Business Ethics

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BUSINESS ETHICS

Discussions of ethics and business trace back to the writings of Plato and Aristotle and persist in the modern philosophical writings of Karl Marx, John Rawls, and others. Although business ethics as a specialized field of study did not emerge until the 1970s, it has grown sharply since. Philosophers, political scientists, business academics, and social psychologists have written systematically about a variety of issues such as the moral status of the corporation, the ethical foundations of the market, fairness in advertising, bribery, corporate governance, human rights and multinational corporations, and business obligations to the environment. During that time, rival theories for interpreting business ethics have emerged and been debated.

Traditional philosophers such as Plato, Aristotle, Aquinas, and Kant discuss issues of the right and wrong in economic activity. They sometimes examine specific business ethics puzzles, including the ethics of the profit motive, just price in trade, usury in lending, and ethics in negotiation. Thomas Aquinas writes at length about the question raised first by Cicero of whether a grain merchant carrying grain to a community stricken by famine is obliged to reveal to the townspeople that other merchants behind him are bringing more grain. (Aquinas concludes that, contra Cicero, the merchant is not so obliged because no businessperson has an obligation to make a prediction which, if it turned out to be false, would rob him of a "just" price.) Moreover, questions about broad economic design are ubiquitous in the history of philosophy. For example, the issue of the communal ownership of property (in modern terms, communism and socialism) was first brought into sharp relief by Plato, was critiqued by Aristotle, and has been the subject of bitter controversy ever since.

For convenience, it is helpful to conceive business ethics as having three parts, where each part corresponds to the level of entity being analyzed: namely,

1. Individual businesspersons: including employees, entrepreneurs, investors, traders, and consumers
2. Business systems, including economic systems, cultural norms, and regulatory and judicial systems.
3. Business organizations, including corporations, trade associations, and international financial organizations such as the WTO, the World Bank, and the IMF.

Each of these three entities gives rise to both questions of right and wrong (normative issues) and to questions of fact (empirical issues). Because empirical issues are not, properly speaking, philosophical ones, and despite the fact that a large and important empirical literature now exists (authored by sociologists, economists, and business academics), this article will not attempt to analyze and explain that empirical literature.

Individual Businesspersons

Philosophers have debated the issue of the individual's pursuit of money and profit for centuries. Plato famously denied top-status positions of ruler or guardian in his ideal state, the Republic, to business people (indeed to all owners of property) out of fear that their pursuit of wealth would corrupt their political virtue. It remained for the eighteenth-century philosopher, Adam Smith, author of the Wealth of Nations, to make the pursuit of profit at least moderately respectable: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard of their own interest. We address ourselves not to their humanity, but to their self-love and never talk to them of our own necessities, but of their advantage." (p. 13.)

Smith meant to draw attention to the fact that efficient economic transactions frequently rely on self-interested or profit-oriented motives rather than more noble motives such as benevolence. In his view, then, our shared goal of achieving a healthy, efficient economy justifies a significant amount of profit-seeking and self-interested activity in business. His well known "invisible hand" provides a metaphor for explaining how free markets seem to direct the inevitable, if regrettable, self-interest of businesspersons toward the common good.

One's ethical evaluation of profit-seeking by businesspersons may be influenced by one's antecedent commitments to ethical theory. Smith's invisible hand relies heavily on consequential considerations: Individual acts and motives are judged ethically through their consequences. For Adam Smith, then, we should sometimes tolerate darker, self-interested motives in business so long as the consequences produce social benefits. Yet a nonconsequential approach to ethics—one placing more emphasis on the quality of the motive or the principle of the individual's action—lacks appeal directly to such a practical justification. A nonconsequential approach must justify profit-seeking, if at all, by nesting the profit motive under other, less selfish motives, such as attempting to benefit one's family, one's community, or society by way of pursuing profit.

Critics have objected to a broad, self-centered view of business because it appears to presume selfishness or, at the very least, psychological egoism. The focus in much of modern economics is upon developing increasingly sophisticated conceptual mechanisms to maximize the achievement of economic goods such as money, market share, or profits, all of which seem to exclude the pursuit of "higher" interests such as benevolence, social welfare, and environmental integrity. Even well-known economists such as Amartya Sen have asserted that the rational economic man, homo economicus, is dangerously close to being a "rational fool." Opposing economists respond, however, that the maximization of individual preferences can easily include the satisfaction of other-oriented preferences such as helping the poor or protecting the environment. A businessperson may simply prefer saving the environment to maximizing his income. Whether such other-oriented preferences can be subsumed comfortably within the mathematically inclined methods that dominate modern-day economics remains hotly debated.

