what ethical issues confront entrepreneurship essay

3.1 Ethical and Legal Issues in Entrepreneurship

Learning objectives.

By the end of this section, you will be able to:

• Develop the ability to identify ethical and legal issues
• Develop an approach to resolve ethical/legal dilemmas once identified

What does it mean to be both ethical and socially responsible as an entrepreneur? When Martin Shkreli decided to increase the price overnight of a lifesaving HIV drug from $13.50 to $750 per pill, the public immediately characterized his actions as unethical. However, he viewed his position as responsible behavior that served the best interests of his company and his shareholders. Although Shkreli’s decision to raise prices was within legal limits, his actions were critically judged in the court of public opinion.

As an entrepreneur, should Shkreli’s concerns be with ensuring the sustainability of his business or with providing patients with a more affordable (less profitable) lifesaving drug? This fundamental question raises a number of related questions about the ethics of the situation. Was the decision to raise the price of the HIV drug by 5,000 percent in the best interest of the business? Was Shkreli aware of all aspects (ethical, legal, financial, reputational, and political) of the decision he made? To critically examine the decisions of an individual such as Shkreli, one needs an enhanced awareness of the multitude of stakeholders to be considered, as opposed to only shareholders.

Stakeholders

A comprehensive view of business and entrepreneurial ethics requires an understanding of the difference between shareholders , a small group who are the owners (or stockholders), and stakeholders , a large group that includes all those people and organizations with a vested interest in the business. Serving the needs of the shareholders, as perhaps Shkreli thought he was doing, is based on a limited view of organizational purpose. This view, known as the “ shareholder primacy ” doctrine, stems from a famous Michigan Supreme Court case involving the Ford Motor Company and two shareholders named the Dodge brothers (who would go on to form the Dodge Motor Company ). 3 This case established a precedent that lasted for decades, built on the premise that the only thing that should matter to a CEO and their company is shareholder profits. However, this concept has gradually been replaced by a more progressive viewpoint, mandating the consideration of all stakeholders when making key business decisions that have potentially far-reaching consequences. As an example of this new awareness, the Business Roundtable , a group of CEOs from the biggest and most successful companies in the US, recently released a new statement addressing business ethics. The CEOs prefaced this statement saying, “Together with partners in the public, private and non-profit sectors, Business Roundtable CEOs are committed to driving solutions that make a meaningful difference for workers, families, communities and businesses of all sizes.” 4

Work It Out

Business roundtable official statement on the purpose of a corporation 5.

Read the following statement on the purpose of a corporation from Business Roundtable:

“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide healthcare; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

• Question: Does it appear that Shkreli, in the preceding pharmaceutical example, considered all the stakeholders as the Business Roundtable Statement recommends, or did he follow the older shareholder primacy doctrine approach?

The aim of this chapter is twofold: first, to assist entrepreneurs in understanding the significance of ethics and the role that entrepreneurs play in developing an ethical and responsible organization. This includes the ability to recognize and identify both ethical dilemmas and legal issues that might arise. Second, we want to enable entrepreneurs to develop a moral compass that allows them to lead their business organization in a manner consistent with ethical and legal principles. An example of an ethical business organization is one that follows the Statement of Purpose by the Business Roundtable . This means creating a business environment in which each member of the organization is encouraged, enabled, and supported to develop the ethical capabilities to habitually and systematically differentiate between right or wrong. This also means that the organization, as a total system, provides consistent, meaningful, and timely consequences for unethical behavior and irresponsible actions.

Link to Learning

Read this article from Forbes to see a list of companies recently deemed the most ethical in the world.

Being an Ethical Entrepreneur

Whenever you think about the behavior you expect of yourself, in both your professional and personal life, you are engaging in a philosophical dialogue with yourself to establish the standards of behavior you choose to uphold—that is, your ethics . You may decide you should always tell the truth to family, friends, customers, clients, and stakeholders, and if that is not possible, you should have very good reasons why you cannot. You may also choose never to defraud or mislead your business partners. You may decide, as well, that while you are pursuing profit in your business, you will not require that all the money earned comes your way. Instead, there might be sufficient profits to distribute a portion of them to other stakeholders in addition to yourself—for example, those who are important because they have helped you or are affected one way or another by your business. This group of stakeholders might include employees (profit sharing), shareholders (dividends), the local community (time), and social causes or charities (donations).

Being successful as an entrepreneur may therefore consist of much more than simply making money and growing a venture. Success may also mean treating employees, customers, and the community at large with honesty and respect. Success may come from the sense of pride felt when engaging in honest transactions—not just because the law demands it, but because we demand it of ourselves. Success may lie in knowing the profit we make does not come from shortchanging others. Thus, business ethics guides the conduct by which entrepreneurs and their companies abide by the law and respect the rights of their stakeholders, particularly their customers, clients, employees, and the surrounding community and environment.

Read the Ten Principles of the United Nations Global Compact that urges corporations to develop a “principled approach to doing business.” The principles cover human rights, labor, the environment, and corruption.

Nearly all systems of moral, ethical, spiritual, and/or religious beliefs stress the building blocks of engaging others with respect, empathy, and honesty. These foundational beliefs, in turn, prepare us for the codes of ethical behavior that serve as ideal guides for business. Still, we need not subscribe to any particular faith to hold that ethical behavior in business is necessary. Just by virtue of being human, we all share obligations to one another, and principal among these is the requirement that we treat others with fairness and dignity, including in our commercial transactions.

For this reason, we use the words ethics and morals interchangeably in our discussion. We hold that “an ethical person” conveys the same sense as “a moral person.” Ethical conduct by entrepreneurs/business owners is not only the right way to behave, but it also burnishes our own professional reputation as business leaders of integrity.

Integrity—that is, unity between what we say and what we do—is a highly valued trait. But it is more than just consistency of character. Acting with integrity means we adhere strongly to a system of ethical values. Such values often serve as the foundation for the creation of ethical codes, or codes of conduct . A code of ethics acts to guide conduct and may be derived from a variety of sources. It could be a personal, internal code of conduct, or an official code adopted by a business organization. Or it could be an external code based on one’s profession (e.g., CPAs, attorneys, CFPs, and others have professional codes of ethics), or a more broadly applicable external code such as that of the Business Roundtable or Business for Social Responsibility . Being a professional of integrity means consistently striving to be the best person and professional that you can be in all your interactions with others. Integrity in business brings many advantages, not the least of which is that it is a critical factor in allowing businesses and society to function properly. It is also a fundamental basis for developing and maintaining trust, which is vital to all contractual and informal commitments between businesses and all their key stakeholders.

Successful entrepreneurs and the companies they represent will take pride in their enterprise if they engage in business with transparency, intentionality, and integrity. To treat customers, clients, employees, and all those affected by a venture with dignity and respect is ethical. In addition, ethical business practices serve the long-term interests of businesses because customers, clients, employees, and society at large will be much more willing to patronize a business and work hard on the business’s behalf if that business is perceived as caring about the community it serves. And what type of firm has long-term customers and employees? One whose track record gives evidence of honest business practices.

Research on the performance of the World’s Most Ethical Companies (WMEC) indicates a positive association between ethical conduct and successful long-term financial performance. These businesses often outperform their market expectations, both in periods of market growth and decline. The WMEC list of companies shows an average annual excess return of more than 8 percent higher than expected profitability. This may be due to a variety of reasons, including what researchers term a positive effect on business culture, stakeholders, and reputation. 6 In other words, being ethical beneficially influences employees, investors, and customers.

Are You Ready?

Which corporate culture do you value.

Imagine that upon graduation, you have the good fortune to face two entrepreneurial opportunities. The first is with a startup known to value a hard-nosed, no-nonsense business culture in which keeping long hours and working intensely are highly valued. At the end of each year, the company plans to donate to numerous social and environmental causes. The second entrepreneurial opportunity is with a nonprofit recognized for a very different culture based on its compassionate approach to employee work-life balance. It also offers the chance to pursue your own professional interests or volunteerism during a portion of every workday. The earnings plan with the first opportunity pays 20 percent more per year.

• Which of these opportunities would you pursue and why?
• In what ways might company contributions to a cause carry more power to impact the cause? In what ways might individual contributions be more powerful? Think of examples for each scenario.
• How important an attribute is income, and at what point would a higher income override for you the nonmonetary benefits of the lower-compensated opportunity?

