Business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed
The law = minimum acceptable standards of behavior, but many morally contestable issues are not covered by law.
Answers to ethics questions are often equivocal: There is no definitive ‘right’ answer
Ethics and morality
Morality is concerned with the norms, values and beliefs embedded in social processes which define right and wrong for an individual or a community.
Ethics is concerned with the study of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for a given situation. These rules and principles are called ethical theories.
A good understanding of ethics is important because:
The power of business in society is greater than before
Business has the opportunity to provide a major contribution to societies, now more than ever
Business malpractices can inflict enormous harm on individuals, communities and environment
Stakeholder demands on business to be ethical are becoming more complex and more challenging
Few businesspeople have received formal business ethics education or training
Ethical violations continue to occur in business, across countries and across sectors
Business ethics can provide us with the ability to assess the benefits and problems associated with different ways of managing ethics in organizations
Business ethics is extremely interesting in that it provides us with knowledge that transcends the traditional framework of business studies and confronts us with some of the most important questions asked by society.
Business ethics in different organizational contexts
Ethics in large vs. small companies
Small organizations – often little resources available to focus on ethics
Large organizations – have more formalized approaches to ethics management, however constrained by the need to focus on profitability and shareholder value, as well as their size and complexity of operations.
Private, public and civil society organizations
Private sector – responsibility primary towards shareholders/owners
Civil society organizations – responsibilities to constituencies they serve (and to their donors). Informal approach, emphasizing mission and values, limited in resources and training.
Public sector – responsibilities to higher general government and to the general public: bureaucratic and formalized approach to ethics management. Aim: Preventing conflicts of interest, corruption, etc.
Globalization – a key context for business ethics
Cultural issues: moral values taken for granted in one place are not understood elsewhere. This can cause friction and confrontations.
Legal issues: beyond borders, legal systems change. Business ethics starts where law ends, but law is not the same in different countries
Accountability issues: companies, often as large as entire nations in terms of GDP, have much more limited accountability, only towards their small group of shareholders. Globalization leads to a growing demand for corporate accountability.
Homogenizing effects of globalization: it creates a new deterritorialized space where business faces similar ethical questions worldwide.
Core components: Economic - Environmental - Social
Triple bottom line: People, Planet, Profit
Chapter 2: Framing Business Ethics
Are typically regarded as ‘artificial persons’ in the eyes of the law
Are notionally ‘owned’ by shareholders, but exist independently of them
Managers and directors have a ‘fiduciary’ responsibility to protect the investment of shareholders
Milton Friendman (1970): ‘The social responsibility of business is to increase its profits’.
Only human beings have a moral responsibility for their actions
It is managers’ responsibility to act solely in the interests of shareholders
Social issues and problems are the proper province of the state rather than corporate managers
Does a corporation have a moral responsibility? Yes:
The legal framework of most developed countries treat companies as a ‘legal’ or ‘artificial’ person that has responsibility for its actions.
Corporations have moral agency (internal decision structures & organizational cultures) of sorts that shapes the decisions made by those in the corporations
Corporate Social Responsibility
Two key questions:
Why do corporations have social as well as financial responsibilities?
Often boils down to enlightened self-interest. This implies taking on social responsibilities insofar as doing so promotes its own self-interest. For example: increased customer satisfaction, avoiding boycotts, becoming more attractive to employees, avoiding legislative retaliatory action, creating an improved and stable competitive context in which to do business on the long term.
It is often argued that this is merely profit maximization ‘under the cloak of social responsibility’. However, what matters are the primary motivations of the decision-maker. Was this profit or altruism? This is often difficult to determine.
There are also moral arguments for CSR:
Corporations cause problems, and hence have a responsibility to solve these
As powerful social actors, corporations should use their power responsibly in society
All corporate activities have social impacts of one sort or another, whether through the provision of products and services, the employment of workers or other corporate activities. Hence, corporations cannot escape responsibility for those impacts.
Corporations rely on the contribution of a much wider set of stakeholders than just shareholders, and hence have a duty to take into account the interests and goals of these stakeholders as well as those of shareholders.
