Business Ethics

Business decisions are ethical decisions. They have a basis in some understanding of what ought to be done - what is "right" and "wrong". Theories about the nature of the firm not only provide some perspective on how we conceptualize the economic objective of business, but help formulate how we view the choices that business confronts. A purely economic perspective argues that the business of the firm is paramount. If the firm pursues its economic, profit maximizing objectives, the social and larger economic interests of all will be served. If we assume that competing interests are imposed on the firm. Business management engages not only the interests that are specific to the firm itself, but also engages interests and issues that have implications beyond the single profit maximization goal of investors. The firm has social responsibilities.

We examine five ethical frameworks for consideration of the social responsibility of business and managers:

Egoism or Self Interest
Social Group Relativism
Cultural Relativism
Utilitarianism
Deontology

Egoism or Self Interest Perspective

Egoism or self-interest ethics assumes that individuals and businesses have an obligation to guide their conduct by a rational calculation of one’s own interests. For business, it follows that value creation or profit maximization is paramount to the firm.

This view is presented by Milton Friedman in his classic Capitalism and Freedom (1962):

Milton Friedman illustrates his perspective with the pencil. The pencil is a product composed of many parts that are produced independently around the world. The wood is from a South American tree cut by a worker who knows nothing of its intended use. The worker labors to cut the wood for wages. The rubber is from a plantation of rubber trees, perhaps located in Indonesia, cultivated for diverse purposes. The lead is made from graphite produced as by -product of mining carbon. The wood-cutter, the plantation owner, the miner know nothing of the end-product, the pencil. Each works in his own sphere to promote his economic well-being.

What brings these diverse efforts together to produce the pencil is the market. Every person serving [legal] self-interest promotes the social good.

The limitation to what is proper or right conduct of self interest is the law. But, the objective of the law ought to be libertarian - that is, to facilitate the greatest possible liberty of individuals and of businesses constrained only by the higher need that all be able to compete fairly and unimpeded by the force of others. There are plenty of cases that suggest that this reasoning has merit. Peter Drucker cites the case of Union Carbide which in an attempt to be socially responsible decided to build a plant in a depressed area of the Appalachian Mountains to bring employment to a chronically unemployed area. Within a few years the plant proved uneconomic, brought ruin to what was an environmentally clean and pristine area, and on the closing of the plant, left the population displaced and as unemployed as before. As Friedman and Drucker argue: clearly, the business of business ought to be business. In pursuing this, there is social benefit.

For the individual egoism evaluates an ethical situation as it applies to the self - me. Conduct is appropriate if it advances my interests and inappropriate if it harms or conflicts with personal interests. Self interest reasoning can be couched in statements that are "self-serving" - although self interest intentionally may be concealed. It is only necessary that the decision-maker be aware of his intent to pursue what is in his interests. A potential problem with egoism is a situation in which competing interests are advanced by other individuals, all pursuing self interests, where cooperative solutions exist and are "better" than non-cooperative, individual action. This is the case of the Commons.

The Case of the Commons: The Commons is a public, grassy area which surrounding sheep herders use to feed their sheep. It is the only available grassy area upon which sheep can feed. Sheep tend to eat grass by tearing the leaves off close to the roots. Thus, re-growth of the grass, if possible at all, is slow. Each sheep herder acts in his on economic self interest. As the farmers prosper from their sheep herding ventures, they increase the size of their flocks. There comes a point at which the grass of the Commons is exhausted by the over-population and feeding by the sheep. At this point, the ventures of all sheep herders are at peril. Economic disaster soon follows as the Commons is exhausted and unable to support the feeding of any sheep.

The point of the Commons is that economic self interest of each individual is at variance with the economic interests of all - which is to preserve the Commons. We have a case in which the "invisible hand" of the market that operates from individual pursuit of economic gain fails to serve either individual interests or community interests.

There are two ways to solve the problem of the Commons.