Many people confuse ethical and legal compliance. However, these concepts are not interchangeable and call for different standards of behavior. The law is needed to establish and maintain a functioning society. Without it, our society would be in chaos. Compliance with legal standards is mandatory. If we violate these standards, we are subject to punishment as established by the law. Therefore, compliance generally refers to the extent to which a company conducts its business operations in accordance with applicable regulations, statutes, and laws. Yet this represents only a baseline minimum. Ethical observance builds on this baseline and reveals the principles of an individual business leader or a specific organization. Ethical acts are generally considered voluntary and personal—often based on our individual perception of what is right and wrong.

Some professions, such as medicine and the law, have traditional and established codes of ethics. The Hippocratic Oath , for example, is embraced by most professionals in healthcare today as an appropriate standard always owed to patients by physicians, nurses, and others in the field. This obligation traces its lineage to ancient Greece and the physician Hippocrates . Businesses are different in not having a mutually shared standard of ethics. This is changing, however, as evidenced by the array of codes of conduct and mission statements many companies have adopted over the past century. These beliefs have many points in common, and their shared content may eventually produce a code universally claimed by business practitioners. What central point might constitute such a code? Essentially, a commitment to treat with honesty and integrity customers, clients, employees, and others affiliated with a business.

The law is typically indebted to tradition and precedent, and compelling reasons are needed to support any change. Ethical reasoning often is more topical and reflects the changes in consciousness that individuals and society undergo. Often, ethical thought precedes and sets the stage for changes in the law.

Behaving ethically requires that we meet the mandatory standards of the law, but that is not enough. For example, an action may be legal that we personally consider unacceptable (consider how many viewed Shkreli’s legal price hike). Entrepreneurs today need to focus not only on complying with the letter of the law but also on going above and beyond that basic mandatory requirement to consider their stakeholders and do what is right.

The Equifax Data Breach

In 2017, from mid-May to July, hackers gained unauthorized access to servers used by Equifax , a major credit reporting agency, and accessed the personal information of nearly one-half of the US population. 7 Equifax executives sold off nearly $2 million of company stock they owned after finding out about the hack in late July, weeks before it was publicly announced on September 7, 2017, in potential violation of insider trading rules. The company’s shares fell nearly 14 percent after the announcement, but few expect Equifax managers to be held liable for their mistakes, face any regulatory discipline, or pay any penalties for profiting from their actions. To make amends to customers and clients in the aftermath of the hack, the company offered free credit monitoring and identity-theft protection. On September 15, 2017, the company’s chief information officer and chief of security retired. On September 26, 2017, the CEO resigned, days before he was to testify before Congress about the breach. Numerous government investigations and hundreds of private lawsuits have been filed as a result of the hack. Equifax will pay at least $650 million, with the possibility of more, to resolve most claims stemming from the data breach. The settlement covers 147 million consumers, just under one-half of the population of the United States. 8

• Which elements of this case might involve issues of legal compliance? Which elements illustrate acting legally but not ethically? What would acting ethically and with personal integrity in this situation look like?

To return to the case of Martin Shkreli , let’s examine it through some foundational theoretical lenses, based on ethical theories. Normative theories of ethics are primarily concerned with establishing standards or criteria that delineate what is considered ethical behavior. Common examples of normative ethical theories are utilitarianism , duty-based ethics (also known as Kantian ethics and/or deontology ), and virtue ethics. These ethical theories, discussed in the following paragraph, provide a systematic means of examining and evaluating business conduct.

From an ethical theory perspective, Kantian or duty-based ethics emphasizes the underlying intent or reason behind a decision and whether that decision is good or bad. For example, if the decision to raise the price of a lifesaving drug by 5,000 percent is moral and if it is intended to add value, then an individual is obligated to raise the price. Utilitarian ethics focuses on the usefulness or utility of the decision. If the decision to raise the price adds value and usefulness for shareholders, then that decision should be made. The Protestant work ethic looks at the decision from the viewpoint of capitalism, free markets, and a sense of duty to ensure maximum return on investment. If the decision deals with a change that is financially sound and beneficial, if there are an adequate number of customers that need and value the HIV product and are willing to pay that price, then that decision should be made. Proponents of virtue ethics claim that ethics consists of a series of innate but latent virtues that an individual needs to develop over time. These virtues consist of trust and derivatives of trust such as truthfulness. In this perspective, if the price hike is fair and equitable, if it is responsible to behave in this way, and if it does not cause harm to the society, then the price should be raised.

While it remains with the courts to determine the underlying intent, legal implications, and consequences of Shkreli’s decision, evidence from this and other case studies shows that some corporate leaders have not developed ethical capabilities, or they have not internalized a moral compass that enables them to differentiate between right and wrong.

Developing a Moral Compass

A moral compass is a state of mind where an individual has developed the needed capabilities to differentiate between right and wrong, or between just and unjust in challenging circumstances. When individuals are able to act in an ethical manner systematically, habitually, and without struggling to decide how to act or what to do in difficult situations, they have internalized that moral compass. It can be said that these individuals possess a good character, are able to earn trust, and have qualities that are deemed necessary for leadership.

To develop and internalize a moral compass, an entrepreneur and the members of the organization need to continually exercise and develop their ethical “muscles.” These ethics-based muscles include qualities such as trust, truthfulness, respect, responsibility, commitment, care, love, and justice. However, as you will learn, an entrepreneur needs to first provide the organizational framework and foundation in which individuals and business units regularly exercise these qualities. This framework and foundation include that everyone receive the right training, be given the opportunity to identify and close gaps in their behavior, receive recognition and incentives that reinforce good ethical behavior, and receive consistent, timely, and substantial consequences when they fail to act responsibly. These and other actions begin to help individuals develop and internalize an ethical compass.

A white-collar criminal convicted of fraud, this interview with Mark Faris shows his admission that greed, arrogance, and ambition were motivating factors in his actions. He also discusses the human ability to rationalize our behavior to justify it to ourselves. Note his proposed solutions: practicing ethical leadership and developing awareness at an individual level via corporate training.

Legal Issues in Entrepreneurship

Unlike working in a large corporate environment with an established structure, entrepreneurs often create and operate a new business venture by their own rules. The pressure to create a new venture, within constraints and limitations, inspires entrepreneurs to find innovative ways to meet potential market demands. At the same time, the challenge to meet these expectations can create temptations and ethical pressures as entrepreneurs make a variety of decisions. Common areas rife with potential legal issues include contracts, torts, employment, intellectual property, conflicts of interest, full disclosure/truthfulness in product or service claims and performance, and antitrust/competition law ( Figure 3.2 ).

Intellectual Property: Patents, Copyrights, and Trademarks

There are multiple reasons why an entrepreneur should be aware of intellectual property rights under the law. For example, if a new startup business comes up with a unique invention, it is important to protect that intellectual property. Without such protection, any competitor can legally, even if not ethically, copy the invention, put their own name or company brand on it, and sell it as if it were their own. That would severely curtail the entrepreneur’s ability to make money off a product that they invented. Intellectual property (IP) rights are created by federal law and protect small businesses from problems such as this. IP law also helps establish brand awareness and secure secondary revenue streams.

Intellectual property (IP) is the output or result of the creative work of one or more individuals to turn a unique idea into a practical and value-added product/service; this manifestation of original ideas is legally protected. IP applies to anything that is the exclusive right of a firm, will help differentiate that organization, and will contribute to a sustained competitive advantage. This creative work can result in a product idea, a new invention, an innovative pivot, or an improvement in an existing product or service. IP can take the form of a patent, a copyright, a trademark, or a variation thereof called a trademark secret.

To develop a sustained competitive advantage, an entrepreneur is responsible to protect, provide the needed safeguards, and continually grow a firm’s IP. These responsibilities include understanding, differentiating between, and dealing with the different types and technical aspects of a firm’s IP. It also means that the entrepreneur should be concerned with the nontechnical aspect of IP, which is to develop a culture of creativity that enables the organization to deliver a continuous stream of new IP.

From a technical aspect, there are two different types of patents: utility and design patents ( Figure 3.3 ). A utility patent protects a brand-new product idea or invention under US law for a period of twenty years (see the discussion on patents in Entrepreneurial Journey and Pathways . A few examples of utility patents would be Nikola Tesla’s electric magnetic motor, dynamo-electric machine, electrical transmission of power, and his system of electrical distribution patents. A design patent protects the ornamental aspects of a product idea. Examples include the design of a new font, a soft drink bottle, or the design features of Apple’s iPhone. In the US, design patents are typically protected for a period of fourteen years.