What is the nature of these social responsibilities?
Carroll’s four-part model of CSR:
Economic responsibility – companies have shareholders who demand a reasonable return on their investments, have employees who want to earn wages, and customers who want quality products against fair prices.
Legal responsibility – companies must abide by the law and ‘play by the rules of the game’.
Ethical responsibility – these responsibilities oblige companies to do what is right, just and fair even when not compelled to do so by the legal framework. For example, societies expect companies to do something against climate change.
Philanthropic responsibility – activities desired by society that improve the quality of life of employees, communities, and society in general.
2 problems with the model: (1) biased towards US context, (2) does not take into account what should happen when two responsibilities are in conflict.
In every part of the world, emphasis is put on different parts of the CSR pyramid. The model is still very vague and arbitrary, which forces us to ask not so much the question of whether to do CSR, but of how to do it.
Corporate social responsiveness – a more strategic concept
4 philosophies or strategies towards social responsiveness by Caroll
Reaction – corporation denies any responsibilities for social issues
Defense – corporation admits responsibilities, but fights it.
Accommodation – corporation accepts responsibility and does what is demanded of it by relevant groups
Pro-action – corporation seeks to go beyond industry norms and anticipates future expectations by doing more than is expected
Outcomes of CSR: corporate social performance
Social policies – explicit and pronounced corporate social policies stating the company’s values, beliefs and goals with regards to its social environment
Social programmes – specific social programmes of activities, measures and instruments implemented to achieve social policies
Social impacts – social impacts can be traced by looking at concrete changes the corporation has achieved through the programmes implemented in any period. Often difficult to measure
Stakeholder theory – looking at the various groups towards which a company has a responsibility
Companies are not managed by the interests of shareholders alone, but a wide range of groups, or stakeholders, also has a legitimate interest in the corporation as well
Principle of corporate rights – companies have the obligation to not violate the rights of others
Principle of corporate effect – companies are responsible for the effects of their actions on others
A stakeholder fits in one or both of the above principles.
Why do stakeholders have a legitimate claim?
There are negative externalities resulting from business actions
The agency problem: many shareholders have predominantly short-term interests in share prices, while employees, suppliers and customers have much more long-term interests.
Managers must balance the fiduciary responsibility to look after shareholders’ interests with the competing interests of other stakeholders. In this light, one can argue that there is a case for some model of stakeholder democracy. The model of corporate governance must be altered to include the voices of various stakeholder groups.
Different types of stakeholder theory:
Normative stakeholder theory – attempts to provide a reason why corporations should take into account stakeholder interests
Descriptive stakeholder theory – attempts to ascertain whether (and how) corporations actually do take into account stakeholder interests
Instrumental stakeholder theory – attempts to answer the question of whether it is beneficial for the corporation to take into account stakeholder interests.
Corporate accountability – the firm as a political actor
More and more power flows from politics to corporations. Are corporations answerable in some way for the consequences of their actions?
This yields considerable risks, and governments are often not anymore able to protect their citizens against these threats (BSE, SARS, Chernobyl incident, bird flu). Governments are losing power, causing a weakened state, while at the same time there is a massive rise in corporate power.
To enable democratic accountability, companies need to maintain transparency. They must acknowledge and make visible corporate decision, policies, activities and impacts to relevant stakeholders.
Three perspectives on definitions of CC:
A limited view of CC – equates CC with corporate philanthropy
An equivalent view of CC – equates CC with CSR
An extended view of CC – acknowledges the extended political role of the corporation in society. Citizenship results in three entitlements resulting from the liberal tradition: Social rights (freedom to participate in society), Civil rights (freedom from abuses and interference by third parties) and Political rights (right to vote or participate in governance beyond his or own privacy). Corporate citizenship describes the corporate function for governing these citizenship rights for individuals.
Social role of the corporation in governing citizenship
Social rights - Corporation as either provider or ignorer
Civil rights - Corporation as either disabler or enabler
Political rights - Corporation as either channel or blockage
Chapter 3: Evaluating Business Ethics
A business wants to base its ethical decisions on a systematic, rational, and widely understandable argument so that they can be adequately defended, justified, and explained to relevant stakeholders. This is where normative ethical theories come into play.
