Chapter 4: General Ethical Theories and
Business Ethics
By Mark Schafer, Bryce Jones, Aries Quintero and Tristan Porter
I. The Basics of Ethics
The junk bonds of the 1980’s, the Enron scandal, and the 2008 financial crisis are events in which
business leaders acted unethically. Each of these events had a dramatically negative effect on a multitude
of innocent U.S. citizens. For instance, the remarkable fallout from a single, middle-sized American
company, Enron, can be observed. The following video emphasizes how large of an effect a few people
acting unethically can have. http://www.youtube.com/watch?v=Uxd9AeXft64 1 Not only did these
unethical actions affect the shareholders, but it also led to the unemployment of hundreds of individuals in
both Enron and the accounting firm, Arthur Anderson, according to the video. In addition to this, the
effect that it had on Enron’s suppliers, customers, Arthur Anderson’s clients, as well as any of the other
parts of the connected community went completely unknown.
A larger scale example of ethical implications was noted in the 2008 American financial crisis. It
would be hard to say that ethics was fully to blame for the crisis, but most experts would agree that the
economic crisis got out of hand partially due to ethics. Unethical actions such as loose bank to bank
lending and the financing of a massive amount of subprime mortgages around the country were two major
examples of greed blinding the eyes of those in power, ultimately coming back to cripple the entire
economy.2 Subprime mortgages are loans to borrowers with poor or below average credit. In order to
protect themselves, banks charge higher interest rates on these mortgages to help cover possible defaults
on the loans.3
In order to gain a better understanding of why people believe what they do and the values that
drive these different ways of thinking, it is necessary to define ethics. Ethics is the set of rules,
principles, or values that each person possesses in order to guide their decision making as to a certain
course of action to take. Ethics helps us determine the balance of following our own interests and those
of others.
A. Overlap Theory
Before we review a few of the many ethical theories, we must acknowledge that neither law nor
ethics have existed independent of one another. Overlap theory suggests that two normative practices
(telling what to do and what not to do) law and morality overlap substantially and agree about what is
right and wrong. Murder, stealing, and breaking promises often violate both legal and moral codes.
Effects of Enron Fraud”. You Tube. February 8, 2008 http://www.youtube.com/watch?v=Uxd9AeXft64
Baker, Dean. “The Housing Bubble and the Financial Crisis”. Center for Economic and Policy Research. 2008
3
“Mortgage Glossary of Terms”. Dream Town Realty. November 29, 2009
http://www.dreamtown.com/mortgage/mortgage-terms.html
1
. “The
2
Chapter 4: General Ethical Theories and Business Ethics
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However, the overlap is not complete. Law and morality may not overlap completely because (a) the law
is wrong and may need to be changed, (b) some things that morality may approve of cannot be legally
enforced, and (c) society may not want legal enforcement involved in personal moral issues. Consider
overlap theory, as you learn more about other ethical theories and about business law itself.
B. Free Will vs. Behaviorism
Most of us operate under the idea that we have choices that we can freely make. Yet there are
psychologists and philosophers that believe “free choice” is an illusion. For them, everything that we do
is based on cause and effect. That, in effect, we are no different than plants and animals and everything
else in the universe. This position is known as “behaviorism.” But the opposite position--“free will”--is
an important assumption of religion, morality, and law. Only with free will can someone be blamed for
their actions. Only with free will can someone be considered good or bad. Much of the justification for
punishing someone (either legally or otherwise) for a wrongdoing is based on the idea that the person is
blameworthy and could have made a different choice. The idea that we treat those who commit crimes
but are insane differently is that they are not blameworthy in the same way as someone who is sane. For
those who believe in behaviorism, “good,” “bad,” and “blameworthy” are concepts with no validity.
Punishment may be acceptable but only as a causal factor to deter people from doing things that we want
to stop.
C. Objectivity or Subjectivity of Ethics
Science can be seen as an objective area of knowledge. Scientific matters are subject to debate,
but good arguments can be given for what is generally accepted. Beyond that, tests and studies can be
done usually to verify what is scientifically accepted. Still, there are large areas of science where there are
no clear answers and considerable disagreement. For example in physics, most of the universe is
considered to be made of dark matter and dark energy. Physicists do not yet know or agree on what these
things are. Every area of science has particular issues, which are controversial. Despite this, people
consider science to be objective.