Copyrights and trademarks are also protected IP ( Figure 3.4 ). A copyright grants the creator of a work the exclusive right to reproduction of the work for a specified period of time (usually the life of the author plus seventy years). A trademark is a registration that provides the owner the ability to use a name, symbol, jingle, or character in conjunction with a specific product or service, and prevents others from using those same symbols to sell their products. A trademark can be protected for an unlimited number of ten-year renewable terms as long as it is still in use. Finally, there is a special category of IP known as a trade secret . This concept refers to proprietary information, processes, or other internal knowledge that contribute to an organization’s competitive advantage in a market. However, unlike patents, copyrights, and trademarks, a trade secret is not included as a protected category under federal IP law. A trade secret is dependent on being kept a secret by the business that owns it and is enforced through contract law.

Entrepreneurs should pay especially close attention to the legal implications of how patent law can affect a business. Patent laws are strictly enforced and are intended to protect inventions. This protection is afforded because a continuous stream of innovations can be a major source of revenue for a firm as well as a vehicle for developing a sustained competitive advantage. A legal patent gives an exclusive right to its patent holder or proprietor to use the invention in any shape or form they deem necessary. It also gives the patent holder the exclusive right to block or withhold access to others, or to sell the right to use the patent. This period of protection ranges from fourteen to twenty years, and is essentially a government-granted monopoly, after which, protection usually expires and competition is opened up to anyone (e.g., generic drugs).

Regardless of its type, a firm has the exclusive rights to the ownership of its IP. To protect those rights, it is important that a firm meticulously and immediately document each IP, the process and timeline by which each IP was developed, the resources used to develop the IP, the details of who owns and has access to the IP, and how others can obtain and use the IP.

An entrepreneur should consider these questions when growing and protecting a firm’s IP.

• Is IP law relevant to my business, and if so, how can it help me?
• How do we identify what IP to protect?
• What are the steps we need to take to get protection?

Less formally, the development of a culture of creativity and innovation is one of the most important responsibilities of an entrepreneur. This responsibility will enable the entrepreneur to develop a sustained competitive advantage. This means you should not be satisfied with an occasional spark of creativity from a designated individual, department, or functional area within your organization (such as research and development). You need to nurture an environment in which every member of your organization is able to be creative, add value, and be engaged in the continuous improvement of the firm. One example of this dynamic is the culture of continuous improvement at Toyota ( Kaizen ) (see Launch for Growth to Success ). In this culture, every member of the organization is expected to be creative and continually improve the processes they are engaged with on a daily basis.

The story of Nikola Tesla —a Serbian-American inventor, engineer, and physicist—offers a cautionary tale for why entrepreneurs need to be attuned to both the technical aspects of a venture’s IP and its culture of creativity. Having filed 300 patents, Tesla is considered by many to be one of the fathers of modern electricity. After immigrating to the United States, Tesla was employed by the Continental Edison Company and began to develop AC technology. However, Edison preferred DC technology and was not supportive of Tesla’s ideas. Tesla had to quit, teaming up with Westinghouse to open the Tesla Electric Light company, bringing his valuable creativity and ideas with him to his new venture. 9 Eventually, Tesla’s AC became the American standard, not Edison’s DC.

Contracts and Torts

Every entrepreneur enters into contracts, usually on a regular basis, and thus should have an understanding of basic contract concepts. Likewise, most businesses are likely to have some involvement with tort law: that area of law that protects the rights of people not to be harmed physically, financially, or in any other way, such as a breach of privacy. Some areas of the business world involve a combination of tort law and contract law, such as litigation involving the wrongful termination of an employee.

Contracts can be formal or informal agreements. Ideally, you should use written contracts whenever you enter into a substantial transaction with another party. Oral agreements are enforceable in most situations; however, proving their terms can be difficult. If you are in the midst of a startup, chances are you are moving quickly. Perhaps you don’t have the time, or the money, to hire a lawyer to prepare a formal written contract. In that event, you should at least follow-up with all parties via traditional mail or email to document the key terms of your agreement. That way, if a dispute arises, you’ll have documentation to fall back on.

Torts are a potential area of risk for entrepreneurs. Financial liability often results from the assumption of and exposure to risk; therefore, this is an important issue for entrepreneurs to manage. This is especially true for the concept of vicarious liability , which is the area of the law that imposes responsibility upon one person for the failure of another, with whom the person has a special relationship (e.g., employer and employee) to exercise reasonable care. Most employers understand they run a risk that their employees may commit a tort, and that they are responsible when employees cause harm to others (customers or coworkers) while on duty, working on company property, and using company equipment. However, many employers are not aware that employers can actually be liable for harm caused by an employee if that employee caused harm within the scope of their job duties. For example, if an employer asks an employee to drop something off at FedEx or UPS after work hours, and that employee negligently causes an auto accident, even if the employee is driving their personal vehicle and not a company car, the employer could be liable for damages. It is an all-too-common situation that could have serious liability consequences for an entrepreneurial business if adequate insurance is not procured.

Antitrust laws (or competition laws ) were developed to ensure that one competitor does not abuse its position and power in the market to exclude or limit competitor access to the market. A few examples of antitrust laws are the Sherman Act , the Clayton Act , the Federal Trade Commission Act , and the Bayh-Dole Act . These acts were created to encourage competition and provide options for consumers. In effect, these laws make it illegal for a competitor to make agreements that would limit competition in the market.

The antitrust concept is important to the entrepreneur’s ability of entrepreneurs to form new startup businesses that are able to compete with larger, more established corporations (which may try to discourage competition). Table 3.1 summarizes the contributions of these acts to supporting antitrust efforts. It is important to note that any deviation from these laws may result in long and costly legal problems.

An example of illegal competition would be the competition and patent war between Intel Corporation and American Micro Devices (AMD). In 2009, AMD filed a suit against Intel claiming that the company had used “leveraging dominance” to exclude AMD from effectively competing in the marketplace through exclusionary pricing, discounts, and similar practices. This claim was later settled by the two firms and resulted in Intel paying AMD $1.25 billion in damages.

Conflict of Interest

A conflict of interest occurs when an individual (or company) has interests in multiple areas (financial investments, work obligations, personal relationships), and the interests may conflict with each other. Employees, for example, have an interest in producing expected work for their employer. A conscious or deliberate attempt to avoid, ignore, or marginalize that which is rightfully due an employer by addressing other interests would be a conflict of interest. This could be as simple as using company time or resources to work on a personal project that has not been sanctioned and will not add value to the company. It could also mean using the tangible and intellectual resources of a company on something that will benefit your private interests instead of your employer’s. This action is unethical since you are not giving the employer what they are due, which are your time, talents, and services in exchange for agreed-upon compensation. Consider the example of Mike Arrington , a Silicon Valley lawyer and entrepreneur who created a blog called TechCrunch . Arrington became the go-to source for tech enthusiasts and investors. His coverage of Silicon Valley-based startup companies could help ensure the successful launch of a new business or product. However, he was criticized for routinely covering stories about the companies he invested in and consulted for. Although he provided full disclosures of his interests, rival critics challenged his conflicts of interest. How could he simultaneously be both an investor and an independent journalist blogging about the very companies in which he had a financial interest? He was in a classic conflict of interest position. 10 Similar cases involving business reporters and potential conflicts of interest include The Wall Street Journal , Business Week , Time magazine, and the L.A. Herald Examiner .

Another situation in which potential conflicts arise is in the area of professional services, which attracts many young potential business owners. Perhaps you want to start your own CPA accounting firm, or CFP financial advisory firm, or IT consulting firm. A professional must be very cautious about conflicts of interest, especially in areas in which you owe a fiduciary duty to your clients. This requires a very high duty of conduct and full disclosure, one that prohibits being involved in both sides of a transaction. For example, as an IT consultant, do you recommend to a client that they buy a software product, when unknown to them, you own stock in that company? Or as a financial advisor, are you getting commissions on both ends of a transaction?

Fraud: Truthfulness and Full Disclosure

Ethical entrepreneurs consistently strive to apply ethics-based concepts in practice, including truthfulness and full disclosure. These two concepts are not only part of an ethical approach to doing business but are also underlying requirements of several areas of law including fraud. A business that makes/sells a product or service has responsibility for fully disclosing the truth about its products/services.

The underlying facts, reality, and evidence behind something are the truthfulness of a matter. An individual who is being truthful is exercising the capability of being factual about a subject matter, dealing with reality, and aware of evidence. Truthful individuals earn a level of credibility and reliability over time because what they say and what they do are in alignment. A corollary of truthfulness is fairness, which means to be impartial, unbiased, and in compliance with rules and standards of right and wrong behavior. Fairness deals with doing what is right, just, and equitable. From the standpoint of application, the quality of being truthful forms the foundation for fairness.