Ethical theories are the rules and principles that determine right and wrong for a given situation.
There are two extreme positions towards ethical theory:
Ethical absolutism: There are eternal, universally applicable moral principles. According to this view, right and wrong are objective qualities that can be rationally determined.
Ethical relativism: Morality is context-dependent and subjective. Relativists believe that there are no universal right and wrongs that can be rationally determined – it depends on the person taking the decision and the culture in which they are located. Ethical relativism is different from descriptive relativism. The latter merely suggests that different cultures have different ethics; the former proposes that both sets of beliefs can be equally right. Ethical relativism then is still a normative theory.
Pluralism: a middle ground between absolutism and relativism.
Two important assumptions by Kaler (1999):
Morality is a social phenomenon. In order to make good business decisions, we need to develop knowledge of the different moralities that we are likely to be faced with.
Morality is about harmand benefit.
Differences in Northern American and European views on business ethics:
Individual versus constitutional morality – in North America, there is a more individualistic perspective on morality, while in Europe there is a greater focus on the economic system and the wider governing institutions.
Questioning versus accepting capitalism – In the US, ethical problems are seen as occurring within the capitalist system, which treats it as a given. In Europe, relevant parts of business ethics focus on questioning the ethical justification of capitalism.
Justifying versus applying moral norms – The challenge in Europe for business ethics consists to a strong degree of the justification and ethical legitimation of norms, resulting from a strong pluralism of moral convictions and values (e.g. in the Netherlands, Germany and Sweden). In the US – as far as the white, Christian majority is concerned – these values are not questioned but are fixed. They focus more on the application of morality to business situations.
Western modernist ethical theories
Absolute by nature – they offer rules or principles to apply. They start with assumptions about the nature of the world, and then more specific assumptions about the nature of human beings. The main advantage is that they have a rather well-defined rule of decision, and therefore provide us with a fairly unequivocal solution to ethical problems.
Consequentialist (teleological) ethics: If the outcome of an action is desirable, then the action itself is morally right; if the outcome of the action is not desirable, the action is morally wrong.
Non-consequentialist (deontological) ethics: base moral judgement on the underlying principles of the decision-makers motivation. An action is right or wrong because the underlying principles are morally right/wrong, not because of its consequences.
Egoism: Focus on maximization of individual desires and interests. A decision is morally right when the decision-maker freely decides in order to pursue either their short term desires or their long-term interests. Man has only limited insight into the consequences of his actions. Egoism ≠ selfishness. Limitation: action of one has direct consequences on others: market failure.
Utilitarianism: Focus on collective welfare, man avoids pain and looks to gain pleasure (hedonist). An action is morally right if it results in the greatest amount of good for the greatest amount of people affected by the action. Utility maximization, takes shape in a cost-benefit analysis of some sorts. Act utilitarianism: looks at single transactions and their results on the pleasure/pain balance. Rule utilitarianism: looks at classes off action and asks whether underlying principles of an action produce more pain or pleasure for society in the long run.
Stem often from religious views, they ground ethical behavior in some eternally valid principles, which are derived from a duty to others, or to a specific deity.
Ethics of duties: Developed by Kant. Morality is a question of certain eternal, abstract and unchangeable principles that humans can apply to all ethical problems. 3 rules:
Act only to that maxim by which you can at the same time will that it should become a universal law
Act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only
Act only so that the will through its maxims could regards itself at the same time as universally lawgiving
According to Kant, an action was only moral if it has passed the above three ‘tests’. Great similarity with the ‘Golden rule’ in almost all religions: ‘treat others as you wanted to be treated yourself’. Problems: Over-optimistic, Complexity and undervaluing outcomes (they are not taken into account, only the ‘duties’ are.
