ADBM July 2024

The Importance of business ethics

Discuss the importance of ethics in business and the possible consequences of non-ethical
behaviour as being suggested inthe Shein case study. (Please make assumptions where
required)

1. The Case of Shein

The case of Shein's alleged exploitation of customs tariff loopholes in South Africa highlights
several critical issues related to international trade, local industry protection, labor practices, and
economic policy.

Key Issues at Stake:

Tariff Exploitation

Shein is currently accused of exploiting a tariff structure designed for small quantities of goods
to import on an industrial scale, thereby paying lower duties than traditional retailers. This
practice potentially gives Shein a significant cost advantage over local competitors such as TFG
and Woolworths, who are subject to higher import duties of 45%. As a result, Shein can undercut
prices, making it difficult for local businesses to compete effectively. This tariff exploitation
poses a significant threat to the competitive landscape, tilting the scales unfairly in favor of Shein
and undermining the principles of fair trade.

Impact on Local Industry

The unfair competition from Shein could have severe repercussions on the local clothing, textile,
footwear, and leather industry, which employs over 200,000 people in South Africa. If Shein’s
practices force local companies to downsize or shut down, the resulting job losses could be
substantial, exacerbating unemployment and economic instability. Furthermore, Shein’s
practices could undermine the Retail-Clothing, Textile, Footwear, Leather Master Plan (R-
CTFL), which aims to promote local content and job creation. The local supply chain could
weaken, and the incentive for local production could diminish, threatening the long-term
sustainability of the local industry.

Labor Practices

Concerns have been raised about Shein’s labor practices, with allegations of "sweatshop labor"
(working conditions that are harsh, exploitative, and often illegal) being used to produce
extremely cheap goods. If these allegations are true, it not only poses severe ethical issues but
also creates unfair competition for companies that adhere to fair labor standards. Shein, on the
other hand, claims adherence to the International Labour Organisation's core conventions and
maintains a strict supplier code of conduct. However, independently verifying these claims is

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challenging and critical to ensuring fair competition and protecting labor rights. The disparity in
labor practices underscores the broader issues of fairness and ethical standards in global trade.

Legal and Regulatory Framework

The loophole in the customs tariff structure that Shein is allegedly exploiting was originally
intended for modest quantities of imports, such as specialist items. To address this issue,
adapting the legal framework to close this loophole without stifling legitimate small-scale
imports is necessary. The Department of Trade, Industry, and Competition (DTIC) is currently
investigating and will provide recommendations. The regulatory response needs to strike a
balance between protecting local industry and ensuring consumers have access to affordable
goods. Effective regulation must safeguard the interests of all stakeholders while promoting fair
competition and sustainable economic growth.

Global Trade Dynamics

China’s role as a major exporter and the trade practices of companies like Shein have a
significant impact on global markets. South Africa’s response to Shein’s practices could set a
precedent for other countries facing similar issues, highlighting the need for coordinated
international efforts to address unfair trade practices. Additionally, the popularity of Shein in
South Africa is driven by consumer demand for affordable fashion. Policymakers need to
consider consumer interests while addressing these trade practices, ensuring that solutions do not
unduly harm consumers but promote ethical and fair competition. Balancing these dynamics is
crucial for formulating effective trade policies in a globalized economy.

2. Business ethics

Business ethics is about identifying and implementing standards of conduct in and for business
that will ensure that the interests of its stakeholders are respected. It thus refers to the values and
standards that determine the interaction between business and its stakeholders. The concept of
the self, good and other which are integral to ethics also apply to business ethics. Business ethics
is about ethical values and standards (good) that guide the business (self) in its interaction with
stakeholders (others). Consequently, what is at stake in studying and practicing business ethics is
to give content to the good (ethical values and standards) and to determine whether the
interaction between the self (business) and others (internal and external stakeholders) lives up to
these ethical values.
The ability to recognize and deal with complex business ethics issues has become a significant
priority in twenty-first–century companies. In recent years, a number of well-publicized scandals
resulted in public outrage about deception and fraud in business and a subsequent demand for
improved business ethics and greater corporate responsibility. Highly visible business ethics
issues influence the public’s attitudes toward business and can destroy trust. Ethical decisions are
a part of everyday life for those who work in organizations. Ethics is a part of decision making at
all levels of work and management. Business ethics is not just an isolated personal issue; policies
and informal communications for responsible conduct are embedded in an organization’s