Disclosure describes sharing the needed facts and details about a subject in a transparent and truthful way. This information should be adequate, timely, and relevant to allow the recipient to understand the purpose and intent behind a product/service and to make a good decision about the value of that product/service. Any deliberate attempt to hide, change, or bend the truth is an unethical and irresponsible action subject to criminal investigation.

One example of a firm that has repeatedly run into several serious, embarrassing, and costly legal issues is Eli Lilly . In one instance, this company admitted in court that they had illegally marketed Zyprexa, which was primarily intended and approved by the US Food and Drug Administration office (FDA) to treat depression, to be used for off-label (not cleared by FDA to market and advertise) ailments such as sleep disorders, Alzheimer’s disease, and dementia. As a result, in 2009, Eli Lilly was fined $1.4 billion by the office of criminal investigation of the US Department of Justice. 11

• 3 Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (1919).
• 4 “Leadership in Action.” Business Roundtable . https://www.businessroundtable.org/
• 5 “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans.’” Business Roundtable . August 19, 2019. https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans
• 6 Nelson Areal and Ana Carvalho. “The World’s Most Ethical Companies: Does the Fame Translate into Gain?” Presented to the European Financial Management Association (EMFA). n.d. https://efmaefm.org/0efmameetings/efma%20annual%20meetings/2012-Barcelona/papers/EFMA2012_0401_fullpaper.pdf
• 7 Tyler Durden. “Massive Data Breach at Equifax: As Many As 143 Million Social Security Numbers Hacked.” Zero Hedge . September 7, 2017. http://www.zerohedge.com/news/2017-09-07/massive-data-breach-equifax-many-143-million-social-security-numbers-hacked
• 8 Stacy Cowley. “Equifax to Pay at Least $650 Million in Largest-Ever Data Breach Settlement.” New York Times . July 22, 2019. https://www.nytimes.com/2019/07/22/business/equifax-settlement.html
• 9 Nikola Tesla. My Inventions: The Autobiography of Nikola Tesla . (Austin: Hart Brothers, 1982).
• 10 Ira Basen. “Why Transparency Is Not Enough: The Case of Mr. Mike.” Center for Journalism Ethics . University of Wisconsin–Madison. June 21, 2011. https://ethics.journalism.wisc.edu/2011/06/21/why-transparency-is-not-enough-the-case-of-mr-mike/
• 11 Food and Drug Administration. Office of Criminal Investigations of the US Department of Justice. www.usdoj.gov/usao/pae

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Entrepreneurship • April 25, 2023

The Crucial Role of Ethics in Entrepreneurship

The world as we know it might be in danger.

The need for entrepreneurs to make ethical choices has never been more critical, especially in the age of artificial intelligence (AI).

Experts in AI believe that rapid advancements in the field, without proper ethical guidelines in place, could endanger our society. Max Tegmark, a professor at the Massachusetts Institute of Technology and a machine learning researcher, issued a call to action urging AI labs to pause the development of AI systems more powerful than GPT-4 for at least six months.

Professor Tegmark , also the president of the Future Life Institute , a non-profit organization aiming to prevent AI from becoming a threat to our civilization, wrote the letter to raise awareness about the dangers of unregulated AI development. The letter garnered support from tens of thousands of people, including notable figures like Apple Co-Founder Steve Wozniak as well as the author and professor Yuval Noah Harari.

The proposed pause in AI development seeks to encourage companies like OpenAI , the creators of ChatGPT-4, to halt their progress on powerful AI systems temporarily. This would provide AI experts and policymakers with the necessary time to collaborate and develop ethical guidelines for AI development, as well as establish proper AI governance systems, ensuring that such technology benefits humanity.

This situation exemplifies the importance of ethical business practices. Entrepreneurs must consider the societal impact of their endeavors, particularly when developing advanced artificial intelligence systems.

Read on to discover the essential role of ethical entrepreneurship and to learn from inspiring stories of ethical business leaders. By understanding and embracing ethical principles, entrepreneurs can help shape a brighter future where technology and innovation are harmoniously integrated into society.

The Crucial Role of Ethics in Entrepreneurship: Why It's More Important Than Ever

Entrepreneurs and business leaders are responsible for ensuring their businesses have a positive impact on the world.

What are the ethics of an entrepreneur?

Being an ethical entrepreneur means making decisions and taking actions that are firmly rooted in a strong sense of morality. This moral compass guides entrepreneurs through the rollercoaster of building and managing a business while shaping the way they connect with the people who matter most, such as customers, employees, investors, and the broader community.

Why is ethics important in entrepreneurship?

Ethics play a crucial role in the long-term success and sustainability of a business. By adhering to ethical principles, entrepreneurs can foster trust, nurture employee morale, and provide a competitive advantage in the market.

In this section, we will explore the various reasons why ethics is essential for entrepreneurship and the positive impact it can have on stakeholders, customers, and the broader community.

Trust and reputation: When entrepreneurs act ethically, they forge trust and build a solid reputation, which is essential for nurturing lasting relationships with stakeholders. According to research by the Edelman Trust Barometer, 76% of respondents consider “trust” a key factor when making purchases.

Employee morale and retention: Ethical leadership sets the stage for a positive work atmosphere, leading to happier employees who stay with the company. A Gallup report showed that businesses with high employee engagement experience a 59% lower turnover rate.

Competitive advantage: Embodying ethical values can help a company stand out from the competition and attract a loyal customer base. A 2020 Accenture study found that 62% of consumers prefer to support businesses that align with their personal values and beliefs.

Long-term success: Entrepreneurs who look beyond immediate gains and consider the broader social and environmental consequences of their actions are more likely to create sustainable business models and achieve enduring success.

Who is an example of an ethical entrepreneur?

Yvon Chouinard, the visionary behind the outdoor clothing and gear company Patagonia , is a prime example of a business leader who prioritizes ethics in entrepreneurship practices. Chouinard has always placed environmental and social responsibility at the heart of his business, from using sustainable materials to donating 1% of their global sales to environmental causes through their “ 1% for the Planet” initiative. In 2012, Patagonia became a Certified B Corporation , voluntarily adhering to high social and environmental performance standards.

Implementing Ethical Guidelines: The Path to Sustainable Entrepreneurship

Incorporating ethical guidelines into a business framework is a crucial yet difficult step for entrepreneurs who aim to create sustainable and responsible ventures. This practice ensures businesses operate in harmony with societal values and environmental concerns and refrain from creating technologies that might threaten the future of our civilization.

One approach to implementing ethical guidelines is by adopting the principles of the Triple Bottom Line (TBL) framework , which was introduced by John Elkington in 1994. The TBL framework emphasizes three dimensions of performance: social, environmental, and financial, often referred to as people, planet, and profit. By balancing these three aspects, businesses can create long-lasting value for both their investors and the environment.

For instance, Unilever, one of the world's leading consumer goods companies , has successfully integrated the TBL framework into its business strategy through its Sustainable Living Plan. This plan focuses on improving health and well-being, reducing the company's environmental impact, and enhancing livelihoods across its supply chain. As a result, Unilever has achieved a substantial reduction in waste and greenhouse gas emissions while also improving the lives of millions of people.

Another effective way to implement ethical guidelines is by obtaining a B Corporation certification. B Corps are businesses that meet the highest standards of social and environmental performance, public transparency, and legal accountability. By pursuing this certification, companies like Patagonia and Allbirds have demonstrated their commitment to prioritizing ethics in entrepreneurship practices, which has resonated with both customers and investors.

A Path to Pursuing Ethical Entrepreneurship

The pursuit of ethical entrepreneurship starts with a single step in the right direction

Ethical entrepreneurship is an essential component of sustainable and responsible business practices. By integrating ethical values and considering the broader environmental consequences of their actions, entrepreneurs and business leaders can create a better future for our society.

Meridian University provides you with the knowledge and tools to cultivate ethical business practices and navigate the complexities of today’s entrepreneurial world. Our MBA in Creative Enterprise is designed to develop crucial skills for success in dynamic organizational settings by merging social, technological, and cultural innovation to create impactful, experience-driven leaders.

The curriculum is built around five integrated areas of study: transformative innovation , purpose-driven organizations, regenerating the commons, living systems theory, and generative entrepreneurship. This unique, comprehensive, and holistic approach equips our students to deal with the complexities of the business world.

You can gain specialized expertise by choosing from a variety of concentrations, including:

• Complexity Management
• Developmental Coaching
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• Organizational Development
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Take the first step in your journey of cultivating ethical business practices and positively impacting our world by Emailing an Admission Advisor.