Some matters in life are obviously more subjective. For example, whether or not a particular
food is delicious to eat is something that people disagree on. One can argue whether broccoli is delicious
or not but it comes down to our particular tastes. It is basically subjective in nature. Is ethics or morality
objective or subjective? There is considerable debate over many moral issues such as abortion, capital
punishment, and legalized suicide
Nonetheless, many areas of morality are generally agreed upon. These may include unprovoked
and unnecessary murder, stealing, rape, lying and breaking promises as well. There are societies where
there are considerable differences about some moral issues, but not usually about random killing. If one
believes that ethics and morality is purely a matter of personal “taste” or perhaps just a matter of what a
particular society believes, then one is a “subjectivist” concerning morality. Reasons to change others’
minds are like “propaganda.”
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If one believes that what is right and wrong morally are subject to universal rules, based on the
ability to give good reasons for these rules, then one is an “objectivist” in regard to morality. Being an
objectivist does not mean that one sees that all issues in morality are crystal clear. It does mean that some
things are clear and that good reasons can be given to back up a position. For example, there are some
fairly clear cut reasons why random killing is wrong, based on the pain of the one killed, the unhappiness
created in others, and the sense of fear created in society. If one thinks that random killing is wrong
because of good reasons and that it is not just a matter of personal or societal opinion, then that is an
objectivist position.
Thus, it is possible, if one is an objectivist, to recognize that (1) some moral rules are clear cut,
(2) some moral issues are not clear, and (3) that some societies may differ on particular issues.
Historically, an objectivist might argue that slavery was acceptable to most societies two hundred years
ago, but despite the beliefs of those societies, slavery was still wrong. If one thinks that according to their
society slavery is wrong, then it is just a matter of personal or societal beliefs; this is a subjectivist
position.
For a subjectivist, any moral issue could change based on personal or societal beliefs. An
objectivist tends to believe that the basic rightness or wrongness is based on reason and does not change
even though personal or societal opinions change. Again, an objectivist may realize that some issues have
not been settled.
An objectivist may believe that rightness or wrongness are based on religious beliefs or other
reasons. Alternatively, an objectivist may believe that religion and reason go hand in hand.
Although many ethical opinions are not always universal, there are certain basic ethical values
that are expected of leaders in the business world. Businessmen and women may at times feel isolated
when the public so easily criticizes them for making mistakes or acting unethically. This feeling is
exacerbated because most people, in general, are allowed to commit similar ethical faults, without the
same scrutiny as businessmen and women. So we must ask then, is it unfair for us to hold businessmen
and women to a higher standard than most of the average population?
II. The Importance of Ethics in Business
Unfortunately, for businessmen and women, it may be necessary to hold them to this higher
standard. In general, all professions in which people’s ethical decisions affect more people than
themselves must be held to higher ethical standards than the general public. This is not only true for
business professions. Surgeons are ethically responsible for their patients’ well-being, public defenders
are ethically responsible for fairly representing all clients, and politicians are ethically responsible for
representing the opinions of the public that elected them. The key difference for businesses is that it’s
often easier for them to act unethically. It is obvious if a doctor screws up a surgery or if an attorney is
simply not trying due to a bias. On the contrary, it isn’t as obvious when accountants are performing
illegal “off-balance-sheet” transactions or if banks are loaning out much more money than they could
come up with if the loans defaulted. Many unethical actions that businessmen and women could pursue
are difficult for most people to understand, but can nevertheless have detrimental effects to many people.
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Business ethics are more universalized than regular ethics.2 They are the ethical values that all
businessmen and women are expected to uphold in order to create stability and trust when dealing with
monetary matters. This trust and stability in the financial system can be illustrated through loans. Loans
are the backbone of any financial system. For loans to occur there must be a sense of trust that the person
receiving a loan will pay back the principle as well as the interest. Without this necessary trust, credit
could not exist in an economy. This trust easily becomes broken if businessmen and women act
unethically to create some skepticism in dealing with money. Many organizations such as AICPA, the
American Institute of Certified Public Accountants, within the finance and accounting field create ethical
pillars in which they expect a certified accountant or capital manager to uphold. They, like many other
governing organizations of fields, have released a document stating certain ethical pillars that they believe
should be universal for all accounting/finance workers. This list is as follows:
Article 1 Responsibilities
In carrying out their responsibilities as professionals, members should exercise sensitive
professional and moral judgments in all their activities.
