Unethical Business Practices [From the Distasteful to Despicable]

The world is a competitive place. Especially in business.

When it comes to making money, the temptation to squeeze out just a little more profit can often lead people down an immoral (and often destructive) path. History is filled with examples of this.

In this article, I am going to discuss 17 of the most common unethical business practices. Some are merely distasteful, while others are downright despicable. In fact, some of the worst practices are illegal and could lead to actual physical harm (and even death) to consumers or employees.

To help organize this list, I broke out the unethical practices based on who is affected most by the activities. I cover unethical business practices against four major groups: (i) consumers, (ii) employees, (iii) competitors and (iv) shareholders and investors.

I will close out the article by sharing some famous examples of unethical business practices, so you can see some concrete historical examples (and discover how things played out for the companies who engaged in them). Let's get into it!

Note: If you want to view a condensed version of this article via video, check out my YouTube video below.

The information contained in this post is for informational purposes only.  It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice.  You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.

What is an Unethical Business Practice?

An unethical business practice is an activity that violates commonly accepted moral and (sometimes legal) standards for business conduct. Although not everyone agrees on matters of morality, unethical business practices generally involve some form of deception, undue influence, or harmful activity against consumers, employees or third parties.

Unethical Practices Against Consumers

Some of the most common (and troubling) unethical business practices are against consumers. Companies may be so eager to generate profits that they do so at the expense of consumers who may become the victims of fraud, unsafe products, price gouging and much more.

In many cases, there are consumer protection laws in place to discourage these types of activities, but that doesn't stop some companies from rolling the dice and pushing the envelope to earn that extra buck.

False Advertising

You have all seen commercials on TV or ads online that have some pretty outrageous claims.

In a lot of cases, it is mere “puffery,” which is just a fancy legal term for exaggerated or false praise (e.g., we sell the best and most satisfying back scratcher in the world). People have become so accustomed to this type of advertising that it isn't too problematic. Nobody really takes those claims at face value.

But when a company makes factual claims about their products that turn out to be false (e.g., the best selling car in the US), then they can fool customers because they are asserting facts, not opinions.

In many cases, companies try to push the truth without actually making fraudulent claims. Such as the famous case where Volkswagen advertised low-emission, clean diesel cars, when in fact their emissions were anything but low. It caused huge reputational harm to the company (as well as big fines and damages).

There are other ways in which companies can engage in false advertising (or at least get very close to it), such as the old “bait and switch” tactic, misleading photos of the product, and inaccurate comparisons of products. Unfortunately, these types of practices are common in the marketplace.

Unsafe Products

In the rush to make a quick buck, companies may often take shortcuts when it comes to creating a safe product.

In the context of food and drugs, the FDA regulates these areas, so there is some built-in legal protection for consumers. But it's far from foolproof. There have been plenty of lawsuits against drug-makers for products that were unsafe (e.g., the $3.3 billion recall of Pfizer's anti-arthritis drug, Bextra).

The same holds true for food. Take, for example, the massive salmonella outbreak for peanut butter in 2009. But there are less high profile examples too. The simplest (and probably most common) example is a restaurant that has poor sanitary practices which result in food poisoning for their customers.

Of course, unsafe products aren't limited to food and drugs. Toys, phones, and cars are just a few of the types of product that can be unsafe if corners are cut.

Poor Quality

Even if a product is not inherently unsafe, it can just be poorly made.

Businesses wanting to save costs on labor and materials will often put out products that will break or be unusable after a relatively short period of time. There are too many examples of this to name, but it is a very common practice.

Now to be fair, if you are hunting for a budget-friendly item, you are not expecting world class construction and materials. But there is a difference between a product that is affordable and can last a reasonable length of time vs. a product that is so poorly made that it falls apart in a week.

Excessively High Prices

Some companies will charge excessively high prices for their products.

Although not necessarily illegal, it can be a distasteful practice, especially when the product is mediocre. Fortunately, the free market usually takes care of this by eventually driving that company out of business or forcing it to reduce its prices due to competitive pressure (especially now that consumers can easily comparison shop online).

Still, there are cases when a company may have such dominating market share that it can impose higher prices without meaningful competition to stop it (more on that later when we discuss monopolistic practices).

Unethical Practices Against Employees

Unethical business practices against employees is the next major category we are going to cover. These practices run the gamut from poor working conditions to unfair pay and can be a major source of pain for normal working folks who just want to earn a fair wage in a decent working environment.