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3: The Ethical and Social Responsibilities of Entrepreneurs

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• Page ID 50769

• Michael Laverty and Chris Littel et al.

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• 3.0: Prelude to the Ethical and Social Responsibilities of Entrepreneurs
• 3.1: Ethical and Legal Issues in Entrepreneurship
• 3.2: Corporate Social Responsibility and Social Entrepreneurship
• 3.3: Developing a Workplace Culture of Ethical Excellence and Accountability
• 3.4: Key Terms
• 3.5: Summary
• 3.6: Review Questions
• 3.7: Discussion Questions
• 3.8: Case Questions
• 3.9: Suggested Resources

A Good Start: Ethics for Entrepreneurs

• Markkula Center for Applied Ethics
• Focus Areas
• Business Ethics
• Business Ethics Resources

Eleven key steps

What can the entrepreneurial team do to give ethics a role in the start-up? New ventures can make ethics part of their business plan.

New ventures can make ethics part of their business plan.

The entrepreneur has so many things on his or her mind: the "value proposition," the features of the product or service, financing, technology, building the team, getting the phones installed, just surviving from month to month. What role can and does ethics play in the critical first months and years of a company's existence? What can the entrepreneurial team do to give ethics a role in the start-up?

The study of how ethics works in companies known as "organizational ethics" has unfortunately focused primarily on larger enterprises. Starting in the mid-1980s, many larger companies established ethics programs staffed by ethics officers. These officers have encouraged others to study how they operate and to measure the effects of their programs. Those who study organizational ethics, fortunately, have been just as interested in how other enterprises those without formal ethics programs succeed in making their companies ethical and value-centered. These insights help us examine how start-ups deal with ethics.

It is obvious the start-up company is unlikely to establish a formal ethics program or appoint an ethics officer, though some start-up CEOs proudly declare that they are the new ventures "ethics officer." Even without a formal program, however, start-ups can create and many have created a very effective commitment to ethical practice.

Examination of the best practices of these start-ups reveals several key steps new ventures can take to make ethics a distinguishing mark of the start-up's culture:

1. Ethical start-ups recognize the ethical dilemmas that surround them in the first few months. The pressures to cut ethical corners are great in a start-up. How much puffery do you use in presenting your idea to venture capitalists? How do you divide stock ownership and options fairly among the founding team and later hires? How reliable does a product have to be before you ship it? How creative can you be in your accounting when the value of your stock is so sensitive to a stumble? When a deal falls through, how quickly do you tell your board and your funders? How generous can you afford to be in employee benefits in the early days? 

2. Ethical start-ups make ethics a core value of the enterprise. Start-up founders have discovered that they must explicitly embrace doing business ethically to counter the temptations to fudge various standards. Ethics should appear in business plans, in company mission statements, and in all other company documents. 

3. The ethical entrepreneur finds early opportunities to make his or her ethical commitment real. A Silicon Valley entrepreneur who took over a months-old company recently refused to send faulty financial data to the venture capitalists, over the objections of his new team. "You just don't do business that way," reflects the entrepreneur, who enjoys both financial success and a superb reputation today. He communicated clearly from that day the ethical standards he and the company would follow. 

4. The ethical entrepreneur anticipates the ethical tensions in day-to-day decisions. As business plans are written and product capabilities are described, the ethical tension between the truthful and the "hopeful" is inevitable. As a start-up tries to attract top talent, there is an unavoidable ethical tension in determining how rosy a picture to draw for the prospect. The ethically thoughtful entrepreneur anticipates these tensions and talks about them with the team before the situations are confronted. In later years of a company's life, this practice will become more formal "ethics training." 

5. The ethical entrepreneur welcomes ethical questions and debates. Some situations cannot be anticipated, and the ethical entrepreneur must always keep an open door so that new ethical issues can be worked out. Even the willingness to take time to discuss and resolve tough ethical dilemmas gives the signal that ethics is important in the start-up. 

6. The ethical entrepreneur is watchful about conflicts of interest. It is hard to single out one area of particular ethical concern in start-ups because there are so many of importance. However, the world of high-tech start-ups emphasizes partnerships, strategic alliances, and "virtual relationships." These arrangements are rife with opportunities for conflicts of interest where an entrepreneur or start-up employee can line his or her own pockets to the detriment of the organization. An early and consistent stand against questionable conflicts of interest is an important dimension of a start-up ethics effort. 

7. The ethical entrepreneur talks about the ethical values all the time. The frantic pace of start-ups and their rapid growth create short memories and a staff that is often very new to the enterprise. Only by continually articulating the ethical commitment can the entrepreneur be sure the members of the organization particularly new hires understand the ethical commitment and know it is real. 

8. The ethical entrepreneur weeds out employees who do not embrace the ethical values of the company. Hiring is among the most important strategic steps a start-up takes. Inevitably, the venture will hire some individuals who believe financial success, perhaps just personal financial success, is the only value. The ethical entrepreneur is on the lookout for "teammates" who do not share the company's values and weeds them out before they can do damage to the reputation or culture of the firm. 

9. The ethical entrepreneur looks for opportunities to engage the company in the community. The start-ups preoccupation with meeting product and financial goals and with its own growth can lead to blindness about anything other than personal gain. Ethical entrepreneurs find ways to engage the team in community service and to emphasize the continuing importance of the teams family relationships. 

10. The ethical entrepreneur takes stock occasionally. Just as the entrepreneur must keep an eye on the start-up's cash flow and produce a balance sheet periodically, so he or she must also take stock of the company's commitment to its ethics and other values. 

11. The ethical entrepreneur renews the commitment to ethical behavior. Companies change as they grow. The most pressing ethical dilemmas of a $10 million or $100 million company differ from those of a fledgling start-up. Ethical values and the commitment to ethical behavior must be recast and re-communicated periodically, preparing the company and its employees to deal with the ethical dilemmas currently faced.

The rewards of being an ethical start-up are many. Personal and team satisfaction is the most prominent. Workers who feel free to act ethically and to deal with others ethically feel better about themselves. Greater personal satisfaction translates into higher productivity and to lower turnover.

For the individual entrepreneur, a reputation for ethical dealing can increase the opportunities for business partnerships and lower the "transaction costs" of managing an ongoing relationship. "The ability to trust the other party and to do business on a handshake speeds up the progress we can make," commented one entrepreneur. A reputation for ethical dealing can make it much easier to attract employees and financing to the current venture or the next.

FURTHER READING

Alexander, Meredith. "Do You Need an Ethics Officer?" The Standard, July 3, 2000.

Global Business Responsibility Resource Center, www.bsr.org/resourcecenter/.

Ethics Resource Center, www.ethics.org.

Hanson, Kirk O. "Implementing Ethics Strategies in Organizations" (Monograph). Society of Management Accountants of Canada, 1998.

Nichols, Nancy A. "Profits with a Purpose: An Interview with Tom Chapman." (founder of Toms of Maine, Inc.) Harvard Business Review (November-December 1992).

Paine, Lynn S. "Managing for Organizational Integrity." Harvard Business Review (March-April 1994).

Woodstock Theological Center. "Creating and Maintaining an Ethical Corporate Culture" (Monograph). Georgetown University Press, 1990.

Kirk O. Hanson has been appointed executive director of the Markkula Center for Applied Ethics; he assumes that post in August 2001. Currently, he is the director of the Sloan Program at Stanford University Graduate School of Business.

This article was originally published in Issues in Ethics - V. 12, N. 1 Spring 2001.

Social Entrepreneurship and Business Ethics: Does Social Equal Ethical?

• Published: 20 November 2014
• Volume 133 , pages 619–625, ( 2016 )

Cite this article

• Elizabeth Chell 1 ,
• Laura J. Spence 2 ,
• Francesco Perrini 3 &
• Jared D. Harris 4  

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This editorial to the special issue addresses the often overlooked question of the ethical nature of social enterprises. The emerging social entrepreneurship literature has previously been dominated by enthusiasts who fail to critique the social enterprise, focusing instead on its distinction from economic entrepreneurship and potential in solving social problems. In this respect, we have found through the work presented herein that the relation between social entrepreneurship and ethics needs to be problematized. Further, we find that a range of conceptual lenses and methodological approaches is valuable as the social entrepreneurship field matures.

