Business Ethics

Ethical Issues and Risks in Business

Risks for Organizations Engaging in Unethical Behavior

Businesses engaging in unethical behavior risk fines, layoffs, lawsuits, reparation of damages, decreased investor confidence, decreased employee morale, and economic destabilization. Examples of these consequences can be seen in subprime mortgages and the housing crisis.

Unethical behavior may create short-term profits, but the long-term consequences can be vast. The behavior may subject the organization to fines or reparation of damages (money or action to make amends for a wrong) imposed by a legal authority or regulatory agency, such as the Food and Drug Administration or the Environmental Protection Agency. Customers may boycott the organization, resulting in a decrease of sales and profits. This decrease in profit can affect the organization's stock price, which also affects whether future stakeholders will want to invest in the organization and whether current stakeholders will continue to support the organization.

An organization also risks losing valuable employees if it behaves unethically. An employee of an organization engaging in unethical behavior can remain loyal to the organization, exit, voice their concern to the organization, or describe the unethical behavior to a news media outlet or government agency.

Employees may remain loyal because they want to keep their jobs and feel they are part of the organization. However, if employees are making or observing decisions that make them uncomfortable, their ethical principles may cause them to examine the situation. Another option is for the employee to exit. This can involve the employee leaving the organization or just removing themselves from the unethical situation. Last, the employee can voice a concern and help provide alternative practices—either by sharing concerns with management or with a news agency or governmental unit.

The risks of an organization engaging in unethical behavior can be seen in the subprime mortgage crisis beginning in 2007, when unverified income for home loans enabled people to borrow debt beyond their ability to pay when mortgage interest rates rose. This created the housing crisis. A subprime mortgage is normally issued by a lending institution to borrowers with low credit ratings. Borrowers expected that they could always sell a house for more than they paid, simply because trends indicated that the value of homes steadily increased over time. Mortgage lenders issued mortgages without verifying the borrower's financial information or the true value of the home and provided subprime mortgages at high interest rates to customers who had poor credit. At times, lenders encouraged loans that they knew the borrowers could not repay. When the housing market crashed, many homeowners were unable to pay back their loans. Banks pursued foreclosures, causing housing prices to fall further.

In response to the subprime mortgage crisis and the housing crisis, Congress amended the Truth in Lending Act (TILA), which prohibits unfair, abusive, or deceptive home mortgage lending practices. The Consumer Financial Protection Bureau established criteria in accordance with the act for lenders to determine whether the borrower can afford to repay the loan. A borrower's debt cannot exceed 43 percent of their income, up-front fees are limited to three percent, and rapidly rising "balloon payments," or large one-time payments due at the end of a loan period, are restricted.