Article II The Public Interest
Members should accept the obligation to act in a way that will serve the public interest, honor
public trust, and demonstrate commitment to professionalism.
Article III Integrity
To maintain and broaden public confidence,
responsibilities with the highest sense of integrity.
members should
perform all
professional
Article IV Objectivity and Independence
A member should maintain objectivity and be free of conflicts of interest in dischargin g professional
responsibilities. A member in public practice should be independent in fact and appearance when
providing auditing and other attestation services.
Article V Due Care
A member should observe the profession’s technical and ethical standards, strive continually to
improve competence and the quality of services, and discharge professional responsibility to the
best of the member’s ability.
Article VI Scope and Nature of Services
A member in public practice should observe the principles of the Code of Professional Conduct in
determining the scope and nature of services to be provided. 4
By following this list of business ethics, finance and accounting professionals should not be as tempted to
act in a way that could risk losing money for clients through immoral actions.
In order to better understand various stances on business ethics, it is important to first discuss general
ethical philosophies. Since ethics are morals that guide peoples’ lives, it is important to first note how
they may be driven by religion, secular thought, or a mixture of both.
III. Ethical Theories
A. Religious vs. Secular Ethics
Religious ethics are principles which stem from their faith that people use to guide their
decisions. It is important to note that these values are not simply considered religious ethics because they
are consistent with a religious view, but rather they come directly from a view that is faith-based.
Whether an action is moral or not is a matter of if it is found in scripture rather than learned through
secular readings or life experiences.
4
Edmonds, Edmonds, McNair, Olds, “Fundamental Financial Accounting Concepts Sixth Edition”. McGraw-Hill. Boston. 2008
Chapter 4: General Ethical Theories and Business Ethics
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Secular ethics are ethics that people possess that are not solely faith-based. These ethical values
may rise from a multitude of sources including education, life experience, observation, and much more.
Secular ethics are incredibly important because they guide the decision making of people that don’t
necessarily follow a religion, or follow a religion that has poor ethical values. Secular ethics allow people
of this group to live by values that would be considered acceptable in society, but not necessarily have a
religious base.
There is not a clearly defined line between religious and secular ethics. Many values that people
hold due to a religious basis could be proven through secular experiences or secular writings. For
example, the golden rule that states one should treat others as they would like to be treated is
demonstrated in a variety of fashions in many religions, and it is agreed upon by most ethics scholars and
non-religious people. Secular and religious ethics are typically interrelated and both can be valuable tools
in creating a complete mode of ethics to incorporate into anyone’s life.
B. Virtue Theory
“So it follows, since virtue of character itself is a mean state and always concerned with pleasures
and pains, while vice lies in excess and deficiency, and has to do with the same things as virtue, that
virtue is the state of the character which chooses the mean, relative to us in things pleasant and
unpleasant.”5 This quote by Aristotle discusses the main point of his virtue theory. Virtue theory
emphasizes finding a middle ground upon pleasure and pain. This is the golden mean theory, which is
highlighted in the table below.
Table of the ‘GOLDEN MEAN’
Each of the moral virtues is a midpoint between excess and deficiency, the 'golden mean'.
SPHERE OF ACTION OR
FEELING
EXCESS
MEAN
DEFICIENCY
Fear and Confidence
Rashness
Courage
Cowardice
Pleasure and Pain
Licentiousness/Self-indulgence
Temperance
Insensibility
Prodigality
Liberality
Illiberality/Meanness
Vulgarity/Tastelessness
Magnificence
Pettiness/Niggardliness
Vanity
Magnanimity
Pusillanimity
Ambition/empty vanity
Irascibility
Boastfulness
Buffoonery
Obsequiousness
Shyness
Envy
Proper ambition/pride
Patience/Good temper
Truthfulness
Wittiness
Friendliness
Modesty
Righteous indignation
Unambitiousness/undue humility
Lack of spirit/unirascibility
Understatement/mock modesty
Boorishness
Cantankerousness
Shamelessness
Malicious enjoyment/Spitefulness
Getting and Spending
(minor)
Getting and Spending
(major)
Honour and Dishonour
(major)
Honour and Dishonour
(minor)
Anger
Self-expression
Conversation
Social Conduct
Shame
Indignation
Obviously nobody is perfect, and humans tend to act against shaky morals to satisfy immediate
pleasures that could lead to long-term pain. Aristotle’s virtue theory tends to create “virtues” or specific
rules to live one’s life by in order to find this medium. Virtue theory considers that if people live by the
5
Hayes, David, “Aristotle’s Virtue Theory”. Associated Content. April 11, 2005
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basis of certain virtues, then they will be fulfilling their highest potential of character. Virtues such as
respecting the opinions of others, love, or fidelity may all be viewed as facets, that when upheld, can form
a good ethical landscape of life. Virtue theory states that if one lives by these virtues, then in all cases to
find this medium between pleasure and pain is an act of betterment in the person’s life.
C. Deontological Theory
Deontological theory holds a basic belief that there are certain
duties or rights that people have. In order to act morally, one must not
violate these rules or rights of others. Strict deontological theories, which
believe that certain rights must absolutely never be violated in any situation
for a person to act ethically, are rare amongst ethics scholars. However, one
famous ethics scholar, Immanuel Kant, believes just this.
Immanuel Kant’s categorical imperative discusses a strict rightsbased theory. It states that one should “act only on that maxim whereby at
the same time you can will that it shall become a universal law”.6 Kant
believes that there are universal maxims or rights that each person possesses,
and that these rights should not be broken under any moral action.
Picture of Kant http://en.wikipedia.org/wiki/Immanuel_Kant
Frances Kamm, a contemporary deontologist, adheres to Kant’s
categorical imperative but gives examples that would either allow an exception to creating a universal
rule or wouldn’t. For example, she believes that killing one person to donate organs to five people would
not be acceptable by society’s standards, for the end does not justify the means. However, it would be
acceptable for a trolley/train to be diverted onto a track that would kill one person instead of the five it
would have originally killed if not diverted.7
The problem with Kant’s strict rights-based theory is that there will ultimately present a certain
situation in which an average person would say that acting unethically ensured a certain right. It tends to
be too objective on the basis of ethics, because there can always be an objection to any rule. For example,
a typical human right that is generally agreed upon would be that every human has the right to life. Kant
would say that under any circumstance this right must not be violated. In a war time situation, most
people would say that killing is necessary to protect lives of a greater population. This, however, would
be in direct violation of Kant’s categorical imperative because it would be breaking the right to human
life. A typical criticism of Kant’s strict rights-based theory is that there are too many instances when this
theory cannot be consistent for every person. There are too many cultures, religions, and lifestyles that
constitute different ethical rights to create a universal list for all.
In order to cope with the faults of a strict rights-based deontological theory, more modern
variations of strict rights-based theories have been created. Most of these theories deal with one major
difference. Although they believe in creating a list of duties that all must follow in order to act morally
good, these duties are not absolute and can be trumped by a conflicting right of greater importance.
6
7
Mallor, “Seclected Material from Business Law: The Ethical, Global, and E-Commerce Environment. 13th Edition, McGraw Hill
“Deontological Ethics”. < http://www.absoluteastronomy.com/topics/Deontological_ethics>.
Chapter 4: General Ethical Theories and Business Ethics
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For instance, it may be a key duty to uphold that a person must view each situation to determine
the action that will protect the rights that they believe in. In the case of military personnel, one might say
that it is the soldier’s duty to kill whoever is absolutely necessary in order to protect the right of human
life that will eventually result from this. In other words, the more modern deontological theories express
that there is a hierarchy of duties that a person possesses. Therefore, it may be necessary to take the
action of killing a few times in something like a war in order to preserve the greater right of human life
that will eventually come.
What Would Kant Do?
As you are leaving your neighborhood grocery store, you notice a woman accidentally drop a 20 dollar
bill on the ground and continue walking. Most ethical theories would agree that giving the 20 dollars
back is the ethical solution. What would Immanuel Kant do in this situation?
Kant would agree with most other philosophers that you should give the woman her money back, but
his reason would be that you shouldn’t do something unless you think a universal rule should be
created, which would apply to everyone.
D. Justice Theory
Justice theory is a branch of rights theory (usually deontological in nature) in which all wealth is
called to be distributed more equally among all people. John Rawls, the creator of the theory, had two
main points. The first was his Equal Liberty Principle which states that “each person has an equal right
to basic rights and liberties.” The second principle, the difference principle says that “social inequalities
are acceptable only if they cannot be eliminated without making the worst-off class even worst off.”8 This
theory is useful in attempting to eliminate class systems and benefit the working class. The socialistic
economic ties are oblivious when discussing total wealth distribution, in an attempt to eliminate classes.
Rawls is considered a rights-based theorist because he believed that equality was a universal right that
could not be broken, and that unequal wealth distribution was in direct violation of this right. An obvious
criticism of this theory is that it is nearly impossible to evenly distribute wealth to every person, and it is
simply not economically feasible.
Robert Nozick was a large skeptic of Rawls’s theory. He believed that equal wealth distribution
was not necessary as long as every person had an equal opportunity to succeed. This theory would be
correlated with a capitalistic economic theory. Nozick believed that as long as everyone has an equal
chance in the beginning, then it is the individual’s own fault if they live in a manner which makes them
poor.
E. Utilitarian Theory
Utilitarian theory discusses actions being moral only if it maximizes a certain good for the
greatest number of people. Unlike rights-based theories, utilitarian theories don’t look at the reason why
a person acts the way they do, but instead look to the end result. In other words, they look at the ends
instead of the means. For example, let’s say a man and a woman were strolling down a sidewalk and
came upon a stranger that was drowning and screaming for help. If the man chose to go in and save him
8, 8
Mallor, “Seclected Material from Business Law: The Ethical, Global, and E-Commerce Environment. 13th Edition, McGraw Hill
Chapter 4: General Ethical Theories and Business Ethics
Page 7
because he valued life, then rights-based theory would say that he acted morally whether he saved the
person or not. However, if the man went in to save the person in order to impress the woman he was
with, then a utilitarian theorist would still consider him to be acting morally if the man was saved because
it would be maximizing a good.
Jeremy Bentham and John Stuart Mill were both strong believers in variations of utilitarian theory.
Jeremy Bentham, the son of a lawyer, was born in London in 1748. At age
twelve, Bentham entered Queen's College, Oxford and was admitted to
Lincoln's Inn at the age of fifteen. Trained in law but never practicing,
Bentham focused on judicial and legal reforms. Bentham would be influenced
by David Hume, and eventually would found the Westminster Review with
the help of Mill. He would die in 1832.9
Picture of Jeremy Bentham -
John Stuart Mill, born in London in 1806, was the son of philosopher James
Mill, but that didn’t stop him from contributing substantially to the ethical
theory of utilitarianism. He lived in the 19th century, a time where neither
women nor African-Americans had rights, but yet called for gender equality
in “The Subjection of Women” and wrote a letter arguing against the
institution of slavery.10
http://en.wikipedia.org/wiki/Jeremy_Bentham
Jeremy Bentham believed that a person was acting morally if he could maximize pleasure over pain. He
received much criticism for this theory because he discussed more of a physical pleasure than any other
types of pleasure which to some scholars almost seemed primitive and animalistic. John Stuart Mill later
furthered Bentham’s theory to include other secondary pleasures such as “health, knowledge, friendship,
and aesthetics.” 8 Mill also emphasized that the highest pleasure that one could achieve was intellectual
pleasure. By including these stipulations, the benefits of utilitarian theory became more transparent and
applicable to human thought.
An important question that became apparent when discussing utilitarian theory was that if a
person created a rule for themselves that tended to maximize utility, should they then follow that rule in
every situation even if utility wasn’t maximized at times? Rule utilitarianism involves creating certain
rules to live by that tend to maximize the good for the greatest number of people. One of these rules
might be that it is wrong to steal. A rule utilitarian theorist would say that in every situation, not stealing
will maximize the goodness for the highest number of people. In order to account for the times in which
this rule didn’t maximize good, act utilitarianism evolved. Act utilitarianism involves judging each
action separately in order to determine the course of action to take to maximize utility. This is beneficial
because there are no longer strict rules that must be followed that could cause utility to not be maximized
in all instances. For instance, if a government of a country is hoarding the country’s food so that certain
political agendas can be passed, then stealing the food in order to feed the need of families would be
9
"Jeremy Bentham." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 29 November 2009.
<http://www.econlib.org/library/Enc/bios/Bentham.html>.
10
<http://www.utilitarianism.com/jsmill.htm>.
Chapter 4: General Ethical Theories and Business Ethics
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considered benefitting the greatest number of people in this case, even though rule utilitarianism would
deem it wrong because it is stealing.