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There are practical, theoretical and profound philosophical reasons why deepening our understanding of social entrepreneurship is important (Chell 2007 ). Practically speaking, when economic systems are in or just emerging from recession, they tend to laud entrepreneurship as a vehicle to provide ready solutions to economic woes, emphasizing entrepreneurship’s concern to take products or services to market and generate value. In addition, over the past decade governments, academics and practitioners have begun to place greater emphasis on social entrepreneurship. These activities imply that the products, services and outcomes of the entrepreneurial innovative process have a social value beyond the direct effects on the transactional parties. Theoretically, there is a need to develop sound models of how such initiatives and processes might function, how they might be supported in order to work more effectively, and to identify the key constraining factors. Zahra et al. ( 2009 ) provide an excellent starting point for understanding different kinds of social ventures, their associated processes for identifying relevant opportunities and the motivations of social entrepreneurs.

In this special issue, we have attracted contributions from both the ethics and the entrepreneurship perspectives, and we would anticipate the readership to be similarly diverse. Thus, in this editorial, we cover some basic ground from each field in anticipation that this will cover known territory for some but be new for others. We begin our discussion with a summary of key concepts and, in doing so, point to some of the key works and protagonists on social entrepreneurship.

On Conceptual Clarity

Kickul et al. ( 2013 ) note that Social Entrepreneurship (SE), like its parent Entrepreneurship, has suffered the imponderable challenges of clarification, definition and differentiation. Protagonists have offered different approaches, e.g. Austin et al. ( 2006 ) have compared SE with Entrepreneurship and identified four key differences: the nature of emergent opportunities; differences in mission; differences in resource mobilisation and management and performance measurement especially of social impact. Further, Weerwardena and Mort ( 2006 ) have approached an understanding of the characteristics of Social Enterprises from a small case-based study of predominant characteristics that shape actions; environmental dynamics, innovativeness; proactiveness, risk management; sustainability; opportunity-seeking/recognition and social mission. This appears to be so like the characteristics of Economic Enterprises—EEs—with only social mission as the apparent differentiator (although some researchers have disputed that the nature of the mission is necessarily so pure). The creation of social value per se is not in dispute but the approach, means, method and outcomes are. Thus, some authors have talked of a continuum between SE (not-for-profit) and Economic Enterprises (for-profit) (Dees 1998 ; Chell 2007 ). Furthermore, if the mission and motives are “impure” then this potentially raises a number of ethical issues and questions. More recently, Dacin et al. ( 2011 ) have acknowledged social value creation, defined as the primary mission of social entrepreneurship, as the most promising approach to set the boundaries around the concept.

Focusing more closely on the social perspective, Bacq and Janssen ( 2011 ), in reviewing various definitions of social entrepreneurship, stress the ideas of a visionary or innovative approach; a strong ethical fibre; an ability to detect opportunities (to address a social need); with a social entrepreneur as change agent and a mission to make a difference. In this special issue, Sophie Bacq, Brigitte Hoogendoorn and Chantal Hartog build on this earlier work and compare the profiles of economic and social entrepreneurs highlighting from empirical research, the finding that both social and economic entrepreneurs have mixed objectives (cf. Chell 2007 ).

Clearly, social entrepreneurship is by no means a simple concept. Indeed, according to Choi and Majumdar ( 2014 ), it is complex, contested and may be conceived as a cluster of related constructs. It thus behoves us as researchers to consider this complexity before embarking upon research in social entrepreneurship and its complexity our objectives, orientation to and specific interpretation of the construct. Within social value creation, Choi & Majumdar argue that there are four sub-concepts: social innovation, social enterprise organization, market orientation and the social entrepreneur. In this special issue, we address these various aspects. While the creation of social value is a necessary condition of social entrepreneurship, it is the combination of social value creation with other elements that together constitute social entrepreneurship. Hence, to research and frame the ethical nature of social entrepreneurship, it is crucial to have a depth of understanding of the nature of the social value created and how it is assessed or measured. The cluster may then serve as a conceptual tool for advancing our shared understanding of the nature of social entrepreneurship, social entrepreneurs, social innovation, the markets they enter and how they are organised. Further, we should not presume that the social enterprise is set up to “do good” in simplistic terms, but examine critically how it is organised, with what intentions and outcomes.

Definitions of social responsibility and related topics are contested (Lockett et al. 2006 ), but in order to proceed with some clarity, broadly speaking, business ethics is understood as the everyday moral rules-in-use in organizations (Jackall 1988 ). Social responsibility is those expectations on business organizations beyond pecuniary ones (Carroll 1999 ). In this special issue, we want to show that both ethical and social lens’ should be employed to understand social enterprises. Regular readers of the Journal of Business Ethics will be familiar with different ethical perspectives, but for the sake of those who are starting from an entrepreneurship lens, it is perhaps worth identifying the key ethical frameworks that have been employed for instance in related research. Spence ( 2014a ) elaborates on these in her work on small- and medium-sized enterprises, proposing that the key ethical frameworks employed include research from the classical works of Kant (to do one’s duty according to reasoned consideration); utilitarianism (to act according to foreseen consequences and maximise utility for all); egoism (to act in one’s own self-interest); social contract theory (focusing on a socially agreed set of rules that govern society and emphasise rights and justice); virtue ethics (judging the character of the individual); to more contemporary theories, such as discourse ethics (which focuses upon decision-making, the resolution of conflicts, power differentials and empathetic understanding); postmodern ethics (in which ethics is self-determined rather than the observance of a prescribed set of ethical codes); moral intensity (an issue-dependent model of decision-making, which can be used to evaluate different ethical situations); and the ethic of care (which focuses upon the interconnectedness of people and the social dimension, and the responsibility of the ‘self’ in caring for the ‘other’). Examples of how these have been employed in small business ethics research are reviewed in Spence ( 2014a , b ), and the articles in this special issue make valuable contributions in developing some of these approaches. It is perhaps noteworthy that on the whole, they emphasise less the traditional, principle and justice based theories, and tend more towards postmodern and critical approaches. Thus, in this Special Issue, Pascal Dey and Chris Steyaert adopt a postmodern, radical humanist, approach to ethics based on the work of Foucault. Haugh and Alka Talwar assume radical humanist assumptions in their paper, and André and Pache draw on the ethic of care (see also Spence 2014b ). Taking somewhat more familiar routes for the business ethics field, Brett Smith, Geoffrey Kistruck and Benedetto Cannatelli assume an ethical framework based on moral intensity, and Begoña Gutiérrez-Nieto, Carlos Serrano-Cinea and Juan Camón-Cala draw on ethical decision-making frameworks. Sophie Bacq et al. turn to altruism, while Sandra Waddock and Erica Steckler focus on vision, values and beliefs.

Aside from their individual perspectives, our papers contribute to three overarching themes which we will elaborate here. These relate to the links between social entrepreneurship, ethics and the social; ethical aspects of scaling and measuring social capital; and ethics and social entrepreneurial outcomes.

On the Links Between Social Entrepreneurship, Ethics and the Social

The progress made in social entrepreneurship research has not been matched by a robust analysis from the ethics perspective (Cornelius et al. 2008 ). There is a presumption that because something is socially-oriented, the motivation is likely to be ethically sound; that it is principled, morally justified and ethically legitimate. We contend that this is superficial shorthand, and part of the role of the Journal of Business Ethics and similar publications must be to critique, explain and assess the ethics of social enterprises in the same way as we do other organizations. Hence, the question at the heart of this endeavour is as follows: Is the social inherently ethical? In this article and the selection of papers which make up the special issue, we conclude that there is considerable need to research further the ethical context of social entrepreneurship and enterprise.

The framing of social entrepreneurship from a disciplinary perspective raises a number of issues (Perrini 2006 ). Ridley-Duff and Bull ( 2011 ) distinguish between economic, social and ethical capital. An economic approach opens the question of a blurring of the difference between profit and not-for-profit social enterprises (Chell 2007 ); the motivations of social entrepreneurs; the impact of the market mechanism on business decision-making, weakening an ethical approach and raising concerns about the inadequacy of the neo-classical economic approach to business. The issues have tended to highlight relationships, at individual-level, within the enterprise and with the community. This suggests the need to consider the social embeddedness of social and socially innovative enterprises (Jack and Anderson 2002 ) with ethical concerns comprising trust, cooperation and commitment relations (Bull et al. 2008 ; Seanor and Meaton 2008 ).