Business Systems

Disputes are common about the extent to which self-interested motives are acceptable in economic behavior. These disputes overlap with others about the desirability of forms of business systems. Just as Adam Smith did, modern economists often stress the societal benefits of free, self-interested market activity. They note that markets free from government interference encourage free exchanges among individuals, and, in turn, business productivity. A realm of perfectly free exchanges, indeed, is often said to establish a condition called "Pareto Optimality": a state in which no one can be made better off without someone being made worse off.

Not surprisingly, then, debates in business ethics have frequently centered on the assumptions of traditional economic theory. Microeconomic theory (which constitutes a part of what is sometimes called neoclassical economic theory) views market participants as rational agents seeking to maximize their own utility. In more recent economic writings "utility" is interpreted to mean the maximal satisfaction of one's individual preferences.

Whether economic theory contains an embedded bias towards selfishness or not, most economists agree that market participants can encounter situations where a businessperson's rational self-interest collides with the social welfare. One of the most notable of these situations is the "prisoner's dilemma" discussed by game theorists, wherein rational self-interest leads each player to defect in certain contexts where cooperation is clearly the best long-term strategy for all. Because prisoner's-dilemma situations are believed to arise frequently in business transactions, it follows that even fully self-interested businesspersons should have an interest in developing techniques of cooperation, both for themselves and others. Indeed, some philosophers have even argued that nearly all morality can be derived from such rational pursuit of self-interest through cooperation.

Others theorists argue that business ethics is simply impossible so long as market freedom is the dominant value. They assert that, in addition to problems such as the prisoner's dilemma, persistent discrimination, sexual harassment, environmental pollution, false advertising, financial scandals, child labor, and bribery require a more of a "visible hand" (usually government's) than an "invisible" one.

Nonetheless, even defenders of heaver regulation of business grant that often law is relatively impotent in ensuring business ethics. For example, law tends to lag behind the knowledge emerging in an industry, so that it often comes too late to correct abuse. Scientists in the asbestos industry in the United States knew about the dangers of asbestos long before laws could be drafted to regulate asbestos harm. Moreover, laws tend to apply to the jurisdiction from which they emanate. Hence, U.S. or German law is nearly powerless to control multinational corporations operating in host countries. This point has special force in many developing host countries where laws are unsophisticated and poorly enforced.

Conflicting cultural values can frustrate ethical decisions. For example, in countries where "grease" payments are common, are businesspersons justified in paying customary bribes to government officials? Or consider issues of human rights. In countries where educational opportunities are inadequate, is it acceptable to hire a fourteen-year-old for full-time employment? Does it make a difference that, as sometimes happens, the majority opinion among adults in a given country holds that child labor is ethically acceptable? Business ethicists have proposed a variety of theories to help solve such dilemmas. Most deny that all employment conditions between the home and host countries of the corporations must be comparable; if that were true, it is argued, employees would, for example, receive exactly the same pay (or at least the same pay adjusted for cost-of-living differences) for the same work. But such wage parity would freeze out almost all foreign investment by multinational corporations in the developing world. Instead, the dominant approach has been to specify a floor of rights that apply to labor conditions and that all corporations must respect.

Business Organizations

Some disagree that a corporation can ever be "responsible" or "irresponsible." They note that corporations have exceedingly narrow personalities; they are chartered for the purpose of making money for their investors. They have, in the words an English jurist, "no pants to kick or soul to damn." Can such organizations be said to have a conscience or moral responsibility? A few theorists regard the corporation as analogous to a large bureaucratic machine and for this reason hold it to be misleading to speak of a corporate "conscience." In turn, they reject the very idea of corporate ethical responsibility. Only individual businesspersons, not corporations, are the true bearers of ethical responsibility. They thus deny moral agency to the corporation, denying that a corporation attains the status of an actor for which such moral predicates as "is responsible" and "is blameworthy" are appropriate. In contrast, theorists who see the corporation as either a large, abstract "person" (the corporation in most legal systems is regarded as a persona ficta, a fictional person) or an organization possessing a decision-making structure capable of rational deliberation are called moral-agency theorists. They believe that corporations are capable of behaving responsibly or irresponsibly.

