and staff and builds loyalty, and because how a firm answers an ethical failure shapes its customer relationships, its employee relationships, its reputation, and its earnings.

Run the numbers. Concealment adds roughly forty dollars this weekend. One parent bites a stale bar, photographs it in the team chat, and five topics' worth of accumulated trust drains away in an afternoon. Pre-orders stop, the league remembers, and the table he earned in Topic 1.5 goes elsewhere. Forty dollars now against every remaining Saturday is the comparison to run before calling concealment profitable.

Staff read the same signal. The best helper in the park would rather work somewhere that will never ask him to mislead a buyer, and once this operation hires beyond family, its reputation does half of the recruiting.

The ethical dilemma

Now the harder case. An ethical dilemma arises when a value collides with other values, or with the organization's own goals and practices. The bloomed chocolate hardly qualifies, since honesty points one way and only money argues back. A real dilemma squeezes from both directions at once.

Suppose disclosure means the weekend earns nothing, and the cousin was relying on his share to replace a broken bike lock. Openness toward buyers now runs against fairness toward the person who works for you. A second version: a caterer bound to confidentiality discovers that a supplier is overcharging a fellow small business, so candor toward a peer collides with a promise already given.

A value can also collide with a goal. The fair-price pledge meets a wholesale increase of twenty percent. Holding the price keeps the pledge and surrenders margin, while raising it protects the goal and strains the pledge. Neither route is dishonest, and each costs the business something it cares about.

Stakeholders

Weighing a dilemma requires the full list of people it reaches, and that list has two halves. Internal stakeholders are directly involved in operations, decisions, and outcomes: owners, managers, employees. External stakeholders are not employed by the firm yet hold a genuine interest in what it decides: customers, government bodies, community members.

Map this business. Inside are the owner and his cousin. Outside are the buying families, the league issuing the permit, and the park office hosting play. Suppliers sit outside as well, because the wholesale parent holds a real stake in the order book without ever working a Saturday. Count only the inside column and half of the consequences vanish from the analysis.

How leaders respond

Two methods dominate. The first totals benefits and costs for each stakeholder group and picks whichever action delivers the greatest total benefit or the least total harm. The second picks whichever action best matches the organization's vision and goals.

Apply the first. Conceal: the owner gains about forty dollars, the cousin keeps a share, families pay full price for damaged goods, and both the permit and the order book are exposed. Disclose and discount: about fifteen dollars comes in from half-price melt bars, families get a fair deal and a reason to believe the menu, and the cousin watches a rule cost something real. Totaled, the discount wins, because the harm avoided exceeds the money surrendered.

The second method lands identically here, since the vision promises game days families can trust. Where the two diverge, apply whichever the question names, list the groups, and show the reasoning rather than asserting a conclusion.

Reputation and culture belong in the weighing too. Reputation is what outsiders remember. Culture is what insiders repeat, because everyone who watches a dilemma get settled learns what this organization actually rewards. The melt bars sell at half price under a handwritten sign, and by Sunday several parents have mentioned it.

Recap and essential knowledge

Codes, training, consequences, and example encourage ethical conduct, and firms invest in all four because trust outlasts any single weekend. Where values collide, leaders count costs and benefits across every group, or let the vision decide. Topic 1.7 asks who owns this operation and who pays when something goes wrong.

Section	Essential knowledge
Unethical behavior and incentives	1.6.A.1
Four tools	1.6.A.2
Why ethics pays	1.6.A.3
The ethical dilemma	1.6.B.1
Stakeholders	1.6.B.2, 1.6.B.2.i, 1.6.B.2.ii
How leaders respond	1.6.B.3

Essential knowledge covered by each section of these notes

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.
\text{short-run gap}=\text{concealed revenue}-\text{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.

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.
\text{loss per customer}=\text{weekly spend}\times\text{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.
\text{net position}=\text{one-off gain}-\text{forgone revenue}

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

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.

See what is included

Essential knowledge covered

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