A key common feature of the articles we present here is that they all draw from a wide range of literature sources, somewhat outside of the ‘usual suspects’ for Journal of Business Ethics article. This is something we support and have encouraged, since we think that this topic like many others suffers from somewhat of a silo mentality with research developing apace in different sub-disciplines with only limited cross-referencing and learning. For instance, some learning can be drawn from research on ethics in small business, since social enterprises are often also smaller organizations (Spence and Rutherford 2003 ; Moore and Spence 2006 ; Morsing and Perrini 2009 ). Entrepreneurship is a similarly fruitful pool from which to draw. Indeed, as long ago as 1985, Kets de Vries wrote on The Dark Side of Entrepreneurship, which has some salience here. In a special issue published by the Journal of Business Venturing , Harris et al. (2009 ) sought to map out the ethical issues and their social implications in the field of Entrepreneurship generally. A special issue of the Journal of Business Ethics (Pless 2012 ) did sterling work of bringing social enterprise into the business ethics literature, but emphasised the social enterprise side of the debate rather than the ethics. In this special issue, we go beyond these somewhat polarised approaches and lay the basis, through the papers, for a more stable foundation which integrates social enterprise and ethics.

Two of our papers, by Pascal Dey & Chris Steyaert and Helen Haugh & Alka Talwar, deal with our question about whether the social is inherently ethical, head-on. The first draws on sociological perspectives on power, subjectivity and freedom and problematizes the context of much of the superficial assumptions around the authentic nature of the practice of social entrepreneurship. Using the work of Michel Foucault, they conclude that a practice-based approach of ethics is a suitable way to advance our understanding of how social entrepreneurs can create conditions of freedom without pre-supposing a ‘true self’ or glibly ethical expectation. They focus on power at the micro-, individual- level in contrast to work that concentrates on hegemony at meso-/macro-levels. They argue that ethics of social entrepreneurship is emergent, realised through social actions that struggle with power, subjectivity and freedom. Social entrepreneurs are not inherently moral beings who do the right thing in contrast to the rest. This would give the social entrepreneur a persona of moral superiority: an essentialist view that is challenged. Thus, Dey and Steyaert seek to answer the question; if social entrepreneurs are not innately ethical, how do they come to enact goodness and social good that others value? Indeed one might ask whether all social entrepreneurs enact such goodness? Dey and Steyaert ask how social entrepreneurs overcome external powers and pressures to conform to a model of economic behaviour (within the strictures of capitalism) that will enable them to live an ethical life. Crucial, argues Foucault, is freedom juxtaposed against the forces of repression, preserving the ability to make choices about what to do and who to be; hence, there ensues a tussle with one’s subjectivity and the sense of freedom needed to realise one’s objectives.

Reflecting discussions well embedded in the corporate social responsibility literature around positive social change (Aguilera et al. 2007 ), the article by Helen Haugh and Alka Talwar focuses on the importance of the constructs of empowerment—in particular of women—and changing social norms to produce an innovative framework for Emancipatory Social Change. This in turn links to work on emancipatory entrepreneurship (Goss et al. 2011 ) which, similarly to the Dey and Steyaert paper, understands the sociological perspective on power through practice. As empirical basis for their work Haugh and Talwar draw on Mahaul, a rural social enterprise in North India which sells traditional handicraft products made by women in rural villages. They argue that emancipatory social entrepreneurship can be a vehicle for social change by empowering women in socio-cultural milieu where the role of women is circumscribed by cultural norms of patriarchy, limiting their education and scope to develop themselves, and allowing them the freedom to support their families by working outside the home. The article demonstrates how emancipatory social entrepreneurship business models and processes are designed to enable women to overcome the barriers that constrain their freedom, by such means as the development of the women’s networks, their skills, and their literacy. The ethical dimension is specifically based on the premise that empowerment—economic and cultural freedom—is good for the women concerned. However, critical reflection suggests that this may be gained at a price. Some women faced resistance from within the family although some husbands were supportive; this resistance could also be felt in the wider community. Hence, there were personal risks if the venture failed. This market-based system of emancipation is clearly embedded in the capitalist system, and these authors raise the fundamental question as to whether, in rural communities, capitalism is in the interests of developing countries and the poor. Haugh & Talwar stress in their conclusion that empowerment is not a purely female construct, and that there is a considerable work not least across a range of gendered social enterprises (e.g. rehabilitation of male offenders) which will further our understanding of social entrepreneurship, ethics and social change.

On Ethical Aspects of Scaling and Measuring Social Entrepreneurship

There has been a considerable gap in our understanding of ethical implications in relation to opportunity recognition, scaling social entrepreneurship, measuring social contribution and the market mechanism. Three of the articles in this special issue address these problems. Papers by Kevin André & Anne-Claire Pache and Brett Smith et al. address scaling from intriguingly different ethical perspectives.

Andre & Pache draw on the ethic of care. They take a view of social entrepreneurs as caring entrepreneurs, and extend this through the entrepreneurial process to encompass opportunity recognition and filtration, creation and exchange in terms of caring about, taking care of, care giving and care receiving. Within the process of scaling up, social entrepreneurs turn their attention to resource providers and other stakeholders, and run the risk of diluting the care offered to beneficiaries. Moreover, with the growth of the enterprise comes greater bureaucratisation, including rationalisation and standardisation to ensure the efficient use of scarce resources. This development poses further ethical challenges on the shoulders of the social entrepreneurs. It presents the complex risk of ceasing to care. Moreover, in assessing impact, the social entrepreneur may no longer focus on the disposition of caring in the need to establish measurable results, and what is at stake is their ethical integrity. The authors put forward a five-point plan to help maintain the ethic of care in the scaled-up organization and by that token avoid mission drift. The article by André and Pache chimes with research around small business social responsibility and the care perspective (Spence 2014b ; von Weltzien Høivik and Melé 2009 ), suggesting some wider application too.

Smith, Cannatelli & Kistruck, in contrast, take a more conventional ethical decision-making lens to understand the influence of moral intensity in scaling social impact. This also complements work in the ethics and small business field, which draws out the aspect of proximity in moral intensity as especially important (Lähdesmäki and Suutari 2012 ). Smith, Cannatelli & Kistruck develop a model of scaling social impact which suggests that the entrepreneurs desire for control, moral intensity and the organizational mode of scaling positively influence the scaling of social impact. The argument revolves around the moral intensity of the situation; the greater the moral intensity, the greater the imperative to take action. Moral intensity concerns the magnitude of consequences, the degree of social agreement about the moral content of the issue, the likelihood that the issue will result in bad or good, the relative immediacy of the consequences, proximity to the consequences and the magnitude of the impact (number of people affected). Implicit (but unknown) according to these authors is the ethical characteristics of the social entrepreneur and the decision not only to start a particular social venture but also to scale it up. In this regard, it begs the question posed by Waddock and Steckler of what is the vision and how did it arise. Further, the mode by which social entrepreneurs choose to scale their enterprise has ethical implications. The different modes suggest different degrees of control exerted by the founding social entrepreneur. This need for power suggests an egotistical ‘dark side’ to both economic and social entrepreneurs (de Vries 1985 ).

The article by Begoña Gutiérrez-Nieto, Carlos Serrano-Cinca & Juan Camón-Cala presents a further useful contribution to the debate around measurement, identifying a credit scores system of socially responsible lending. The paper moves beyond traditional approaches around socially responsible lending to incorporate a focus on social impact which is just as complex as the mechanisms commonly used for financial impact. They propose a model for social credit score based on applicant credit history, the present situation of the company and financial and social viewpoints of the specific project. One of the five sets of criteria includes a social impact assessment, a history of the enterprise and intangibles that include human, internal and external capital. The upshot is a balanced score card which reveals the strengths and weaknesses of the application. This demonstrates how a socially responsible lender can quantify both financial and social impact criteria to assess an applicant according to the lender’s own values whether that be impact on employment, equality, community outreach or other socially valued criteria. There is considerable room for further work on measuring social impact not least in the sphere of social entrepreneurship but also more generally for government and business initiatives too.

On Ethics and Social Entrepreneurial Outcome

In our final section of papers, the person of the entrepreneur herself is more directly focused upon especially in terms of the social entrepreneur’s position in relation to social entrepreneurial outcome. Both papers presented here robustly challenge the binary assumptions of cause and effect in research on social entrepreneurs.

Sophie Bacq, Chantal Hartog & Brigitte Hoogendoorn take a critical approach to the assumptions made about social entrepreneurs using quantitative data from the Global Entrepreneurship Monitor. They proffer a series of questions concerning the nature of empathy and moral judgement of social entrepreneurs and the observation that it would appear that social entrepreneurs project a fragile entrepreneurial profile and as such may be less likely to achieve their mission. Finally, they speculate as we have mentioned above that social entrepreneurs’ motives could be “impurely altruistic”. Thus, the article by Bacq et al. seeks to go beyond the taken-for-granted moral portrayal of social entrepreneurs which we started this article with, that is, that social entrepreneurs are ethical. Indeed, they give an intriguing and counter-intuitive answer to the question of the link between ethics and the social entrepreneur. They find that in contrast to the dominant idea that a strong entrepreneurial orientation is a source of ethical approach, they find that the reverse is true. In short, Bacq, Hartog & Hoogendoorn have evidence that ethical issues are also likely to emanate from a frail entrepreneurial profile. This startling re-buff to the rose-tinted way in which much of the media portray social entrepreneurship is an important and timely intervention.

