Importance of Business Ethics and Costs of Unethical Behaviour – Ethics in Business (Senior 3 Entrepreneurship) | Ganzaa

Ethics in Business

Lessons

Senior 3 · Entrepreneurship

Ethics in Business

4 lessons

Lesson 4 of 4

Importance of Business Ethics and Costs of Unethical Behaviour

25 min

The most expensive lie in motoring

In September 2015, the United States Environmental Protection Agency found that Volkswagen, one of the world’s largest car makers, had programmed its diesel engines to switch on their pollution controls only during laboratory tests. On the road, the cars gave off up to 40 times more nitrogen oxides than the standard allowed. The software had been fitted to about 11 million cars worldwide.

The chief executive resigned within days. In 2017 a United States court ordered the company to pay a criminal fine of US$2.8 billion, and by June 2020 the scandal had cost Volkswagen about US$33.3 billion in fines, penalties, settlements and buying back cars. A decision to cheat on a test, taken to save money, became one of the costliest in business history.

Definition

Unethical behaviour: conduct that breaks accepted principles of right and wrong, such as lying, cheating, bribery or harming others for gain, whether or not it is also illegal.

Reputation: what customers, workers, partners and the public believe about a business, built up over time from its behaviour.

Trust: confidence that a person or business will act honestly and keep its promises. It takes years to build and can be lost in a day.

Why business ethics matters

Importance	How ethics helps the business
Customer trust and loyalty	customers come back to sellers they trust and recommend them to others
Good reputation	an honest name attracts customers, partners and investors at no extra cost
Motivated, loyal workers	staff stay longer and work better in a fair workplace; good applicants want to join
Access to finance and partners	banks, SACCOs and investors lend to firms whose accounts and promises they can believe
Avoiding fines and court cases	following the law and treating people fairly avoids penalties, compensation and legal costs
Good relations with government	honest taxpayers and law-abiding firms are trusted partners and face fewer problems
Long-term survival and growth	trust built over years is an asset that cheating firms cannot copy
Fair markets and national development	honest competition, paid taxes and less corruption benefit the whole economy

The costs of unethical behaviour

Costs to the business	Costs to society
fines, compensation and legal costs	unsafe or fake goods harm people’s health
lost customers and falling sales	tax evasion leaves less money for schools, hospitals and roads
a damaged reputation that is slow to repair	corruption makes honest firms lose contracts and raises prices
withdrawn licences or certificates; closure	pollution damages land, water and health
low staff morale, theft and high staff turnover	people stop trusting markets and businesses
lenders and partners refuse to deal; managers may face prison	investors avoid countries where cheating is common

In Rwanda, the costs are backed by law: for example, Law N° 54 of 2018 on fighting against corruption punishes bribery, and Law N° 011 of 2026 relating to competition and consumer protection gives consumers the right to repair, replacement or refund for defective goods, with administrative fines that double for a second offence and quadruple for a third within two years.

Tip

Exam technique: short run against long run. Questions on the costs of unethical behaviour reward answers that compare the quick gain with the later loss: “Short weight earns a little extra each day, but when customers find out, the trader loses their business for good.” Always name who bears the cost: the business, its stakeholders or society.

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Worked example

Worked example 1: does short weight pay? (illustrative figures)

A trader sells sugar at Frw 1,600 a kilogram to 40 customers a day, but gives each “kilogram” only 950 g. She trades 26 days a month.

Extra takings a day: each customer gets 0.05 kg less, so $40 \times 0.05 \times 1{,}600 = 3{,}200$ , Frw 3,200.

A month: $3{,}200 \times 26 = 83{,}200$ . After 3 months: $83{,}200 \times 3 = 249{,}600$ .

Then customers discover the cheat. She loses 15 regular customers, each of whom spent Frw 30,000 a month with her at a profit margin of 15%, and pays a fine of Frw 100,000.

Lost profit a month: $15 \times 30{,}000 \times \frac{15}{100} = 67{,}500$ . Over the remaining 9 months: $67{,}500 \times 9 = 607{,}500$ .

Net result for the year: $249,600 - 607,500 - 100,000 = - 457,900$ a loss of Frw 457,900, and the lost customers may never return.

Worked example 2: counting the costs of the Volkswagen case

Who bore a cost	What it was
The company and its owners	about US$33.3 billion by June 2020; a damaged brand
Managers	the chief executive resigned; managers faced criminal charges
Customers	cars recalled or bought back; owners lost value and trust
Society	extra air pollution harmful to health; lower trust in emissions testing

Lesson: one unethical decision spread its costs to every group of stakeholders, and cost the owners far more than the cheating ever saved.

Warning

Common mistakes. (1) Saying “it’s only unethical if you are caught”: the harm to others happens either way, and most cheating is found out in the end. (2) Listing only costs to the business: unethical behaviour also costs customers, workers and society. (3) Treating ethics as a cost with no return: the benefits in the first table are real business advantages.

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Practice

Define unethical behaviour and reputation.
Explain five reasons why business ethics is important to a business.
State four costs of unethical behaviour to a business and four to society.
A butcher adds water to meat to make it heavier. Explain how this could affect (a) the butcher’s business; (b) customers; (c) the community.
A shop gains Frw 2,000 a day for 60 days by overcharging, then loses customers worth Frw 50,000 of profit a month for the next 6 months. Find its net gain or loss.
“Ethics is a luxury for big companies; small traders must cheat to survive.” Evaluate this statement.

Show answersHide answers

Unethical behaviour: conduct that breaks accepted principles of right and wrong, such as lying, cheating or bribery, legal or not. Reputation: what people believe about a business, built from its behaviour over time.
Any five, explained: customer trust and loyalty; good reputation; motivated workers; access to finance and partners; avoiding fines and legal costs; good relations with government; long-term survival; fair markets.
Business: fines and legal costs; lost customers; damaged reputation; withdrawn licences; low morale; partners refuse to deal. Society: harm to health; less tax for public services; corruption; pollution; loss of trust.
(a) when discovered, customers leave, inspectors may fine or close the shop; (b) customers pay for water and may risk their health if the water was unclean; (c) trust in local traders falls, and honest butchers lose customers to suspicion.
Gain: $2{,}000 \times 60 = 120{,}000$ . Loss: $50{,}000 \times 6 = 300{,}000$ . Net: $120,000 - 300,000 = - 180,000$ , a loss of Frw 180,000.
Disagree. Small traders depend even more on regular customers and word of mouth, so one discovered cheat can ruin them, as Worked example 1 shows. Honest weights, fair prices and good service are cheap ways for a small trader to stand out. Hardship is real, but cheating usually makes it worse.

1The most expensive lie in motoring

2Why business ethics matters

3The costs of unethical behaviour

The most expensive lie in motoring

Why business ethics matters

The costs of unethical behaviour