Ethics of right and justice: Conceptualized by Locke, it claims that humans are entitled to certain ‘natural rights’ or moral claims, such as rights to life, freedom and property, freedom of speech, conscience, consent, privacy and entitlement to a fair legal process. These natural rights ‘are a certain basic, important and unalienable entitlements that should be respected and protected in every single action’. These rights are sometimes seen as related to duties, since the rights of one person can impose duties on another. Examples:
Declaration of the Rights of Man
United Nations Declarations of Human Rights
Limitation: the notions of rights are quite strongly located in a Western view of morality.
Fair treatment of individuals in a given situation with a result that everyone gets what they deserve. Two views:
Egalitarian approach: justice is the same as equality, burdens and rewards should be distributed equally and deviations from equality are unjust. Problem: does not take into account differences between people, and offers no incentives for hard work and innovation.
Non-egalitarian approach: justice in economic systems is ultimately a product of the fair process of free markets.
Solution lies in between. The ‘Theory of justice’ by Rawls (1971) proposes 2 tests for whether an action could be called just:
Each person is to have an equal right to the most extensive total system of basic liberties compatible with a similar system of liberty for all.
Social and economic inequalities are to be arranged so that they are both:
To the greatest benefit of the least advantaged; and
Attached to offices and positions open to all under conditions of fair equality of opportunity
Limits of Western modernist theories
Too abstract: too theoretical and philosophical, not practically applicable in business
Too reductionist: theories focus on one aspect of morality (duties, consequences, rights) when all matters at the same time
Too objective and elitist: only specialist ethicists and philosophers can pronounce the right and wrongs of other people without any experience of the actual situation they are faced with.
Too impersonal: do not take into account personal bonds and relationships
Too rational and codified: feelings and emotions are not taken into account
Too imperialist: why would Western theories be suitable for business people all over the world?
Alternative approaches on ethical theory
Ethical approaches based on character and integrity: Virtue ethics contends that morally correct actions are those undertaken by actors with virtuous characters. Therefore, the formation of a virtuous character is the first step towards morally correct behavior.
Ethical approaches based on relationships and responsibility: Feminist ethics starts from the assumption that men and women have fairly different attitudes towards organizing social life, with significant impact on the way ethical conflicts are handled. Feminist ethics is an approach that prioritizes empathy, harmonious and healthy social relationships, care for one another, and avoidance of harm above abstract principles. Focus on Relationships, Responsibility and Experience.
Ethical approaches based on procedures of norm generation: Discourse ethics aims to solve ethical conflicts by providing a process of norm generation (on the spot, democratic agreement) through rational reflection on the real life experience of all relevant participants.
Ethical approaches based on empathy and moral impulse: Postmodern business ethics. ‘Modern’ theories such as capitalism, communism, socialism etc. are too ambitious, reductionist, optimistic and can therefore not explain the complex reality of human existence. Postmodern business ethics is an approach that locates morality beyond the sphere of rationality in an emotional ‘moral impulse’ towards others. It encourages individual actors to question everyday practices and rules, and to listen to and follow their emotions, inner convictions, and ‘gut feelings’ about what they think is right and wrong in a particular situation. Therefore, it does not provide us with rules, principles or ‘recipes’ for ethical decision-making. Characteristics
Examples rather than principles
‘Think local, act local’
Page 129: Summary of theories
Chapter 4: Making Decisions in Business Ethics
Stages in ethical decision-making
Four-stage model by James Rest (1986), in which individuals move through a process whereby they:
Recognize a moral issue
Make some kind of moral judgment about that issue Focus of normative theories
Establish an intention to act upon that judgment
Act according to their intentions
Influences on ethical decision-making
Individual factors: The unique characteristics of the individual making the decision (age, gender, experience, socialization). Research on this originates mainly from the US, as the North American focus is often on choice within constraints.
Situational factors: Features of the context that influence whether the individual will make an ethical or an unethical decision (work context features such as reward systems, job roles, organizational culture and issue features such as the intensity of the moral issue or the ethical framing of the issue). Research on these factors originates mainly from Europe, as the European concern is often more with the constraints themselves.
