Business ethics constitute a functional

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INSTITUTIONAL AFFILIATION(S)
BUSINESS RESEARCH

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How Ethical mistakes can lead to Business Bankruptcy?
Literature Review
Business studies define business failures in several forms. From wider understanding,
it is demonstrated as difference arising due to unexpected results, termination to avoid further
loses, discontinuation and failure to manage. In narrow terms, it is defined as bankruptcy
(Kücher, Mayr, Mitter, Duller, & Feldbauer-Durstmüller, 2018). “Business Ethics
covers the areas of moral principles and decision making, governance issues and codes of
conduct for a business” (Goela & Ramanathan, 2014, p. 49). In other words, ethics
constitutes a set of principles and moral obligations which gives directions for smooth
business functioning.
Businesses are often challenged with ethical dilemmas annually or on an everyday
basis. Some of the ethical dilemmas stem out of management approach or out of leadership or
situations that impact the decision-making process. When businesses are faced with such
ethical dilemmas constantly, profit declines and business directions get influenced which
leads to business bankruptcy (McFarlane, 2013). Most of the business ethic mistakes
contributes to organizational failure, loss of brand reputation, a decline of customer loyalty
and reduced market shares. In worst cases, it can result in loss of customers, business partners
and employees which makes owners face several prosecutions and life imprisonments too.
For example, the unethical calls made by Barings Bank made it bankrupt and its shareholders
lost $1 billion. The bank was then sold to ABN Amro (Panfilii & Popa, 2011). Therefore,
ethical principles and code of conduct are considered as necessary pillars to business success.
Ethical business does not always mean that organization have to follow standard laws
only. According to Kabeyi (2018), ethical actions breed trust and in the economic growth of

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the company, trust act as the key to success. If one act ethically, he/she contributes to social
capital directly or indirectly which in turn makes societies and economies flourish. Hence,
acting ethically makes corporate owners feel good and they consider adopting ethics in long
term business strategy for organizational and personal development. However, Lukason &
Hoffman (2014) argues that a company does not get bankrupted due to a single reason rather
through a failed process that may vary considerably in duration. Many large corporations
have faced bankruptcy in the last few decades due to lengthy failure procedures while small
and medium firms emerge quickly. It can be said that ethical mistakes together with issues in
decision making by leadership and management in well-known organizations, small and
medium firms have led them to face bankruptcy.
Business ethics constitute a functional normative theory, namely, social contract
theory, stakeholder’s theory and stockholder’s theory. Stockholder theory states that business
owners must resolve any ethical issue by undertaking actions which can foster shareholders
return without exploiting law. Stakeholders theory in ethics requires managers to resolve
ethical issues by considering shareholders interest and maintain their rights. Social contract
theory posits that managers must look for ways to enhance social welfare without violating
minimum justice principles and laws. All three principles are wider in range but are inter-
connected and proves to be a strong factor. Organizations which comprehends and ensures
that the three factors are taken care of by providing fair or equal treatment gains ultimate
business objectives. Yet, many theoretical studies and principles often fail to define what
needs to be done during the decline of firm's health or during failure process rather suggest
various indicators that might fit appropriate for the fulfilling the purpose ( Lukason &
Hoffman, 2014). As a result, causes of failure stemming from the firm's internal and
external environment remains out of the management control that causes business
bankruptcy.