Social Group Relativism

If not the self as the proper referent to "right" conduct, then the reference is the expectations of others - our social group. Social group relativism is the view that we assess what is proper conduct by understanding what our social group expects of us. While the term "relativism" has come to imply that "any thing goes", here the term simply means that standards of conduct in our personal life and in business are governed by the expectations of others on our behavior. Pejoratively, "we conform."

We identify with several groups that comprise a larger society. Our personal identity is crowded with social categories which are assigned to us and to which we assign ourselves - race, sex, nationality, religion, membership in social groups, political affiliations, allegiances to colleges and sports teams, age grouping, and the family into which we are born, to name a few of the social groups in which we have "membership". All of these social groups or categories identify to others, and to ourselves, who we are. The values or expectations that each of these "groups" share are varied and are sometimes conflictive.

An Example: You are the Personnel Manager at a large corporation (group membership is the company). The company is about to lay off a number of employees because of a down-turn in the market. Your boss hands you the list of people who will be "laid off" and instructs you not to tell anyone until the formal announcement is made next month. A close friend of yours is on the list to be laid off. Your friend is about to buy a new house. Do you tell your friend that he/she may not or will not have a job next month?

There may be no "right" answer here, but if the solution is not to tell because "I am a Personal Manager" and my company requires that I remain silent on this" - the social reference is the company. If the solution is to tell the friend because he’s about to make a major mistake - the socially relevant referent for action is the friendship group. Social group relativism may not pose a clear choice of action until we have identified what social group is most relevant to our actions. This may vary given the circumstances.

In business social relativism often takes the form of industry practices. Many small businesses pay minimum wage and provide no health insurance not only because it may be in their interests to do so, but because it is an accepted industry practice to do so.

CULTURAL RELATIVISM

Cultural relativism bases ethical judgment on societal norms, or the law. If an action is not illegal, it is permitted. Here social culture is equated with law because laws are an expression of national cultural values. They need not be fixed or constant values. For example, American cultural acceptance of, and law regarding, child labor in this country has changed over the past century. Only recently, however, have we attempted to impose this legal and cultural standard on the import of manufactured goods from other countries. Of course, there are many examples of how cultural and legal standards of conduct have changed from the treatment of women and minorities to product liability standards. Although not fixed in time, the law as a standard for ethical behavior is an attempt to forge a national consensus on individual conduct. In the case of child labor laws, the standard is high. In the case of health care entitlement, the standard in the U.S. is not as high as, say, most European countries.

Cultural relativism does not lead to a universal sense of "right" conduct. What is "right" is governed by the national culture to which the decision maker belongs. As business becomes more international, conflictive cultural norms and laws become problematic in trying to act "ethically". Until recently most European businesses freely paid "fees" to agents in third world countries for delivering large government contacts because it made business sense; it was legal; and, "everyone else paid bribes." American businesses, however, were disadvantaged in this kind of competition because the practice of paying bribes for contracts was "unethical", illegal, and followed by other American businesses only at their peril of being caught and convicted in U.S. courts.

Utilitarianism

A contemporary of Adam Smith, Jeremy Bentham offered a political theory that attempts to resolve conflicts between individual and collective demands on one’s actions - utilitarianism. The theory’s fundamental proposition is "the greatest good for the greatest number." The utilitarian ethic requires that a decision-maker assess the choices of all who are involved in its outcome, then commit to an action that is satisfying to a majority. When a decision harms the greatest number of people involved, it is "wrong". Individuals sacrifice their personal interests when these do not serve the general welfare.

This majoritarian ethic, however, has difficulties. Who is the majority whose interests are to be considered? Is it "right" for a majority to suppress a minority? The question evokes our history of a slavery, the German extermination of Jews, and recent conflicts in Ireland, Palestine, the former Yugoslavia, and Rwanda. The ancient Greeks distrusted democracy simply because it had the potential to lead to a tyranny of the majority.