Individual influences on decision-making:
Age and gender: hard to distinguish, depends on experiences
National and cultural characteristics: different backgrounds have different views. Hofstede’s 5 dimensions have a significant impact on acting upon ethical questions in business:
Education and employment: there are definite differences between those with different educational and professional experience present
Cognitive moral development: refers to the different levels of reasoning that an individual can apply to ethical issues and problems. Three levels:
Level one (preconventional): the individual exhibits a concern with self-interest and external rewards and punishments. Stage 1: Obedience & Punishment >> Stage 2: Instrumental purpose and exchange
Level two (conventional): the individual does what is expected of them by others. Stage 3: Interpersonal accord, conformity and mutual expectations >> Stage 4: Social accord and system maintenance
Level three (postconventional): the individual is developing more autonomous decision-making based on principles of rights and justice rather than external influences. Stage 5: Social contract and individual rights >> Stage 6: Universal ethical principles
Most important critiques:
Gender bias: model mostly tested on male subjects
Implicit value judgments: ‘rights and justice’ are chosen to prevail above numerous other bases of morality, such as responsibilities and relationships, virtues and moral impulse.
Invariance of stages: there is also context dependency involved in making ethical decisions
Locus of control: determines the extent to which he or she believes that they have control over the events in their life.
High locus of control: ‘I can shape my own future’
Low locus of control: ‘My future depends on others’ actions, luck and fate’
Personal values: an enduring belief that a specific mode of conduct or end state of existence is personally or socially preferable to an opposite or converse mode of conduct or end state
Personal integrity: an adherence to moral principles or values
Moral imagination: does one have a variety of possibilities and moral consequences of their decisions, the ability to imagine a wide range of possible issues, consequences, and solutions.
Situational influences on decision-making:
Magnitude of consequences
Probability of effect
Concentration of effect
Moral framing: how is the moral issue described?
Managers tend to rationalize their behavior, out of fear of losing:
Harmony by provoking confrontation and finger-pointing
Efficiency in decision making
Their image of power and effectiveness
Reward systems: people tend to do what they are rewarded for, e.g. maximizing sales. When ethical behavior is not rewarded, it will often not be conducted.
Authority: people do what they are told to do, or what they think they are being told to do.
Bureaucracy: A number of negative effects on decision-making:
Work roles: people quickly adopt the roles that are assigned to them, and will act in correspondence with these roles The Stanford Experiment
Organizational culture: some norms are determined by shared values, beliefs and behaviors within the organization, which can act both as barriers as well as enhancers of ethical behavior. Therefore, an ‘ethical culture’ is needed.
National context: different cultures maintain different views of what is right and wrong (different on the Hofstede perspective, which focuses on the individual instead of the national culture in which the issue is taking place).
Chapter 5: Managing Business Ethics
Business ethics management is the direct attempt to formally or informally manage ethical issues or problems through specific policies, practices, and programmes.
Components of business ethics:
Mission or value statements
Codes of ethics
Risk analysis and management – management of financial and reputational risk
Ethics managers, officers and committees
Ethics education and training
Stakeholder consultation, dialogue and partnership programmes
Auditing, accounting and reporting
Three focal areas:
Setting standards of ethical behavior
Managing stakeholder relations
Assessing ethical performance
Setting standards of ethical behavior: designing and implementing codes of ethics
Organizational or corporate codes of ethics
Professional codes of ethics
Industry codes of ethics
Programme or group codes of ethics
Prevalence of codes of ethics
2/3rds of large companies have codes of ethics
Content of codes of ethics
Define principles or standards that the entity wants to uphold
Set out practical guidelines for employee behavior, either generally or in specific situations (such as accepting gifts, treating customers, etc.)
Effective codes of ethics should contain both specific values and specific content and frameworks.
Effectiveness of codes of ethics
Management must be role models. There must be participation from employees in the development to increase involvement and ‘buy-in’. Companies must be willing to discipline employees found in breach of the codes. Also, follow-through is very influential on employee behavior. To achieve this, codes must be translated into a standardized and quantified audit instrument for clear assessment, and code compliance must be linked to managers’ performance evaluation.