One major criticism of utilitarian theory is that it does not rightly justify the person’s means in
performing an action. It seems very unethical to save a person’s life in order to impress the public, but
utilitarian theory says that because life is being saved, the act is moral. This idea seems counterintuitive
to typical ethical thought.
Comparing Ethical Theories
There are five people in the world that, if killed, would be able to give scientists the cure for cancer
through their DNA. What would a deontologist do in this situation? A utilitarian?
Deontologists would not condone this action, because then it would always be acceptable to kill five
people to get a problem solved. As this would not be a good universal rule, they would not want to allow
this to take place.
Utilitarians, on the other hand, would not see a problem in doing this. They believe that as long as it
provides the greatest good for the most number of people, it is ok. Killing five people to save millions
would be perfectly alright.
IV. Business Ethics
Are we obligated to use ethics in business dealings? Are we really responsible for anyone other
than ourselves? Who are we responsible for? These are just some of the questions men and women
looking to enter the work force may consider for themselves. Of course, it is important to become a good
business leader as one can in this world of demanding competition, but it is just as important to look out
for others that our decisions may be affecting. These other people could potentially be anyone related to
the business: shareholders, employees, customers, etc. Anyone that could be greatly affected by a
person’s actions within a business should come into consideration when taking a course of action.
A. Shareholder Theory
Shareholder theory states that a person is acting ethically if they act in a way to maximize profit
for their shareholders. The shareholders are simply anyone that owns a piece of the company and
therefore profits on the company gaining revenue. If someone makes decisions solely based on
shareholder theory, then they are not concerned with other factors that the business may be affecting other
than simply maximizing profits for their shareholders.
There are some benefits to belief in shareholder theory. A good result of shareholder theory is
that it tends to maximize productivity. When the only thing that is worried about is generating revenue,
then the business tends to find the most efficient way to utilize resources to generate the greatest level of
revenue possible. This efficiency can be deemed important because it means that there is little wasteful
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spending and wasted resources which are important as they are limited on this earth. Another benefit is
that shareholder theory is still considered to be under constraints of the law. This is a very important
thing because most businesses tend to get into trouble when they operate to maximize profits in a way that
is outside of the law. By staying within the restraints of the law, it is much more difficult for
businessmen and women to perform unethical profit maximizing actions.
Problems also exist with shareholder theory. One major problem is that it doesn’t take people
like customers, the environment, or employees into account, so it could potentially hurt them. If a
business decides to maximize profits, randomly fire employees, sell defective products to customers, and
pollute the environment, they might still be considered ethically good as long as resources are being used
efficiently. Another problem is that shareholder theory begs to question whether a business should
maximize profits in the short run or long run. If they are committing “off- balance-sheet” transactions
that are considered within the realms of the law in order to maximize profit, then they might seem ethical
under shareholder theory. It is obvious, however, that unethical actions similar to those committed by
Enron did maximize profit for a while, but ultimately led to the shareholders’ demise. It is important to
attempt to identify under what conditions profits should be maximized.
B. Stakeholder Theory
Stakeholder theory deals with not only maximizing profits for the shareholders, but also acting
in the best interest of the stakeholders. Stakeholders are considered to be anyone or anything that is
directly affected by a business. This could include employees, customers, suppliers, community, and
environment. It is important to take all of these into account because they will all ultimately end up
determining the success of the business. If a business owner neglects the employees, they could all quit
and there would be no business operation. If he neglects the customers, they will probably go to a
competitor and he will no longer generate any revenue. All of the stakeholders play an integral role in the
success of a business.
Many positive reasons exist for a business to operate under stakeholder theory. One main reason
is that it finds an even balance for all members involved. Respect is an important issue that is necessary
for all smooth business transactions. People work more efficiently and under better terms if they know
they are being respected. Stakeholder theory allocates respect to each member involved in the business.
Therefore, there is no reason for the business to fail simply due to one facet of the company being
neglected. Another positive aspect would be that unethical transactions are much more unlikely to occur
when everyone’s needs are being considered. For example, if a bond broker selling bonds to a customer
takes into account the customer’s well-being as well as the profits for his shareholders, he would not sell
things like junk bonds that he knows are very risky and could be easily worth nothing to his customers.
A problem with stakeholder theory simply lies in the fact that it becomes much more difficult to
run the business. It is much easier to run a business when the leaders don’t have to worry about anything
but generating revenue for the shareholders. Thinking about employee, customer, and supplier well-being
as well as not hurting the environment for future generations is a lot to demand from a business.
However, for a business to grow and operate successfully over many years, it has been determined again
and again that when all the needs are taken into account across the entire board of the business, then
everyone is happy and will work to keep the business going.
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B. Shareholder’s Rights Theory
The rights of shareholders are largely found in a corporation's charter and by-laws and state law.
There is an inevitable conflict that arises from the separation of corporate ownership and control.
Even though the board of directors runs the company, the shareholder should have some impact on the
company's policy, as the shareholders technically elect the board of directors. Yet in many instances this
is not the case. Shareholders generally do not have the right to vote on most matters relating to the control
of how the board of directors or officers run the company. Furthermore, while the shareholders elect the
board of directors, in large corporations the shareholders are presented with just one slate (put together by
management). In other words, there is no choice. Occasionally, shareholders may revolt and go to court
claiming the board is not acting in their interest; but this is rare. A movement exists to give shareholders
more rights and there may be new rules from the Securities and Exchange Commission to create these
rights.
If shareholders agree that the management and board are performing poorly, then they theoretically
can elect a new board of directors that can then hire a new management team. In practice, however,
genuinely contested board elections are rare. Most shareholders are unaware that management and the
board elect themselves, calling out that they are looking out for all shareholders, and continue to profit
themselves. In 2008, billionaire investor Carl Icahn set up an organization to fight for shareholder rights.
See http://www.icahnreport.com/
Comparing Ethical Theories
Ethical Theories
Virtue Theory
Deontological Theory
Pros
-Ancient theory provides lots of
knowledge on how to follow it
-Can be ambiguous
-Not clear cut, virtues could overlap
-Even if actions produce bad
outcomes, they can still be deemed
moral
-Can eliminate class systems
-Can benefit the less fortunate
-Not lenient on breaking rights or
duties if the outcome of doing so
could be more ethical
-If everyone has the initial equal
opportunity to succeed, then why
should wealth of those that
succeeded be redistributed to those
that were lazy or failed?
-Immoral actions can be deemed
ethical if they have ethical ends
Justice Theory
Utilitarian Theory
Shareholder Theory
Stakeholder Theory
Cons
-Produces the greatest amount of
good for the greatest number of
people
-Provides the greatest benefit for
the people that provided direct
money to help the company grow
-Companies take actions in order to
provide the greatest benefit for the
entire companies stakeholders
Chapter 4: General Ethical Theories and Business Ethics
-Doesn’t take into consideration
other stakeholders affected by
company decisions
-Could possibly be too many
stakeholders to provide substantial
good for all
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V. Ethics/Business Ethics Final Check
Using the following word bank, complete all the questions. Some may be used more than once.
Subjectivists
Act utilitarian
Aristotle
Objectivist
Rule utilitarian
Deontological
Utilitarianism
Shareholder theory
Shareholder’s Right
Bentham
Stakeholder theory
Mill
Virtue
1. ______________ believe that moral views are personal and cannot be subjected to rational
dispute.
2. ______________ are maximizers.
3. As a(n) ______________, you believe that certain things are morally wrong and this can be
shown by rational argumentation.
4. By adopting rules or guideline for a broad number of moral decisions, ______________ believe
that we can maximize good for all.
5. ______________ states that businesses should be concerned not only with shareholders but also
with other groups such as employees, customers, and the community.
6. Different societies can have different moral codes, which are not subject to rational dispute by
others is an example of ______________.
7. ______________ focus on each moral decision and weighs if it maximizes good for all.
8. ______________states businesses should, within the limits of the law, maximize profits for
shareholders.
9. ______________ might include honesty, generosity, kindness, and bravery.
10. If you follow certain moral rules and view those as your duty, then you are believe in
______________ morals.
11. ______________ thought that the moral thing to do was to maximize the greatest pleasure over
pain for everyone.
12. ______________ theory is less concerned with right and wrong and more concerned with
promoting what is good and building character.
13. ______________ is the idea that managers and boards have more stock therefore more control
over the company; leaving shareholders out and dry.
14. ______________ believes that intellectual pleasure was the highest pleasure.