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operations. This means that ethical or unethical conduct is the province of everyone who works
in an organizational environment.
Some special aspects must be considered when applying ethics to business. First, to survive,
businesses must earn a profit. If profits are realized through misconduct, however, the life of the
organization may be shortened. Competitors in particular are quick to point out a company’s
misconduct. For instance, in the battle between Microsoft’s Bing search engine and Google,
Google accused Microsoft Corp. of copying its Internet search engine results. Recognizing the
damage this could do to its reputation, Microsoft quickly defended its reputation and claimed
that Google’s accusations were little more than a publicity stunt.Second, businesses must balance
their desire for profits against the needs and desires of society. Maintaining this balance often
requires compromises or trade-offs. To address these unique aspects of the business world,
society has developed rules—both legal andimplicit—to guide businesses in their efforts to earn
profits in ways that do not harmindividuals or society as a whole.
2.1 Why business ethics?
Ethical misconduct has become a major concern in business today. Largely in response to the
financial crisis, business decisions and activities have come under greater scrutiny by many
different constituents, including consumers, employees, investors, government regulators, and
special interest groups. For instance, regulators are looking carefully at Countrywide Financial to
see whether its tope xecutives purposefully misled investors about the risks of certain securities it
was selling One lawsuit alleges that Countrywide and top executives like former CEO Angelo
Mozilo misled investors by portraying its investments as low risk. Such misconduct has lowered
consumer trust in business. Consumer trust in most industries is declining.
Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of
interest, defective products, bribery, and employee theft are all problems cited as evidence of
declining ethical standards. There are several evidece of such as elaborated in the case of Shein
as discussed below:
a. Misuse of Company Resources and Exploitation of Tariffs

Shein is currently accused of exploiting a tariff structure designed for small quantities of goods
to import on an industrial scale, thereby paying lower duties than traditional retailers. This
practice potentially gives Shein a significant cost advantage over local competitors such as TFG
and Woolworths, who are subject to higher import duties of 45%. This exploitation is
reminiscent of how Countrywide Financial misled investors about the risks of certain securities.
By misusing tariff structures, Shein misleads the market regarding the true cost of their products,
leading to unfair competition and market distortions. This not only undermines local businesses
but also raises serious ethical concerns about the integrity of Shein’s business practices.
b. Labor Practices and Sweatshop Allegations

Concerns have been raised about Shein’s labor practices, particularly allegations of "sweatshop
labor" used to produce extremely cheap goods. If these allegations are true, Shein's actions

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would constitute severe ethical violations akin to the safety lapses and ethical breaches seen in
BP’s operations, especially after the 2010 Deepwater Horizon disaster. These poor labor
practices not only violate human rights but also create unfair competition for companies adhering
to fair labor standards. Just as BP’s ethical misconduct led to a significant erosion of consumer
trust, Shein could face a similar decline in consumer confidence, severely impacting its brand
reputation and sales.
c. Legal and Regulatory Non-Compliance

Shein's alleged non-compliance with local customs and labor regulations mirrors the ethical
breaches seen in other industries, such as the FBI agents cheating on tests about surveillance
procedures. If Shein is found guilty of exploiting tariff loopholes and violating labor laws, it
could face significant legal repercussions, including fines and sanctions. Regulatory bodies, like
the Department of Trade, Industry, and Competition (DTIC), are investigating these practices,
much like the scrutiny Countrywide Financial faced. Such regulatory actions could result in
stricter oversight and operational limitations for Shein, highlighting the importance of adhering
to legal and ethical standards.
d. Impact on Local Communities and Industries

Shein's business practices pose a significant threat to local industries and employment, similar to
the conflicts Walmart faced with communities over building near historical sites. The potential
job losses and weakening of local industries due to Shein’s practices could lead to economic
damage and increased unemployment, affecting over 200,000 people in South Africa’s clothing,
textile, footwear, and leather sectors. This situation underscores the need for corporate
responsibility. Like Walmart eventually decided to relocate its Supercenter after stakeholder
concerns, Shein needs to consider the broader impact of its operations on local communities.
Failure to do so could result in increased resistance from stakeholders and damage to its social
license to operate.
Whether they are made in the realm of business, politics, science, or sports, most decisions are
judged either right or wrong, ethical or unethical. Regardless of what an individual believes
about a particular action, if society judges it to be unethical or wrong, whether correctly or not,
that judgment directly affects the organization’s ability to achieve its business goals. For this
reason alone, it is important to understand business ethics and recognize ethical issues.
 The benefits of business ethics

The field of business ethics continues to change rapidly as more firms recognize the benefits of
improving ethical conduct and the link between business ethics and financial performance. Both
research and examples from the business world demonstrate that building an ethical reputation
among employees, customers, and the general public pays off.
1. Ethics contribute to employee commitment

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Employee commitment comes from employees who believe their future is tied to that of the
organization and from employee willingness to make personal sacrifices for the organization.
The more a company is dedicated to taking care of its employees, the more likely it is that the
employees will take care of the organization. Issues that may foster the development of an ethical
culture for employees include the absence of abusive behavior, a safe work environment,
competitive salaries, and the fulfillment of all contractual obligations toward employees.Home
Depot associates, for example, participate in disaster- relief efforts after hurricanes and
tornadoes, rebuilding roofs, repairing water damage, planting trees, and clearing roads in their
communities. Because employees spend a considerable number of their waking hours at work, a
commitment by an organization to goodwill and respect for its employees usually increases the
employees’ loyalty to the organization and their support of its objectives.
For Shein, addressing allegations of sweatshop labor and ensuring fair labor practices could
significantly improve employee morale and loyalty. Providing a safe work environment,
competitive salaries, and respecting contractual obligations would show employees that the
company values their well-being. This commitment can lead to increased productivity, reduced
turnover, and a more dedicated workforce. Just as Home Depot’s employees participate in
disaster-relief efforts, Shein could engage in community and employee welfare activities to build
a stronger bond with its workforce.
2. Ethics contribute to investor loyalty

Investors today are increasingly concerned about the ethics, social responsibility, and reputation
of companies in which they invest, and various socially responsible mutual funds and asset
management firms help investors purchase stock in ethical companies. Investors are also
recognizing that an ethical culture provides a foundation for efficiency, productivity, and profits.
Investors know, too, that negative publicity, lawsuits, and fines can lower stock prices, diminish
customer loyalty, and threaten a company’s long-term viability. Many companies accused of
misconduct have experienced dramatic declines in the value of their stock when concerned
investors divested.
For Shein, adopting ethical practices and ensuring transparency in its operations could attract
socially responsible investors. An ethical culture can serve as a foundation for efficiency,
productivity, and profitability. Conversely, negative publicity from unethical practices can lead
to a decline in stock value and investor trust. By addressing the allegations and implementing
robust ethical standards, Shein could enhance its reputation and attract long-term investor
loyalty, similar to companies that have faced misconduct allegations and recovered by improving
their ethical conduct.
3. Ethics contribute to consumer satisfaction

It is generally accepted that customer satisfaction is one of the most important factors in a
successful business strategy. Although a company must continue to develop and adapt products
to keep pace with customers’ changing desires and preferences, it must also seek to develop
long-term relationships with its customers and stakeholders. Patagonia, Inc., has engaged in a
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broad array of ecological, socially responsible, and ethical behaviors over many years to better
connect with its target markets. The company has donated approximately $40 million to
environmentally oriented causes. Employees can volunteer for environmental groups and earn up
to one month’s pay. The entire clothing line was sourced using organic cotton beginning in 1996.
In addition, the company is currently creating the Patagonia National Park to protect wildland
ecosystems and biodiversity in Chile and Argentina. All new facilities are being built with LEED
certification, demonstrating a commitment to green building and the environment.
Shein can enhance consumer trust and satisfaction by addressing labor practice concerns,
ensuring product quality, and maintaining transparency. Like Patagonia, which engages in ethical
and socially responsible behaviors to connect with its target markets, Shein could implement
sustainable practices and support community initiatives. This commitment to ethics could
differentiate Shein from competitors and lead to increased customer loyalty and brand strength.