Managing stakeholder relations
Assessing stakeholder importance: an instrumental perspective
Three relationship attributes to determine the perceived importance of stakeholders
Power: power to influence organizational action
Legitimacy: whether the organization perceives the stakeholder’s actions as desirable, proper or appropriate
Urgency: the degree to which stakeholder claims are perceived to call for immediate attention
Types of stakeholder relationship
Antagonistic as well as co-operative behavior is possible with stakeholders
Stakeholder relationships can take a variety of different forms, including the following:
Challenge – mutual opposition and conflict
Sparring partners – relationship based on ‘healthy conflict’ and periodic bouts of conflict
One-way support – relationship based on philanthropy, sponsorship or other contribution
Mutual support – formal or informal two-way support (e.g. strategic philanthropy)
Endorsement – relationship based on paid/unpaid public approval to a partner in relation to a specific product, or programme (e.g. labeling and accreditation schemes)
Project dialogue – relationship based on discussion between partners regarding specific project or proposal, such as stakeholder dialogue accompanying major regeneration or construction projects
Strategy dialogue – discussion of long-term issues and developing an overall strategy for organizations, industries or regulatory regimes
Task force – relationship based on co-operation to achieve a specific task, such as a research project or new product/system development
Joint venture or alliance - relationship based on formal partnership involving significant mutual resource commitment to achieve specific goals.
Problems with stakeholder collaboration
Resource intensity: time-consuming and expensive compared to normal decision making
Culture clash: different values and goals
Schizophrenia: conflict and collaboration at the same time may result in schizophrenic behavior
Uncontrollability: no guarantee that a mutually acceptable outcome will be reached
Co-optation: ‘greenwashing’ or ‘bluewashing’ by allying with certain organizations/labels
Accountability: if decisions are made ‘behind closed doors’, accountability may be compromised
Resistance: as a result of these or other concerns, other stakeholders may try to resist the development of a collaborative relationship.
Assessing ethical performance
Reports labeled ‘ethical’ will focus on the individual-level aspects of the business, such as compliance with codes of ethics, legal violations, etc.
Reports labeled ‘environmental’ will focus on the organization’s impact on the natural environment
Reports labeled ‘social’ will focus a more broad range of topics, including employee conditions, health and safety, equal opportunities, human rights, corporate giving and community relations.
Reports labeled ‘sustainability’ are often concerned with the triple bottom line (People, Planet, Profit).
Social accounting will be used as the generic term.
Defining social accounting
It focuses on issues other than (though not necessarily excluding) financial data
The intended audience consists of stakeholders other than (though not necessarily excluding) shareholders
Unlike financial accounting, social accounting is not (at least as yet) required by law in most jurisdictions
Social accounting is the voluntary process concerned with assessing and communicating organizational activities and impacts on social, ethical and environmental issues relevant to stakeholders.
Why do organizations engage in social accounting?
Internal and external pressure
Improved stakeholder management
Enhanced accountability and transparency
There are also numerous disincentives, such as perceived high costs, insufficient information, lack of standards, or unwillingness to disclose sensitive or confidential data.
What makes for ‘good’ social accounting?
Evolution: a commitment to learning and change
Management policies and systems
Important schemes in place that seek to tackle specific aspects of social accounting. For example:
Auditing and certifying
Organizing for business ethics management
Formal ethics programmes
Compliance orientation – emphasis on preventing, detecting and punishing violations of the law, not of ethical codes.
Values orientation – defining organizational values and encouraging employee commitment to certain ethical aspirations.
External orientation – focus on satisfying external stakeholders. What is regarded as right is what is expected or acceptable
Protection orientation – protecting top management from blame for ethical problems or legal violations
US: Compliance approaches
Europe & Asia: Values and external approaches
Informal ethics management: ethical culture and climate
Culture change is very popular, though very difficult to implement.
Cultural learning is a different approach. It focuses on smaller subcultural groups within the firm and enabling employees to make their own ethical decisions.
Business ethics and leadership
To cope with change, leadership is required instead of management. The leader’s role in bringing about a culture change is to set an example and be a moral person and a moral manager. In supporting cultural learning, the leader’s role is more a facilitating, participating and empowering one.