Returning to the case of the Commons, what if the Commons cannot be privatized and parceled? This is the case with certain, finite resources. For example, excessive over-fishing of the Chesapeake threatens to destroy the resource of fish. The waterway cannot be "privatized" or parceled. The obvious solution, then, is that fishermen must cooperate to preserve fishing. However, fishermen refuse to cooperate as each is attempting to maximize individual economic self interest and maybe distrustful of rivals’ attempt to gain an advantage. Each buys larger fleets and hasten the extinction of fish in an effort to increase yields with a diminishing supply of fish. Adam Smith’s theory of the social contract does not work. Bentham’s utilitarian solution of trying to maximize some common good cannot be enforced in a community that is distrustful of other’ actions and a majority cannot be formed.

John Stuart Mill argued for a more complex utilitarian philosophy that equates utilitarian with "practical". Mill argued that the greatest number do not always know the common good. Nor for that matter would an individual pursuing his own interest, necessarily contribute to the common good, as Adam Smith had argued. What is discernible as socially good arises from experience, practice, trial and error. Most, importantly, the social good emerges from the creation of the kind of society that engenders competing interests and ideas of the "good". Because all must be consider equal, the greatest good lies in the greatest liberty for individuals to pursue their own self expression of what is good. The utilitarianism of Mill attempts to balance the rights of minorities with the rights of the majority by limiting majoritarian actions through the requirement that minority interests are to be protected. But, Mill is also arguing that the common good is served by allowing conflict among competing interests. The common good is worked out through a shared experience of what is beneficial to the community. The fishermen of the Chesapeake Bay should learn that their actions are interdependent and that individual self restraint may be the most prudent action. The alternative is collective disaster.

Mill’s approach is illustrated by what is now taking place in Arizona where conflictive interests among cattlemen, environmentalists, and the government are being resolved to find workable solutions in land management. Cattlemen need cheap grazing lands; environmentalists seek protection of wild life; and, the government attempts to enforce property and environmental laws. Across the three parties it is difficult to assess what is the "public good" and a majority point of view is not very helpful. The solution required that all parties cooperate to express their competing needs and work together to find a workable solution agreeable to all. This was found through shared land ownership and shared stewarding of the land to accommodate, to an acceptable level, everyone’s interests. To find this "common ground" required that each surrender personal or group interests to commit to a solution in the "public good."

Deontology

The deontological perspective is sometimes stated simply as: "Do unto others as you would have them do unto you." The root word "deon" is from the Greek meaning "obligation" or "commitment". The philosophical theory of deontology is formalized in the writing of Immanuel Kant in the early 1800’s. Kant places the basis of ethics on the obligation, or the duty, to do what is "right". What is "right" comes from an idealized notion of what a "better world" ought to be. The duty to make this a better world is something we take upon ourselves. Kant argued that not everyone in all cases is capable of this. And, in certain circumstances there may be a compulsion to act otherwise. But, if you ask "What is the ‘right’ thing to do?", image the world or the circumstance as it should be - then act on the merits of this Ideal. By raising the very question: "Is this action or decision "right", "good" or "bad"?", we raise the question of whether this is something we are willing to do, irrespective of the number of others who may do it. One test, then, of what is "right" is: Is this action something that that would be universally applicable to all people in all situations - or, as Kant terms is it a "categorical imperative"?

While this may sound like a religious commandment, deontology as a field of ethics attempts to forge a concept of "right" that is more universal than one religion. Telling the truth, for example, is a moral obligation, but not because it may be instructed by religion. Truth telling is a duty because we understand what it is like to be lied to. Falsehoods create distrust, undermine relationships, and if acted on, can lead to disaster. To the deontologists, this is not a utilitarian value - tell the truth only when it serves "good" purposes. Truthfulness is simply right as an ideal, and we assume the obligation to commit to the Ideal as something of value in, and of, itself. Unlike most of the ethical theories in which actions or decisions are evaluated as to their consequences: in egoism the issue is the consequence to me; in social group and cultural relativism the issue is the consequence to and expectations of my group or country; in utilitarianism the issue is the consequence to all involved - in deontology, the issue is doing the right thing, simply because it is the right thing to do.