Our special issue ends by coming back to a broad view of an element of the social entrepreneur’s life and the literature and media buzz around social entrepreneurship: the much-maligned concept of ‘vision’. Sandra Waddock and Erica Steckler present qualitative work on the narrative life stories of social entrepreneurs, which highlights the interactive nature of vision, linking it in different ways to action. They theorise three possible courses taken by social entrepreneurs: (a) deliberate or purposive , where vision is an outgrowth of intention which precedes action; (b) vision arises from action either inadvertently where there is an aspiration but no clear pathway, and it is gradually through immersion in their work that a vision, though not necessarily a coherent vision, emerges, or (c) vision is emergent or developmental , arising through actions based on their values and beliefs to make a difference in the world, a vision gradually emerges in an evolutionary fashion. Hence, we may conclude from this article that some social entrepreneurs’ work may be imbued by a moral set of values from the outset but that this does not apply to all. In short, Waddock and Steckler find that it is not necessarily the case that vision precedes action in entrepreneurship.

Entrepreneurship has been bedevilled with myths—the heroic male who goes it alone against the odds; the entrepreneur who happens to be in the right place at the right time; the notion that anyone can be an entrepreneur—and now we can add potentially the myth concerning the ethical social entrepreneur. Our stated aim in our call for contributions to this Special Issue was to garner evidence to explode what appeared to be a misapprehension about the nature of social entrepreneurs and social entrepreneurship. Certainly there is room for social entrepreneurs to identify a social need as a problem that their enterprise might address (though the social need might simply be construed as a business opportunity and the motives might be mixed); and whilst it may be possible to develop an ethical framework around that enterprise going forward there is no inevitability about this, as several of our papers clearly demonstrate. Further, the notion that the ethical pursuit of a social issue might simply continue when there are numerous pressures pulling the enterprise in other directions is unrealistic. What we have found is that whatever the social entrepreneur’s original motives the obstacles to be overcome, the developmental issues arising, the need for different capitals, especially financial, and the relationships engendered; all may contribute to mission drift.

We have also found that the pursuit of social enterprise solutions tends to be intertwined with social innovations within their processes and practices. The work raises some fascinating questions: What does it mean to be a social entrepreneur? Why are women more likely to be social entrepreneurs and what is it about empathetic understanding that facilitates the pursuit of social entrepreneurship and does this same quality assure successful outcomes? What are the different ways in which scaling-up social enterprises can be successfully achieved and how can social enterprises maintain an ethical stance in a capitalist environment where there may be pressures to compromise in order to pursue a sustainable course? What are the different ways in which social enterprises can deal with intangible aspects of the environment, in particular power and cultural norms, and how can this be carried out ethically? Further how, in a capitalist system, can social enterprises be funded ethically such that the greater good and social outcomes are shown to be achieved and are achievable? The articles in this special issue begin to address all these questions, but there is still more work to be done.

The research methods in evidence in respect of social entrepreneurship tend to be conceptual, theory-building, qualitative and exploratory around single case studies. We are pleased to be contributing to a broadening of methodological approaches, but much more work should be done on this.

The scholarship drawn upon in this volume tends to be Western, in particular European and North American. There is thus a need for research from Asia, Africa and South America to give a broader picture of social entrepreneurship in other geographical locations and internationally and locally embedded situations.

Finally, we hope to have contributed to the maturing of the social entrepreneurship field by adding a range of critical scholarly perspectives which demonstrate at the very least that we need to continually investigate the links and fissures between the social and the ethical and better understand the implications of the assumptions which underpin policy, practice and scholarship around social entrepreneurship.

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Small Business Research Centre, Kingston University, London, UK

Elizabeth Chell

Centre for Research into Sustainability, Royal Holloway University of London, London, UK

Laura J. Spence

SIF Chair of Social Entrepreneurship & Philanthropy, SDA Bocconi School of Management, Bocconi University, Milan, Italy

Francesco Perrini

Olsson Center for Applied Ethics, Darden School of Business, University of Virginia, Charlottesville, USA

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Correspondence to Laura J. Spence .

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Chell, E., Spence, L.J., Perrini, F. et al. Social Entrepreneurship and Business Ethics: Does Social Equal Ethical?. J Bus Ethics 133 , 619–625 (2016). https://doi.org/10.1007/s10551-014-2439-6

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August 29, 2016

10 Common Ethical Dilemmas in Entrepreneurship

The following answers are provided by members of Young Entrepreneur Council (YEC) , an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective , a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

When you’re considering job candidates, it’s important that nepotism doesn’t drive hiring practices. Not only is it unethical to hire a less qualified candidate purely because of their relationship to you, you also do your company a disservice by not hiring the best person for the job. Make the success of your company your primary goal and nepotism will never be able to get a foothold.

– Rakia Reynolds , Skai Blue Media

• “Accidental” Copyright Infringement

Many new business owners are consciously unaware when they’re infringing on the copyrights of other creatives, especially when it comes to using images and “everyone knows it” content. Unfortunately, ignorance of the law here can be a costly mistake. If you find yourself wanting to use something that you didn’t create yourself, it’s important to get permission from the rightful owner.

– Nathalie Lussier , AmbitionAlly

• Overworking Your Staff

Small businesses sometimes ask too much of their employees without noticing. It’s a given that everyone on a small team will have to pull their weight and wear multiple hats, but you need to be conscious of where to draw the line. For example, if you hire someone for marketing, don’t just push them into a different department because you need support there; it’s not what they signed up for.

– Dave Nevogt , Hubstaff.com

• Tax Accounting and Commingling of Expenses

As a small business owner, the most challenging thing to get right is tax accounting. The primary issue is commingling of assets and properly attributing expenses across personal and business. If you don’t get expensing right you can end up in trouble with local, state, and federal tax authorities. The easy fix is to not commingle, but at every step you should seek the advice of an experienced accountant.

– Kristopher Jones , LSEO.com

• Maintaining Control Over Employee Behavior

In today’s environment, it’s a must that you have guidelines in place as to what constitutes workplace harassment, discrimination, and bullying. There should also be clearly set consequences for what happens when these policies are violated.

– Andrew Schrage , Money Crashers Personal Finance

• Sticking to Your Mission

For certain businesses (like finance), your mission is more than a marketing statement; it’s an ethical code that needs to be upheld at all costs. When you’re just starting out and have limited resources, it might seem tempting to ignore this to grow quicker and compete with the top players. But ignoring ethics will always come back to bite you, no matter how far ahead you get.

– Elle Kaplan , LexION Capital

• Claiming Income

Many small business owners may get paid in cash for jobs or projects. So it may be tempting to hide this income rather than reporting it, especially given the fact that a business owner operates on tight margins. However, it’s important to implement a transparent system and ensure taxes are paid and revenue is reported accurately.

– Peter Daisyme , Due

• Hiding Blemishes During Fundraising

It can be very tempting to slightly exaggerate things while on the hunt for investment and it is a very slippery slope with no real upside. You either lose credibility/trust later on or commit yourself to an unrealistic timeline that will only frustrate those who have bought into your dream. Be optimistic but realistic with where challenges might occur. Openness and honesty help ensure a good fit.

– Douglas Hutchings , Picasolar

• Merging Personal and Business Accounts

It can be tempting to not report income, to put vacations on your business card, or to tap your business account when you need some extra cash. But this kind of behavior is dangerous and represents a slippery slope. Keep your business finances separate from your personal finances. Be reasonable with your expenses. And don’t avoid or ignore doing proper payroll or paying quarterly taxes.

– Robby Berthume , Bull & Beard

• Hiring Someone to Write Fake Reviews

Harvard Business School published a paper estimating 1 in 5 Yelp reviews is fake. Many businesses creating an online presence are approached by third parties offering positive online reviews in exchange for cash. The temptation is high as online reviews can go a long way in building a brand. However, consumers are getting smarter at identifying fake reviews, so getting caught is real and has very negative consequences.

– Sam Madden , PocketSuite, Inc.

BusinessCollective , launched in partnership with Citi, is a virtual mentorship program powered by North America’s most ambitious young thought leaders, entrepreneurs, executives and small business owners.

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