Assuming, then, that the corporation is even the kind of thing that can behave responsibly or irresponsibly, the question next arises about what a corporation's "being responsible" means. Three major approaches to this question have been offered. These may be labeled: the Classical Framework, the Stakeholder Framework; and the Social Contract Framework.

The Classical Framework

The "classical" framework asserts that the moral responsibility of the corporation is nothing other than maximizing profits for its investors. This approach is associated with modern economic theory and writings of Frederich Hayek and Milton Friedman. The view holds that the sole moral responsibility of the corporation, and in turn of the managers who serve as agents for the shareholders, is to enhance the interests only of the owners of the corporation, the shareholders. The corporation is often seen by its classical defenders as a nexus of contracts among free-acting individuals whose peculiar advantage lies in its ability to reduce transaction costs among participants by, for example, offering organizational remedies in lieu of expensive, individual contracts among individuals.

Critics of the this approach are quick to point out that corporate executives are not publicly elected officials and as such are poor choices for shouldering decision-making promoting the common good. Indeed, often corporate executives have been associated with bad choices, as when large U.S. companies in Chile decades ago helped unseat the country's democratically elected president. Do we really want, these critics ask, to entrust corporate officials with the common good?

The Stakeholder Framework

On the stakeholder theory, managers have obligations primarily to shareowners but also have certain ethical obligations to other groups called "stakeholders"—those who have a stake in the corporation's activity, including customers, stockholders, employees, and people who live in areas affected by the corporation. Disagreements exist about precisely who should be included as stakeholders, but almost all theorists agree that three principal groups of stakeholders are customers, employees, and stockholders. Hence, the stakeholder framework agrees with the classical framework in assigning special importance to the interests of stockholders. The difference between the stakeholder view and the classical view, however, is that stakeholder theorists do not limit the responsibilities of corporate managers entirely to satisfying stockholder interests. Managers, in turn, must make tradeoffs among the interests of the corporation's stakeholders if they are to manage well. Some stakeholder theorists argue that by working to enhance the interests of all stakeholders, the company will also maximize the long-run interests of the stockholders. But other theorists disagree, arguing that some stakeholders must inevitably receive less in order for the stockholder to achieve a maximum return on his investment.

The Social Contract/Social Contracts Framework

This view construes corporate and managerial obligations in terms of implicit "contracts" that exist in and among companies, industries, political units, and other relevant economic communities. For example, it has been argued that an implicit "social contract" exists between corporations and society requiring that corporations refrain from exploiting their workers or from destroying the environment; in return for the special favors it receives from society—unlimited longevity (because in most legal systems a corporation is a "persona ficta" or fictional person, it never dies) and limited liability (investors in corporations are responsible for the actions and debts of the corporation only up to the extent of their invested money). In a similar vein, it has been argued that an implicit social contract exists in most societies requiring that jobs and advancements allocated by a consideration of the qualifications of the applicant rather than his or her gender or race. Beginning in the 1990s, the idea of a social contract was extended by some to include the possibility of a multiplicity of social contracts, interpreted as the implicit set of agreements that exist within and among communities of economic actors, including corporations, trade associations, unions, industries, and professional associations.

Other business ethics issues arise for for-profit corporations. One of these is the factual question of whether a corporation that has better ethics will make more money in the long run than a corporation with worse ethics. Scores of empirical studies on this topic have been conducted, although the answer remains elusive. There is also the question of how a good corporation should be structured. What form of corporate governance should a corporation adopt? Should it include employees on its board of directors? Should employees participate in the management of the corporation, and should they perhaps be given automatic status as shareholders?

Lurking in the backdrop of many discussions of corporate ethics is the issue of what power, if any, managers should have in making ethical decisions. Suppose, for example, that competitive market forces eclipse any moral "space" that managers might have. In such an instance, the entire notion of "business ethics" seems irrelevant. If "ought implies can" and if business managers are captive to the dictates of the market, then how can one say that they "ought" to behave well? On this view, the only way to reform business behavior is to change the surrounding market or regulatory environment—that is, to force business to recognize that its self-interest lies in ethical behavior. Most business ethicists, however, agree that corporations have at least some discretionary space. The empirical debate centers on how much.

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