Answers: 1 Sub, 2 Ult, 3 Obje, 4Rule Ult, 5 Stake, 6 Sub, 7 Act Ult, 8 Share, 9 Virtue, 10 Deont, 11 Bentham, 12 Virtue, 13
Share Right, and 14 Mill
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Ethics/Business Ethics Summary
Overlap Theory:
This suggests that two normative practices (telling what to do and what not to do) law
and morality overlap substantially and agree about what is right and wrong. Murder, stealing,
and breaking promises often violate both legal and moral codes. However, the overlap is not
complete. Law and morality may not overlap completely because (a) the law is wrong and may
need to be changed, (b) some things that morality may approve of cannot be legally enforced,
and (c) society may not want legal enforcement involved in personal moral issues.
Moral Subjectivism/Objectivism
Subjectivists believe that moral views are completely personal and cannot be subjected to
rational dispute by others. Some may view morality as the just the societal view of right and
wrong. But different societies can have different moral codes, which are not subject to rational
dispute by others. This is also a subjective view (though broader).
Moral objectivists believe that that there are certain moral principles that can be backed
up by giving reasons and that others’ moral views can be wrong. Certain people or societies can
believe certain things but it is possible that they are morally wrong and this can be shown by
rational argumentation. It is possible under moral objectivism to have issues that are not obvious
in regard to what is right and wrong.
Utilitarianism
Utilitarians are maximizers. These moral theories were first suggested by two British
philosophers Jeremy Bentham and John Stuart Mill. Bentham thought that the moral thing to do
was to maximize the greatest pleasure over pain for everyone. Mill thought we should maximize
happiness over unhappiness. Given the difficulty to measuring pleasure and happiness, today
some utilititarians may want to maximize, say, economic efficiency over society: maximizing
the goods and services for everyone.
There are two basic types of utilitarians (other than what they want to maximize):
Act utilitarians want us to maximize for each moral decision. On the other hand, rule
utilitarians think that it is not practical to do that for each moral decision.
Rule utilitarians want us to adopt rules for a broad number of moral decisions that
maximize. They think that overall this method will do a better job of maximizing.
Pros: Utilitarians consider everyone and everyone counts the same. It does not have a
multitude of conflicting rules.
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Cons: How do you measure pleasure or happiness and how do you compare one person’s
pleasure or happiness to another’s. Utilitarians may possibly ignore basic rights of
individuals if it makes a lot of people happy. This is sometimes called the “tyranny of the
majority.” It is less concerned with economic equality.
Deontological Morality
Deontologists want us to follow certain moral rules; they are not maximizers. Some
deontological systems may be commanded by religion (such as the Ten Commandments), some
by rational argument; sometimes these may overlap substantially. Deontologists often suggest
that we keep promises, tell the truth, not hurt others unnecessarily, sometimes help others, and be
fair. Duties and rights are often paired. If one person has a duty, often another person has a
right. Thus political or moral rights may be based on a deontological theory.
In the textbook, rights theory = deontological. John Rawls’ theory of justice is basically
deontological. Some (but not all) deontological systems might be accused of “moral fanaticism.”
Pros: Follows many basic moral systems that use such rules.
Cons: If the rules conflict, how do you resolve the conflict? How do you prioritize the
rules? It may not consider costs and benefits like utilitarianism. It may be too concerned
with economic equality.
Virtue Theory
Virtue theory is less concerned with right and wrong and more concerned with promoting
what is good. It worries less with drawing lines in regard to behavior and works toward building
character. Virtues might include honesty, generosity, kindness, and bravery. Greek philosopher
Aristotle was the first to promote this theory. Some religions want us to not only follow the rules
of right and wrong but go beyond what is required.
Pros: Not just concerned with just getting by avoiding what is wrong but is concerned
with building character.
Cons: Virtue theory may be less helpful in not show what is required and what is
forbidden.
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Business Ethics:
Shareholder Theory
This says that businesses should, within the limits of the law, maximize profits for
shareholders. Textbook calls this profit maximization theory.
Pros: This theory would appear to maximize economic efficiency.
Cons: This theory might seem to ignore basic duties and right imposed by a moral
system. It may ignore the welfare of others.
Stakeholder Theory
This says that businesses should be concerned not only with shareholders but also with
other groups such as employees, customers, and the community.
Pros: This theory is concerned (like morality) with the whole community.
Cons: This theory may ignore to some extent the interests of the owners of the company.
It may lead to a less efficient economy. How does one prioritize the interests of the
different stakeholders?
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