Chapter 007 - Ethics & Social Responsibility of Business

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Ethics and Business
© 2010 Pearson Education, Inc., publishing as Prentice-Hall
Ethics
A set of moral
principles or values
that governs the
conduct of an
individual or group.
Law and Ethics



Businesses organized in any country are
subject to its laws and the laws of other
countries in which they operate.
Businesspersons owe a duty to act ethically
in the conduct of their affairs and not to harm
society.
Not all ethical standards have been enacted
as law.
Law and Ethics

Law and ethics often coincide.


E.g., bribery is illegal and unethical.
Law may permit certain behavior that
seems unethical.


(continued)
E.g., law may permit pollution emissions that pose
health risks.
Law may demand certain conduct that
seems unethical.

E.g., law prohibits hiring illegal aliens; jobs could
assist destitute workers.
Law and Ethics
(continued)
Major Ethical Theories
Ethical
Fundamentalism
Utilitarianism
Ethical Relativism
Rawls’s Social
Justice Theory
Kantian Ethics
Ethical Fundamentalism

A person looks to an outside source
or a central figure for ethical rules or
commands.


E.g., the Bible, the Koran, Karl Marx.
Critics argue that ethical
fundamentalism does not permit people
to determine right and wrong for
themselves.
Utilitarianism

A person must choose the action or follow the
rule that provides the greatest good to
society.



Origins in work of Bentham and Mill.
Standard sometimes misstated as “the greatest
good for the greatest number of people.”
Critics argue that it is difficult to estimate the
“good” that will result from different actions,
that it is hard to apply, and it treats morality
as an impersonal calculation.
Kantian Ethics



A person owes moral duties based
on universal rules.
Premise that people can use
reasoning to reach ethical decisions.
People should employ categorical
imperative: “Do unto others as
you would have them do unto you.”

E.g., keeping a promise to abide by a
contract is a moral duty, even if the
contract turns out to be detrimental to
Kantian Ethics

(continued)
Universal rules are based on two important
principles:
1. Consistency – all cases are treated alike
with no exceptions.
2. Reversibility – the actor must abide by
the rule he or she uses to judge the
morality of someone else’s conduct.
Kantian Ethics


(continued)
If one is to make an exception for himself,
that exception becomes a universal rule that
applies to all others.
Critics argue that it is hard to reach a
consensus as to what the universal rules
should be.
Rawls’s Social Justice Theory

A person has a social contract with all
others in society to obey moral rules that are
necessary for people to live in peace and
harmony.




Origins in work of Locke and Rousseau.
Rawls was modern proponent.
Fairness is the essence of justice.
The least advantaged must receive special
assistance to allow them to reach their
potential.
Rawls’s Social Justice Theory


(continued)
The principles of justice should be chosen
by persons who do not yet know their
station in society.
This veil of ignorance would permit the
fairest possible principles to be selected.

E.g., the principle of equal opportunity in
employment would be promulgated by
people who would not yet know if they
were in a favored class.
Rawls’s Social Justice Theory

(continued)
Two major criticisms of this theory:
1. Establishing the blind “original position”
for choosing moral principles is
impossible in the real world.
2. Many persons in society would choose
not to maximize the benefit to the least
advantaged persons in society.
Ethical Relativism



A person must decide what is ethical based
on his or her own feelings as to what is right
or wrong.
No universal ethical rules to guide a person’s
conduct.
If a person meets his or her own moral
standard in making a decision, no one can
criticize him or her for it.
Ethical Relativism


(continued)
Critics argue that actions widely
regarded as unethical (e.g., fraud), seen
as ethical under this theory, depending
on perpetrator’s viewpoint.
Few philosophers advocate ethical
relativism as an acceptable moral
theory.
Summary of Theories
Theory
Description
Persons look to an outside source or
Ethical
fundamentalism central figure for ethical guidelines.
Persons choose the alternative that
Utilitarianism
would provide the greatest good to
society.
A set of universal rules establishes
Kantian ethics
ethical duties. The rules are based on
reasoning and require (1) consistency
in application and (2) reversibility.
Summary of Theories
Theory
Rawls’s social
justice theory
Ethical relativism
(continued)
Description
Moral duties are based on an implied
social contract. Fairness is justice. Rules
are established from an original position.
Individuals decide what is ethical based
on their own feelings as to what is right or
wrong.
Social Responsibility of Business




Decisions made by business have farreaching effects on society.
In the past, many business decisions were
made solely on a cost-benefit analysis.
 “Bottom line” impact.
Such decisions may cause negative
externalities for others.
Corporations owe some degree of social
responsibility.
Theories of Social Responsibility
Maximizing
Profits
Moral
Minimum
Corporate
Citizenship
Stakeholder
Interest
Maximizing Profits



Theory that a corporation’s duty is to take
actions that maximize profits for
shareholders.
The interests of other constituencies are not
important in and of themselves.
Friedman: “…one and only social
responsibility of business—to use its
resources and engage in activities to increase
its profits as long as it stays within the rules
of the game…”
Moral Minimum



Theory that a corporation’s duty is to make a
profit while avoiding harm to others.
As long as business avoids or corrects the
social injury it causes, it has met its duty of
social responsibility.
Laws enforce some moral minimum of social
responsibility on corporations.



E.g., occupational safety laws.
E.g., consumer protection laws for product safety.
E.g., Sarbanes-Oxley Act.
Stakeholder Interest

Theory that a corporation must consider the
effects its actions have on persons other
than its stockholders.


E.g., employees, suppliers, customers, creditors,
local community.
Critics argue that it is difficult to harmonize
the conflicting interests of stakeholders.
Other Stakeholders of a Business
Employees
Suppliers
Customers
Environment
Society
Creditors
Local
Community
Corporate Citizenship

Theory that a business has a responsibility to
do good.


Business is responsible for helping to solve
social problems, even those it did not cause.
Corporations owe a duty to promote the
same social goals as do individual members
of society.
Corporate Citizenship


(continued)
Theory argues that corporations owe a debt
to society to make it a better place.
 Duty arises because of the social power
bestowed on corporations.
A major criticism of this theory is that the
duty of a corporation to “do good” cannot be
expanded beyond certain limits.

E.g., corporate funds are limited.
Summary of Theories
Theory
Maximizing profits
Social Responsibility
To maximize profits for stockholders.
Moral minimum
To avoid causing harm and to
compensate for harm caused.
To consider the interests of all
stakeholders, including stockholders,
employees, customers, suppliers,
creditors, and local community.
Stakeholder interest
Corporate citizenship To do good and solve social problems.
Corporate Social Audit



Idea that audits should be conducted
not only of financial health of
corporation, but also of its moral health.
Examine whether corporation has
adhered to code of ethics and met duty
of social responsibility.
May be difficult to define, measure
results in practice.
Procedures for Social Audit




Employ independent, outside auditor.
Demand cooperation of company
personnel with auditing firm during
audit.
Auditor reports findings directly to
board of directors.
Board reviews results and implements
program to correct any deficiencies
found.
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