Poor Working Conditions

Whether it is unsafe equipment in a factory, unconscionably long hours, or simply a boss that is awful and demeaning, poor working conditions are an unethical business practice that can lead to mental stress, exhaustion, and even injury or death.

Outsourcing

With the constant pressure to save on costs, many companies turn to cheaper labor in other countries.

This sort of outsourcing happens all of the time and, by now, is viewed as a simple business decision. But it can have a serious impact on the existing workers who will lose their jobs as a result. Now I understand the need for companies to remain competitive in the global marketplace, but I also see how it can be unethical when a company forces large groups of people to lose their livelihood so that it can improve its bottom line.

Discrimination

There are some companies that have employees who engage in illegal discrimination. This can include discrimination based on race, color, religion, sex. age, national origin, etc. This is an unethical practice that has seen a lot of attention over recent years and many companies are taking steps to prevent it from happening.

But there are still plenty of examples where discrimination and harassment have been alleged and companies (some of them very large) have been called out for it. For example, the US government recently sued Uber for alleged discrimination against people with disabilities.

Unfair Pay

The question of what is “fair” compensation is a difficult one to answer.

In the US, there are many who advocate for an increase to the minimum wage and many companies and governmental entities have taken steps to increase their wages as a result. But there are plenty of companies who have not followed suit.

I understand the arguments on both sides, and won't let this devolve into a political debate, but the bottom line is that in some cases, workers may not be receiving fair pay for the amount and type of work they do (especially in countries that are less developed than the US where they may be making pennies on the dollar for the same work).

Unethical Practices Against Competitors

The business world is cutthroat and companies are always looking for an edge. That means that sometimes a company will resort to immoral practices ranging from theft to anti-competitive practices against their business rivals. Here are some of the most common unethical business practices against competitors.

Stealing a Competitor's Intellectual Property

Copycats abound in the business world. As Bill Gates has purportedly said, “intellectual property has the shelf life of a banana.”

Taking someone else's intellectual property, especially if it's protected under law (e.g., copyright, patent, trademark, trade secret), and pawning it off as your own is a no-no, but some companies will run the risk of a cease and desist letter and potential lawsuit to gain a competitive advantage.

Of course, theft is always immoral and the fact that it has become commonplace in the business world doesn't make it right.

Monopolistic Practices

While technical monopolies are illegal in the US, that doesn't mean that there aren't companies with huge market dominance. Google, for example, has an overwhelming lead when it comes to search engine usage (over 86%). In second place is YouTube (also owned by Google!). Compare that with Bing, which is Microsoft's alternative to Google Search (at around 7%). Source

This means that if a company wants to advertise on search engines, they are probably going to go with Google. And that means overwhelming market influence.

According to Investopedia, common monopolistic practices include restricting output, raising prices and enjoying supernormal profits.

Obviously, the lack of competition is not helpful to consumers and can result in absurd profits for the company that controls a dominant share of the market.

Poaching Employees

Finding good employees is critical to the success of any business. So when a company identifies someone who is with a competitor and poaches them, it is a big loss to the competitor and a huge gain to the company that hired away the employee.

While not illegal in the US (we operate in a free market when it comes to employment opportunities), it can create ethical issues when a company steals an employee in breach of a contract.

For example, when a business hires another company to work on a project, they usually sign a contract that contains a non-solicitation clause that prohibits the business from recruiting the other company's employees. If the business likes the other company's employee and works out a deal to hire them away, that can be a breach of contract (and an unethical way to conduct business).

Bribery

Bribery is a pretty clear cut case of immoral activity.

But many companies still use this practice to gain an edge over competitors. Whether it is bribing government officials to get their products approved or greasing the palms of bankers to get loans, bribery is a tactic that is still used today, especially in countries where such practices are common (and in many cases, expected).

Unethical Practices Against Shareholders and Investors

The final category we are going to discuss is unethical business practices against shareholders and investors. They include shady accounting, misleading reporting and insider trading. Publicly traded companies, in particular, have strict rules around these types of practices, which can carry stiff penalties, up to and including jail time.

Fraudulent Accounting

There are standards of accounting that exist in the business world. When a company wants to inflate its numbers or hide some of its liabilities, it may engage in shady accounting practices. Of course, in addition to being potentially illegal, it is highly immoral to mislead investors or owners in this way.

Poor Environmental Practices

Some companies will adopt poor environmental practices to save money.

They may dump waste into the ground or water, dispose of pollutants into the air, and do other things that are harmful to the environment. Again, in the US, much of this type of activity is regulated by the EPA and companies can face stiff fines if they violate the law.

But that doesn't stop some companies from continuing to pollute the environment (especially in places in the world that may be less regulated).

Excessive Executive Compensation

Executive compensation has been a hot topic for many, especially with all of the discussion around income equality. While some may hold that the free market should determine executive pay, others argue that it is unethical for executives to make so much more than entry level workers in the company.

Because of this concern, many publicly traded companies have compensation committees where board members discuss CEO compensation and pay a lot of attention to whether it is fair or excessive.

Misleading or Inaccurate Reporting (For Public Companies)

The SEC is the regulatory agency in the US responsible for making sure publicly traded companies accurately report on their results.

Companies who misreport (or omit material information) can suffer fines and reputational harm. But the temptation to fudge the numbers or not mention a risk or development at the company that can harm the stock price is sometimes too great. When that happens, companies will lie about their numbers or omit the negative development and hope they don't get caught.

Of course, this is a completely unethical way to operate because you are harming investors who have bought your stock and who rely on the truth of your publicly-reported results.

Insider Trading

The final unethical business practice we will discuss is insider trading. That is when someone has information about a company that is not publicly available and trades on that information.

Because all trades have a counterparty, the person doing insider trading is taking advantage of that counterparty. It's a completely unethical business practice and people can go to jail (up to 20 years) for engaging in it.

Famous Examples of Unethical Business Practices

Enron

If you were an adult in 2001, you probably remember the Enron scandal. It's one of the most famous accounting scandals in history and was one of the drivers of sweeping legislation aimed at improving the accuracy of financial reporting for public companies (the Sarbanes-Oxley Act).

Enron was a huge energy company that was raising eyebrows with some analysts back in early 2001 because they used confusing accounting practices. When the SEC looked into it, they discovered that certain special purpose entities (SPEs) under the Enron umbrella that appeared to be making money were actually losing money and Enron was attempting to hide these liabilities through these SPEs.

The company eventually collapsed due to this and had to file for Chapter 11 bankruptcy.

Volkswagen

Volkswagen was involved in an emissions scandal which started in September 2015, when the EPA declared that it believed Volkswagen had cheated on emissions tests.

The suspicions turned out to be true and Volkswagen had to pay massive fines and damages. The scope of the misconduct was huge, with some claiming that it affected up to 11 million cars.

Apple (Foxconn)

Apple received a ton of bad press between 2010-2012 when it was discovered that their supplier in China, Foxconn, was engaging in unethical business practices, such as wage and hours exploitation and underage workers. There were reports of high suicide rates (and who can forget the imagery of nets in the factory to “catch” people attempting suicide).

Since that time, Apple has implemented a supplier code of conduct and human rights policy, both of which are aimed at addressing these types of ethics issues.

Wells Fargo

In 2018, it was uncovered that Wells Fargo had been opening up customer accounts without customer consent. This account fraud scandal was widely reported at the time and caused immense reputational harm to the company (who had been plagued with scandals in the past).

This particular scandal was purportedly due to a culture of extreme pressure and high incentives to open up accounts through cross selling. Wells Fargo CEO at the time was forced to resign and the bank had to pay out significant fines ($185 million) and make sweeping changes to its practices.  

Uber

Uber faced serious allegations of sexual discrimination and harassment back in 2017. It purportedly promoted a “bro” culture which resulted in sexist jokes and there was an allegation that senior leaders visited a brothel in South Korea. This ultimately led to the resignation of CEO Travis Kalanick.

The new CEO, Dara Khosrowshahi, has made efforts to remediate these cultural issues and improve Uber's reputation. Apparently, his efforts were successful because Uber recently went public in May 2019 with a market cap at the time of nearly $70 billion.

Conclusion

So there you have it – 17 of the most common unethical business practices, ranging from the distasteful to despicable (with some famous historical examples to boot).

If you want to learn how to start a business (and do it right!), check out my ultimate beginner's guide to starting a business. We cover each step of the process in detail (from ideation to launch), so you can successfully get your new business off the ground.

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