4. Ethics contribute to profits

A company cannot nurture and develop an ethical culture unless it has achieved adequate
financial performance in terms of profits. Businesses with greater resources—regardless of their
staff size—have the means to practice social responsibility while serving their customers,
valuing their employees, and establishing trust with the public. Ethical conduct toward customers
builds a strong competitive position that has been shown to positively affect business
performance and product innovation.When Intel discovered a design flaw in one of its chips, it
recognized the need to put stakeholders ahead of profits. Even though it cost the company $1
billion in repairs and delays, the company halted shipments so it could fix the problem. By acting
responsibly to ensure that it offered a quality product, Intel may be more profitable in the long
run than if it had simply ignored the problem and gotten caught after the product
introduction.Every day, business newspapers and magazines offer new examples of the
consequences of business misconduct. It is worth noting, however, that most of these companies
have learned from their mistakes and recovered after they implemented programs to improve
ethical and legal conduct.
For Shein, addressing ethical concerns and building a strong reputation for fairness and
responsibility could result in a competitive advantage. As seen with Intel’s decision to halt
shipments to fix a design flaw, prioritizing ethical behavior over short-term profits can lead to
long-term financial success. By ensuring ethical practices, Shein could avoid costly legal issues,
improve customer and investor trust, and foster innovation. Ethical conduct can also attract a
more loyal customer base, willing to support a company that aligns with their values.

Possible Consequences of Non-Ethical Behavior in the Shein Case Study

The case of Shein illustrates several potential consequences of non-ethical behavior, emphasizing
the importance of maintaining high ethical standards.

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1. Economic Impact and Unfair Competition

The economic impact of Shein's alleged exploitation of tariff structures designed for small
quantities of goods is significant and multifaceted. By importing goods on an industrial scale but
paying duties intended for small-scale imports, Shein gains a cost advantage that local
competitors cannot match. This practice distorts the market by creating an uneven playing field
where Shein can offer products at lower prices compared to local retailers who must pay higher
import duties.

Firstly, this unfair competition poses a direct threat to local businesses within South Africa's
clothing, textile, footwear, and leather industries. These industries collectively employ over
200,000 people across various stages of production and retail. Local companies, facing higher
operational costs due to compliance with tariff regulations, find it increasingly challenging to
compete with Shein's pricing strategy. As a result, these businesses may struggle to maintain
profitability, leading to potential downsizing of their workforce or even closure of operations.
This scenario exacerbates unemployment rates and contributes to economic instability within the
affected sectors.Moreover, the economic impact extends beyond immediate job losses. Local
businesses that are forced to downsize or shut down due to unfair competition from Shein may
also disrupt the supply chain and related industries. Suppliers of raw materials, logistics
providers, and retail outlets that rely on these businesses for revenue and employment also face
adverse effects. The ripple effect can lead to broader economic repercussions, affecting local
economies where these industries are significant contributors.

Furthermore, the competitive disadvantage imposed on local businesses undermines the broader
economic policies aimed at fostering domestic production and employment. Initiatives such as
the Retail-Clothing, Textile, Footwear, Leather Master Plan (R-CTFL), which aim to promote
local manufacturing and job creation, may struggle to achieve their intended goals if
international competitors like Shein continue to exploit regulatory loopholes.

2. Damage to Reputation and Consumer Trust

Allegations of sweatshop labor and poor working conditions raise serious ethical concerns for
Shein. Firstly, if Shein is found guilty of employing sweatshop labor practices, where workers
endure substandard wages, excessive hours, unsafe working conditions, and lack of labor rights,
it would violate fundamental ethical principles. Such practices contradict internationally
recognized labor standards and human rights, which modern consumers increasingly value and
prioritize in their purchasing decisions.
Consumer backlash is a significant concern in this context. Today's consumers are more
informed and conscientious about the ethical conduct of businesses they support. Instances of
unethical labor practices, once exposed, can provoke strong reactions from consumers who may
boycott Shein's products as a form of protest. This boycott can extend through social media
campaigns, advocacy groups, and consumer activism, amplifying the negative impact on Shein's

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brand reputationNegative publicity resulting from poor labor practices can also have enduring
effects on Shein's image. Media coverage highlighting exploitative conditions or labor rights
violations can tarnish the company's reputation, portraying it as unethical and insensitive to
human welfare. This negative perception can persist long after the initial incident, influencing
consumer perception and trust in Shein as a responsible corporate entity.
Moreover, the fallout from unethical labor practices goes beyond immediate consumer reactions.
It can lead to regulatory scrutiny and legal challenges, potentially resulting in fines, penalties, or
restrictions on Shein's operations. Governments and regulatory bodies may intervene to enforce
compliance with labor laws and ensure fair treatment of workers, further damaging Shein's
standing if violations are substantiated. Rebuilding trust and repairing reputational damage in the
aftermath of allegations involving sweatshop labor is a complex and arduous task for any
company. Shein would need to demonstrate genuine commitment to ethical practices,
transparency in its supply chain, and accountability for past shortcomings. Implementing robust
labor standards, conducting independent audits, and engaging with stakeholders to address
concerns are crucial steps toward restoring consumer confidence and mitigating reputational
harm.
3. Legal and Regulatory Consequences
Non-compliance with local customs and labor regulations can lead to severe legal repercussions
for Shein. Firstly, Shein's alleged exploitation of tariff loopholes, such as using a tariff structure
meant for small quantities of goods to import on an industrial scale, violates customs regulations.
If proven, this could lead to significant fines and penalties imposed by regulatory bodies
responsible for overseeing customs and trade practices. These fines are not only punitive but can
also be financially burdensome, affecting Shein's bottom line and profitability.
Moreover, allegations of violating labor laws, including practices like sweatshop labor or poor
working conditions, could further compound legal challenges for Shein. Labor regulations are in
place to protect workers' rights, ensure fair wages, and maintain safe working environments.
Non-compliance with these laws not only undermines ethical standards but also exposes Shein to
potential lawsuits, legal settlements, and reputational damage.Continued unethical behavior, if
unchecked, can escalate regulatory scrutiny from government authorities. This heightened
oversight may result in more frequent audits, inspections, and investigations into Shein's
business practices. Increased regulatory scrutiny not only consumes resources but also limits
Shein's operational flexibility and ability to conduct business freely. Moreover, stricter
regulations could be imposed as a response to unethical conduct, further constraining Shein's
operations and requiring costly compliance measures.
The impact of legal repercussions and heightened regulatory scrutiny extends beyond immediate
financial penalties. It can affect Shein's ability to attract investors, secure partnerships, and
maintain relationships with stakeholders who prioritize ethical business practices. Negative
publicity stemming from legal violations can damage Shein's brand reputation and consumer
trust, leading to decreased sales and market share.
4. Impact on Investor Confidence

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Investors are increasingly concerned about the ethical conduct of companies in which they
invest. Firstly, ethical misconduct by Shein, such as exploiting tariff loopholes or engaging in
questionable labor practices, can erode investor confidence. Investors are increasingly aware of
the impact of corporate behavior on long-term financial performance and sustainability. They
understand that negative publicity, legal disputes, and regulatory fines resulting from unethical
practices can harm a company's reputation and financial health. This awareness prompts
investors to scrutinize companies' ethical track records as part of their investment decision-
making process.
A loss of investor confidence can manifest in several ways. Existing investors may choose to
divest from Shein, selling off their shares due to concerns about the company's ethical practices.
This divestment can lead to a decline in Shein's stock value, as selling pressure increases and
demand for the company's shares decreases. A lower stock price not only affects shareholder
value but also signals to the market a lack of confidence in Shein's future prospects.Furthermore,
ethical misconduct can deter potential investors from considering Shein as an investment
opportunity. Institutional investors, ethical funds, and socially responsible investors may exclude
Shein from their portfolios or avoid investing altogether if they perceive the company's ethical
practices to be inadequate or controversial. This limits Shein's access to capital and reduces its
ability to raise funds for growth and expansion initiatives.
Maintaining high ethical standards is therefore crucial for Shein to sustain investor trust and
ensure long-term business success. Companies that prioritize ethical conduct demonstrate a
commitment to corporate responsibility, transparency, and accountability. These attributes are
increasingly valued by investors seeking to align their investment strategies with environmental,
social, and governance (ESG) criteria.