As suggested in the five ethical frameworks presented, we do not all see "right" in the same way. Deontology suggests that there is some universal Ethic that is available to all of us. This is an empirical problem that in Kant’s reasoning is not especially a problem. As it is not possible to "prove" the existence of God, it is not possible to "prove" the existence of universal truths that cannot be rooted in scientific inquiry. But, I can conceive of a better way, a higher level of conduct; and, it is faith or belief in the value of this Ideal that connects me to an obligation to act accordingly - and, nothing else.

There are many cases of business decisions based simply on doing the "right" thing. A few years ago when a New England textile mill burned down, the owner opted to continue paying the salaries and benefits of workers while the plant was being re-built. Companies such as Johnson and Johnson and Dayton Hudson spend large amounts of money for community services in the areas in which they operate as part of their desire to be good citizens. And, many small businesses spend the money to provide health insurance for their employees, simple because its the right thing to do.

Business Codes of Conduct

While generally I have framed business ethics as societal issues, ethical behavior is also a matter of concern within organizations. Do the same ethical dictates that govern society also operate within business organizations? Should they? If we assume, as the egoist does, that the social good is maximized by individual self interest, why should this not also be the case for behavior within organizations? What are standards of conduct for employees sanctioned by firms? The amount of real literature on this subject is meager. Here are the findings of two such studies:

1). Fred R. David. "An Empirical Study of Codes of Business Ethics: A Strategic Perspective", paper presented to Annual Academy of Management Conference, Aug. 1988. David examined data from 83 corporations. Performing a factor analysis, he identified the following clusters of values across businesses:

Clusters of Variables Found in 83 Corporate Codes of Business Ethics

2) Susan J. Herrington, "What Corporate America is Teaching About Ethics", Academy of Management Executive, Feb. 1991, p. 71.

Harrington's work can be summarized:

Study of 202 Fortune 500 firms identified important missing elements: 75% failed to address personal character issues, with most emphasizing client relations and conflict of interest. issues. Herrington observed that most codes of conduct addressed issues related to profit maximizing behavior.

What the David’s research shows is that within business organizations conduct is regulated by codes of conduct. The desired outcomes fall in three broad clusters: organizational citizenship (conforming to normative behavior that advances the business’s image and day to day operations); behavior that protects the organization legally ; and, behavior that advances the business’ relationships with customers.

Herrington’s study ( a larger study ) found that most business codes of conduct were directly related to the organization’s need to maximize profits. If this finding is valid, what is suggested is that the stakeholder approach - at least as it applies to internal stakeholders - may create internal, organizational politics. But, internal political conflicts are regulated by contracts with all employees in such a manner that an employee’s work with the organization is conditional. Conflict is permissible, but conflicts are circumscribed by the overarching purpose of the enterprise - to survive and to earn profits. We are presented with the agency problem writ large - ensuring compliance from not only management, but for all workers to act in the interests of the owners. The social contract within the enterprise is similar to that confronted by the Commons. How do we protect the common good - survival and growth of the business - the resource at which we all feed? The answer lies in collaborative effort, cooperative behavior - behavior that is regulated, because it cannot emerge from diverse individual self interests.

Unfortunately, this lofty conclusion begs the question: what actions, what decisions, what consensus serves the short and long-term interests of owners and of the organization as a whole? Are interests of owners necessarily the same as society as a whole?

If there are individual actions that are required to maintain the organization and, perhaps, serve its economic interests, how should these actions be regulated? [Consider: Punishment. Rewards. Culture or Shared Values. Trust.] Simply put: by what means shall the manager manage the organization to achieve these interests? These are some of the issues that we’ll be dealing with throughout this semester.

Let’s look at HU Code of Conduct: