The Role of Wealth
Any discussion of business ethics, within any cultural or religious framework, requires at the very outset a definition of the role of material wealth, financial assets, and other forms of economic possessions. Furthermore, there is a limit to what legislation can achieve and therefore, as important as is having legislation which caters to ethical principles, it is essential for a society to have a moral code within which its members are educated and to which they aspire beyond the discipline of the courts. As often as not, it is their attitude towards these material goods which will determine in no small measure the behavior of people in the market place. In those societies in which the possession of material goods is the be-all and end-all of man's life, or where simply ownership is the main thrust of the culture, it is very difficult, perhaps impossible, to maintain any form of ethical behavior since the norms of that society, both legal and cultural, will crumble before the onslaught of unbridled wealth. A concept of unlimited private property will destroy the social obligations which go together with the possession of wealth. The needs of the weak and the inefficient members of society will be neglected as will the protection given to other people's property against damage to the environment or to the natural resources by possessors of such unlimited private property rights. On the other hand, a society which rejects possession of material goods or which does away with concepts of private property or one which insists on poverty as a desirable social goal, creates its own moral problems since this runs contrary to the normal instincts of man. In such societies there soon grows a separate real underground economic reality of vast inequalities alongside the official egalitarian one.
So too a discussion of Jewish business ethics has to begin with an examination of the Jewish attitude to wealth and the moral attitudes created by its religious teachings, literature, and role models.
By and large, apart from a number of isolated ascetic trends in the days of the Second Temple and later in the 14th century pietistic movements of European Jewry, Judaism sees nothing wrong per se with the pursuit of wealth and with its acquisition. Basically this human need to provide for the material needs of the individual, the family, and society, is viewed in Judaism merely as one of many needs or urges possessed by the individual, which are considered to be essential for the propagation and continuation of the human race. The attitude of Judaism towards economic activity is exactly the same as its treatment of other human needs such as food, clothing, shelter, sex, and social organization. These needs or urges are legitimate provided they operate within the framework laid down by Jewish law and tradition. The aim of Judaism in this respect is not to destroy or to uproot these urges, which is considered both impossible and undesirable, but to educate them so that man will become sanctified in the way he satisfies these needs.
All wealth originates from the Deity who in His unlimited benevolence, grants it to His creatures in order to satisfy their legitimate needs. This promise of the Divine provider frees man from the unremitting pressure to provide through his own efforts, not just for himself but also for his children, grandchildren, and even for the unborn generations. This lesson was taught in its simplest form in the daily gift of manna to the children of Israel coming out of Egypt. It continues, however, to be part of the Jewish business fabric even though the miraculous manna was substituted in the Land of Israel and down to our own times, by the normal economic cycle of human endeavor in all its forms. The first fruits of the Jewish farmer were brought to the Temple in a confession which stressed that the source of that wealth was not man's luck, wisdom, or prowess but God; the blessings and grace over food, the institution of the sabbatical and jubilee years, and the prayers for prosperity on the Days of Awe, all contribute to the awareness of this source.
The Divine origin of wealth, however, brings with it an obligation to a pattern of business conduct in accordance with the Divine will. Over and above the parameters for the conduct of business activity lies the injunction to study Torah. This is an injunction which is unlimited in time, being unrelated to one's intellectual ability, age, economic welfare, or political status. Since time is an economic good and severely limited, such learning reduces the amount of time available for the acquiring and spending of wealth and is an important limitation on the business activity of the Jew. Furthermore, the use of wealth for conspicuous consumption and as a means of power becomes limited since the time devoted to this form of economic endeavor is being taken away from Torah study. So a concept of modesty in lifestyle and the pursuit of wealth becomes a basic tenet of Jewish business education.
Wealth therefore is legitimate provided it is earned and used within the parameters of Jewish religious teaching. These parameters insure the highest moral and ethical form of living since they owe their existence to a Divine code of absolute truth and morality. By and large, Jewish economic life, both that of individuals and that of society, has operated for thousands of years according to this framework within which the satisfaction of material wants is limited by the demands of morality, the rights of the individual are protected and provision is made for the needs of society, both at the individual and communal levels.
Since Judaism is an action-oriented religion rather than one which emphasizes faith, these parameters are expressed in detailed and clearly defined legal constraints and obligations. Furthermore, the fact that it aims to create a holy national group as distinct from religious individuals gives communal welfare and needs a proprietary interest which has to be recognized within the parameters of economic activity of the individual.
It may be argued that the moral and ethical framework for Jewish business behavior represents an idealistic society which never existed in reality. There is however sufficient empirical evidence to show that this argument is not valid. The three major codes of law – Maimonides' Mishneh Torah (12th century, North Africa), Jacob ben Asher's Arba Turim (14th century, Spain) and Joseph Karo's Shulḥan Arukh (16th century, Ereẓ Israel) – include sections related to business activity alongside sections regarding marital relations, religious ritual, and the dietary laws. It is illogical to admit that all the latter have always been an integral part of Jewish living and at the same time to argue that only the halakhic rulings regarding business are different. Furthermore, the extant enactments of the Jewish communities, which in effect represented mini-states rather than associations of co-religionists, included market regulations and punishment for economic misdeeds as well as curbs on patterns of consumption. The autonomous communities existed in all the countries of the Jewish Diaspora from the beginning of the exile after the destruction of the First Temple (586 b.c.e.) down to the Napoleonic period and even later in parts of Eastern Europe and North Africa.
Alongside the codes and communal enactments there exists an extensive responsa literature (halakhic answers to problems covering all aspects of Jewish civil, commercial, and ritual law) which shows that Jews had recourse to the rabbinic courts on business practices and litigation both at the individual and communal levels. This literature serves not only as evidence of the practical implementation of the Jewish ethical parameters for business activity but also as a refutation of the common assumption that Jewish law applies to an archaic, primarily agrarian economy.
Change in business techniques consistently requires reexamination of previous halakhic rulings to ascertain which of them are applicable and which are not. The responses to questions addressed to rabbinic authorities in all the centuries and countries of the Diaspora are a reflection of the applicability of the halakhah to changes in business techniques. In our day questions of advertising, full disclosure, insurance, labor unions, ecology, etc., form part of the ongoing responsa literature. At the same time, the basic human responses to having or not having wealth remain the same in all economic systems and therefore the moral guidelines of Judaism apply irrespective of the sophistication or lack of it in a particular stage of economic development.
Individual or Corporate Moral Responsibility
It would seem that many of the problems in modern business ethics flow from the separation of identity which exists in almost all legal systems between the corporation and the individual share holders who make up that corporation. This creates moral problems since the same person who in his private life would not think of stealing or robbing or breaking the law sees nothing wrong with doing exactly those things in his role as a director or an official of a corporation. It is as though the individual is divorced from the machinery and mechanism which goes to create wealth in our modern society by viewing the corporation as a separate legal personality. Jewish law has a provision for such business forms as the corporation in which the liability to the creditor is limited to the share capital of that corporation with no recourse to the private assets of the individual shareholders. This is something which is public knowledge and therefore it can be assumed that all involved in the transaction are aware of it so that there is no moral problem involved.
Judaism, however, cannot accept the separation between the corporation and the individual when it comes to abrogate the responsibilities of the latter as seen in Jewish business law. Two examples may suffice to demonstrate this (Minḥat Yizḥak, Part 3, section 1; Part 4, sections 16 and 18). Jews are not allowed to own leavened bread during Passover, so a corporation which has a majority of Jewish shareholders would likewise be forbidden from possessing such leavened bread. In the same way, the view that since the corporation is not a human being, the biblical injunction against interest does not apply to loans between two corporations or between an individual and a corporation has been rejected by most rabbinic authorities. So, a corporation whose shareholders are Jewish would suffer the same restriction on lending money at interest as do individual Jews. This means that the limitations on business activities imposed by Jewish moral teachings and rabbinic law, and the social obligations flowing from the possession of wealth, which apply to the individual, are binding on the corporation as well. Jewish executive officers cannot claim that their sole responsibility is to maximize the profits of their shareholders even in those cases where this can only be done contrary to Jewish ethical principles. In the same way, shareholders would be required to dismiss their corporate officers if these would perform actions on their behalf considered to be immoral or non-permissible in Judaism; otherwise, the responsibility, moral and legal, devolves on them. Furthermore, awards for damages granted by a bet din (rabbinic law court) against the corporation could be made against the private assets of the shareholders and not just against those of the corporation, since they are morally responsible for the actions of the corporation.
Truth in Trading
The basis of any business ethic is the protection of the property rights of all those involved in the market; buyer and seller, employer and employee, developer and community. So it is easy to follow Maimonides in regarding the Mosaic laws against dishonest dealings which in effect deprive one of the parties of their property, simply as rational and logical sanctions, essential to the existence of the market place. Most biblical commentators, however, did not accept this attitude but saw the injunction against theft as revealed Divine wisdom and therefore extending beyond human wisdom (Malbim on Exodus 20). Furthermore, business dishonesty thus becomes a transgression against God's will, a religious crime, over and beyond the legal aspects of the crime involved. This aspect becomes clear when we read the comment of the Talmudical sages that the fate of the generation of the Flood was only sealed because of ḥamas, robbery or theft even of something of no intrinsic value. The ḥasidic rabbi of Sochaczew queried why this should have been the cause of the Flood, since we know that that generation actually committed all three of the gravest sins – idolatry, adultery and murder – for which the penalty is death. He explained that ḥamas is the beginning of the unraveling of the whole fabric which culminates in the three cardinal sins, so that it was the robbery which sealed their fate.
This viewpoint is categorically at odds with the cost-benefit analysis common to much present-day teaching of business ethics which seeks to calculate the cost (imprisonment, shame, etc.) of committing a crime against the benefit (increased profits, status, etc.). Basically this argues that crime does not pay and therefore it should not be committed. However, when crime does not pay, no moral dilemma exists and therefore this type of analysis does not contribute much to an ethical framework. The Jewish value structure, in contrast, provides a framework of permissible and non-permissible actions irrespective of the gain or loss involved.
Halakhically, dishonesty in business falls into two categories – theft and robbery – both extended far beyond the idea of the cat burglar and highwayman. Theft is understood as all those acts whereby one takes illegal possession of another's property without him being cognizant of it, while robbery refers to the forcible taking of that property, exploiting the other's inability to protect himself. An example of the former is the case of a hired buying agent who accepts bribes or payments under the table in order to prefer a certain supplier so that his employer receives either inferior goods or pays a higher price; in those cases, where the goods are identical in every way to that of the other suppliers the bribe has to be shared with the employer since one is not allowed to make a profit from the use of somebody else's property. Robbery includes all those cases where a person uses his legal or financial position in order to withhold from another property which rightly belongs to him. So a debtor who falsely takes an oath that he has repaid a debt, a squatter living in somebody else's property without paying rent, or one who finds an article which he is obligated to return to the owner by Jewish law but does not do so are all considered robbers. The personal use of trust money, one who receives an asset as security for a debt and then claims to have bought it, and the withholding of a worker's wages are all seen in rabbinic language as cases of robbery.
Halakhically there are, however, other forms of business dishonesty, such as "geneivat da'at," literally "stealing another's knowledge," defective weights and measures, "li-fenei ivver" – a stumbling block in the path of the blind (Lev. 19:14), and *ona'ah, the act of wronging another by selling him an article for more than its real worth.
The mixing of good and inferior apples is classified by all the codes as geneivat da 'at but the ruling goes far beyond this simple example. Judaism in essence rejects the concept of "let the buyer beware" and places the full onus for disclosing defects and other shortcomings on the seller, even in the absence of a written guarantee. So geneivat da'at applies to the sale of a used car when the seller hides the fact that it has been involved in a serious accident, as it applies to the supply of goods or services which are not in accordance with the specifications regarding weight, size, color, etc. Advertising properties of goods which they do not really possess, false statements regarding the comparative efficiency of the articles sold, and even decorative packaging or wrapping so as to create a false impression are all examples of geneivat da'at.
When a corporation does not make full disclosure of any items in its financial reporting which are relevant to its creditors or its shareholders or the governmental agencies, it could quite easily be guilty of geneivat da'at since the trading conditions under which it is operating are not what they are made out to be. This lack of full disclosure of the corporate financial reporting would also seem to be an infringement of the law of ona'ah, which provides for redress for overcharging. Maimonides rules that in all those cases where important information regarding price is withheld, the injured party could claim the protection of the rabbinic court against the infringement of his rights under the law of ona'ah (Yad. Hilkhot Mekhirah, chapter 13, halakhah 4). Since the financial reporting has an effect on the price of a corporate share, the withholding of such information could also constitute an infringement of ona'ah.
The biblical injunction against putting a stumbling block in the path of the blind comes within the framework of truth in trading beyond its meaning of a physical obstacle in the path of a blind person (Rashi on Lev. 19:14). The rabbis considered as blind one who does not have access to unbiased information relevant to his business dealings, or one who is unaware of the physical and moral damage done to him by the consumption of certain goods. Halakhically, one may not give a person business advice in which the interest of the giver is not made clear, so any professional who advises his clients to purchase certain goods or certain stock in which he has an undisclosed interest or which he intends to sell, would be guilty in rabbinic terms of li-fenei ivver and could be forced to make redress in a rabbinic court. The same would apply to the giver of bribes to a purchasing officer in order to make a sale or to the use of insider information in trading on a stock exchange. This concept also poses a problem when we are selling goods which are harmful to somebody, such as cigarettes, liquor, drugs, pornography, and weapons which are used for aggression. In each case where a person is ignorant of the physical or moral damage done to him the seller would be guilty of li-fenei ivver. Naturally, the same would apply to the advertising of such goods.
The injunction regarding just weights and measures is repeatedly ordered in the Bible and so forms another facet of Jewish business morality. The fact that in all Western countries there exist laws protecting the public against defective weights and short measures does not detract from the importance of this Jewish injunction. Halakhah places responsibility on the rabbinical courts for the supervision of scales, measures, etc., so that infringement of them becomes a religious transgression irrespective of whether pertinent legislation exists outside the Jewish framework or not. Some rabbinic insights into these laws have a special contribution to business ethics since they create an ideological framework for our actions in the market place.
Most economic crimes are carried out in great secret, the fear of discovery often being a major constraint on business immorality. Tampering with weights and measures, "short changing" clients, and "cutting corners" are especially conducive to the secret defrauding of others and are often not considered to be serious crimes. The sages saw them in a different perspective. In the book of Deuteronomy, the verses regarding weights and measures precede the commandment to wipe out the memory of the arch enemy of God and Israel, Amalek. Rashi questions this linkage and answers that it was because the Jews were negligent of honesty in their weights and measures that God sent enemies upon them. Furthermore, infringements of these market rules were considered not only immoral but also illegal even if they were almost valueless, unlike other forms of theft which had to be of at least some value before they could be dealt with in a court of law. In Exodus the laws of weights and measures are linked to the deliverance of the Jews from Egypt. The Sifri explains the connection between the two seemingly unrelated matters by saying that "He who distinguished between the seed of the first born and that of the other sons will surely search out one who soaks his weights in salt (in secret and to distort them)."
Once, Israel Ba'al Shem Tov, the founder of Ḥasidism, was traveling by coach. The coachman halted the horses in order to reap some barley from one of the fields adjacent to the road. He asked the Ba'al Shem Tov to keep guard and to call him when he saw anyone watching him. As soon as the coachman put the sickle to the barley, the rabbi called out, "They see, they see." Quickly the coachman dashed to the coach, got up on his seat, looked around and saw nobody. He turned angrily to the Ba'al Shem Tov to complain about his needless intervention since nobody was there to witness the theft. "But there really is," answered the Ba'al Shem Tov, pointing heavenward, "there really is."
The purpose of all business is to earn profits for the entrepreneur, and the sages of the Talmud, recognizing this, held that a trader who bought and sold without profit was not a trader. The question, however, is whether the managing directors of a corporation have only an obligation to earn maximum profits for their shareholders or do they also have social obligations and objectives. This question goes beyond the requirement of truth in trading and also beyond the demands of legality. After all, laws of human society are the result of the consensus of the members of that society so that it is quite easy to imagine one which negates the social responsibilities of the individual and refuses to pass legislation providing for the communal needs. From what has been said above, it should be obvious that the corporation has the same social obligations as individual shareholders and therefore, just as they may not conduct their business without respect to these obligations, so too their representatives, the directors of the corporation, may not shirk them. The full discussion of these obligations is an extensive topic and here we will look at only two aspects of the social responsibility of business; the issue of ecological damage and the field of communal costs.
In Jewish law a man may not cause damage either with his body or property to another man's body or property, and, whenever such damage is done, monetary compensation has to be paid (Yad, Hilkhot Nizkei Mamon, ch. 5; Sh. Ar., Ḥm, sections 153–156). It is immoral, however, to plan or conduct one's economic activity which will cause damage on the assumption that it is cheaper to pay for the damage concerned than to introduce technological devices to prevent that damage. Businesses, therefore, which pollute the environment or which destroy the quality of living, either physical or aesthetic, have to be placed in such areas as to prevent any damage from occurring to others; alternatively, where the siting of the firm or plant of itself does not cause ecological damage then safeguards must be introduced to prevent any damage.
Jewish teaching, in this respect, does not differentiate between ecological problems relating to individual neighbors and those problems which arise from the clash of interests between individuals and the community. Halakhically, the community has economic needs which have to be met and this often means acquiring rights in the private property of the individual through taxation not only of money, but also of assets. So, a Jewish community can force corporations or individuals to pay taxes in order to provide for the costs of communal living and to appropriate land for roads and other facilities. In the same way, Jewish law requires zoning of industrial and commercial premises in a way which prevents damage or enhances the aesthetic pleasure of the community. There may, however, be cases where the economic advantage to the community far outweighs the damage caused by the industry, as for instance where ecological restraints on development mean unemployment and poverty. There are rabbinic responsa which ruled in favor of an industry as against the ecological damage where the livelihood of the entire community depended on that industry (Teshuvot Maharashakh, part 2, subsection 98, and Shemesh Ẓedakah,Ḥm, section 34, subsection 11). However, the same sources held that this was only a result of Jews living in exile where they did not have authority to introduce zoning rules, but in their own country they would be able to plan so as to ensure economic development without suffering ecological damage.
Where the damage caused is one to life or to the human body, there can be no compromise and no monetary compensation is sufficient. If an industry is shown to be detrimental to the health of its workers, then the owners would have to introduce safeguards to protect them. If there are no technological possibilities for removing the danger to health then it might well be that in Jewish law such industries would not be possible at all. Furthermore, since Judaism does not see a man as being the master of his own body, one is not allowed to place oneself in danger. Workers therefore cannot agree to accept employment which is hazardous to their health, even if the employer is willing to increase their wages.
The conflict between individuals or between individuals and the community regarding scarce resources may take the form of nuisance issues or minor discomfort rather than actual damages. In these cases, Judaism argues that one should do another person a favor and forego one's rights. In a 14th-century responsa, for example, the case was ruled against a plaintiff who argued that the smoke from his neighbor's kitchen bothered him. Even though smoke constitutes a major ecological damage, nevertheless the rabbi held that people could not cook without using their stoves and this outweighed the irritation caused (Teshuvot ha-Rashba, part 2, section 65).
Judaism teaches that man has the right to use the wealth of the world since that is the purpose for which God created that wealth. At the same time, he does not have the right to willfully mismanage it or waste it, even if it is legally his property. This means that the wasteful use of natural resources by the corporation or by society in general would be frowned upon. Steps have to be taken to insure that future generations have the ability to enjoy these resources just as the present one does. At the same time, however, if there is a conflict between destroying a certain species in order to provide a livelihood for human beings, the needs of man take precedence since the whole creation was meant for the enjoyment and profit of mankind.
Man's wealth is given to him by God in trust to be used inter alia to assist the weaker and inefficient members of society and to fulfill his communal responsibilities. This applies also to the wealth of the corporation. This wealth sharing is not left up to the conscience or generosity of the individual, but is a religious obligation, enforceable by a rabbinic court. So the community has the right to tax its members, corporate or otherwise, in order to provide for these costs. The evasion of such taxes is considered tantamount to theft, either from the recipients of the communal services or from other taxpayers who are required to pay more. This applies not only to the taxes levied by the Jewish community but also to those of the general society in which Jews live (Yad, Hilkhot Gezeilah ve-Aveidah, ch. 5, halakhot 11–12; Tur, Sh. Ar., Ḥm, section 369. A.I. Ha-Kohen Kook. Mishpat Kohen, section 148, who extended this to include Jewish state authority even where there is no longer a king). This is in keeping with the principle that in money matters "dina de-malkhuta dina" – "the law of the land applies" except where it contradicts Torah law. It is only where the government is illegal, having usurped its powers, or where the laws are discriminatory, immoral, or erratic, that some authorities have ruled that it is permissible to disobey the law and this too only on condition that others are not harmed thereby.
Today, many corporations have their headquarters in a country or area which has a lower tax rate rather than the area in which they conduct their business, thus escaping their obligation to share in the latter's social costs. Jewish law would require taxes to be paid where the money is earned thus insuring the social and physical infrastructure (Teshuvot ha-Rashba, part 1, nos. 664, 788). There are even precedents in Jewish law where the community has prevented wealthy citizens from leaving, on the grounds that this would damage or destroy their tax base (Takkanot Va'ad Arba Araẓot – enactments of 1661).
There is a halakhic consensus that competition between entrepreneurs is permissible where the community benefits from it or where the competition in no way involves any aspect of theft or coercion. As often as not, however, competition brings with it not only communal economic benefits but also social dislocation. This occurs when it results in the dismissal of workers or in the destruction of the inefficient competitor. In these cases, society has to decide whether or not there is any moral responsibility for the unemployed or for the displaced entrepreneur. If so, the question remains as to who is obligated to bear that responsibility, the corporation or society itself.
In Judaism there is undoubtedly a clear-cut moral problem created by the unemployed worker and by the displaced entrepreneur since obligations are owed both to the people who are poor as well as to those who become so. The question as to whether it is their fault or not is irrelevant. Nor is there a concept of "the deserving poor." Nevertheless, the issue of placing the responsibility for solving the moral problem is less clear.
It would seem that, in order to provide a Jewish answer to this question, a distinction has to be made between legal rights which can be enforced by a rabbinic court and what is required by Jewish concepts of charity.
Employer-employee relationships are in Jewish law primarily part of the general laws of hiring and these make the fulfillment of contracts binding. The corporation therefore has a responsibility for any compensation provided for in the employees' contracts as well as those provided for by local custom such as severance pay, even where these are not expressly mentioned in the contract. In parenthesis it should be noted that workers who, owing to old age or illness, become unable to work at their usual productivity cannot be fired without compensation, either monetary or through shortened work hours or physically less demanding jobs. Those unable to work at all have to be compensated. Some authorities would link this to the grant given in the Torah to the Hebrew bondsman while others argue that long-term employment assumes that people age or get ill so that, even in the absence of a contractual agreement, the employers express their assumption of this obligation (Ziknei ha-Dayyanim, Torah ve-ha-Medinah, vols. 9–10; see also Mordechai, Bava Meẓia 246, who holds that courts can enforce charitable acts on Jews. See also Teshuvot ha-Rosheh, part 1, section 300).
It seems, however, that, where the firing is the result of economic factors such as unprofitability or competition, the employer does not have any obligation to provide compensation other than that granted by custom or specified in the labor contract. Similarly, it would seem that the corporation has no legal obligations to the competitor who has been displaced as a result of halakhically permitted competition. There is no doubt however about the halakhic obligation of the community to provide either the financial or spiritual assistance needed or of the corporation (or its shareholders) to participate in funding this assistance through their tax payments. Assistance to the poor and needy is one of the obligations of the communal purse and cannot, for example, be negated by majority vote, in order to lower the communal tax burden as can other communal services.
This assistance, nevertheless, is charity, not a redistribution of income or transfer payment. Charity, even though a hallmark of Jewish life throughout the Diaspora and over the centuries, and despite the fact that it shares in Hebrew a common root with justice, is nevertheless charity with all its negative overtones for the recipient. So the rabbis frowned on making a living off charity a profession, insisting that a man should flog a carcass in public (considered one of the lowest menial tasks) rather than be dependent on the community. This is no way lessens the obligations of the giver, community, individual, or corporation but militates against the creation of a welfare mentality.
Although the communal obligation is clear, nevertheless, the possessor of wealth also has charitable responsibilities, even if these cannot be enforced in a court, over and above his communal taxation. Maimonides classifies giving a person a job, a loan, or suitable business advice which will prevent him from becoming dependent on the communal purse as the highest form of charity (Yad, Hilkhot Mattanot Aniyyim, ch. 10, halakhot 7, 18, 19). It would seem that in this respect the corporation can be far more effective and varied than the individual. Employees who are laid off, or for that matter displaced competitors, can be retrained, using the corporation's equipment and technology so as to qualify for alternative employment. The corporation can make information regarding job opportunities and economic prospects, either locally or nationally, available, thus overcoming a serious obstacle to re-employment, or to establishing new small enterprises. Part of the corporate profits can be set aside to form a fund for granting interest-free loans to its unemployed workers or those whose firms have ceased to operate as a result of its competitive success. Such interest-free loans, the corollary to the biblical and rabbinical injunctions against taking interest, have been a feature of Jewish communal living since biblical days. These loans are not meant solely for temporary assistance to hard-pressed farmers. Their use for enabling people to start their own business is legitimate and could constitute a major corporate contribution not only to the discharged workers but also to the unemployed, underprivileged, and temporarily financially strapped entrepreneur in general.
There exists a distinctive Jewish ethical framework for the conduct of business within which Jews have always operated. This framework regards wealth as a gift of God, legitimate and useful but operative within the parameters laid down by Jewish law, morality, and custom. These parameters forbid the earning of wealth through dishonest means which include theft but also coercion, misrepresentation, unrevealed conflict of interest and defects, rejecting the concept of "let the buyer beware" but placing the onus for full disclosure on the seller. Corporations share the moral obligations of the shareholders and therefore what is not permissible for the individual is also forbidden to the corporation.
As a result of the national orientation of Judaism, the group and society have, as it were, a share in the wealth of the individual. Private property rights are recognized and protected but are never absolute. This means that possessors of wealth, corporate or otherwise, can be taxed to meet the social needs of the community, whether these include charity for the poor and inefficient citizens or the unemployed, or the provision of public services. Furthermore, business may not be conducted in such a way as will damage another's property or health, or for that matter the ecological quality of life of other individuals or of society.
The legal nature of Judaism means that its ethical framework is transferred into obligations, permissible or otherwise, and the rabbinical courts are obligated to enforce them. At the same time operating beyond the limits of the law, doing one's fellow man an economic favor and voluntarily relinquishing one's property rights are part of the religious education of the Jew.
In general, the realm of ethics in trade and business is divisible into three categories: (a) tradesman-customer relations; (b) competition and relations among and between tradesman and craftsmen; and (c) competition among customers. Regarding the first category, see *Consumer Protection; *Deceit; *Hafka'at She'arim (Profiteering); *Sale; and *Mistake. Concerning the subjects included in the second category, the monopoly rights of professionals and holders of licenses in specific occupations, and intellectual property rights, see *Trespass. In the present entry we shall focus on further issues in the second and third categories: the frustration of an emerging transaction between the parties; protection from competing business; price cutting; and advertising. Some of the discussions may be relevant to more than one of the aforementioned subjects.
The basic doctrine governing commercial law is the legal principle of trespass. The term and doctrine of "trespass" (hassagat gevul; lit. "moving a landmark") underwent many stages of expansion and development. The Torah, from which the phrase originates, uses it to refer to the unlawful taking of a neighbor's land by physically moving the boundary markers into the neighbor's property so as to annex part of that property to the trespasser's own adjacent land. The Torah deals with this situation in two verses: (a) "You shall not move your neighbor's landmarks, set up by previous generations, in the property that will be allotted to you in the land that the Lord your God is giving you to possess" (Deut. 19:14) and (b) "Cursed be he who moves his neighbor's landmark" (Deut 27:17). Even in the patriarchal period, it was customary to insist on precise landmarks, as evidenced from the description of the field in "Machpelah" (lit., the "double cave") that Abraham bought from Ephron the Hittite (Gen 23:17). The Hebrew prophets and wisdom literature protested against the movers of landmarks (Hos. 5:10; Prov. 22:28; Job: 24:2), and the prohibition of trespassing into another person's land was also discussed in talmudic literature and in the Codes (Maimonides, Yad, Hil. Genevah 7:11; Sh. Ar., Ḥm 370.1; cf. at length in *Hassagat Gevul (Encroachment).
Already in talmudic times, and particularly in the post-talmudic era, it was necessary to confer legal recognition and protection to rights which had not yet been crystallized in legal formulae. Legal expression and protection was given to such rights by extending the doctrine of "moving a landmark" to include the prohibition against "moving" or "trespassing" upon various economic, commercial, and intellectual boundaries. The meaning of the term "boundary" was likewise extended beyond the physical to include additional areas, so that even those relating to the occupation and livelihood of a competing business owner came to be referred to as a "boundary." Initially this prohibition was of moral standing only, without any legal sanction. However, the steadily increasing development of businesses and commercial life from the talmudic period to modern times was accompanied by an increased development and sophistication of categories and parameters enabling the qualified exercise of judicial coercive power in preventing the violation of the business owner's rights by unfair competition, without unduly restricting free market trade.
trespass by frustrating the crystallization of a transaction between parties – "the poor man sifting through leftover bread"
According to the talmudic rule, when a poor man is sifting through leftover bread and another one comes and takes it for himself, the latter is called "an evildoer" (Kid. 59a). The Talmud cites this rule in the commercial context of "competition" between two potential purchasers vying for the same item. When a person is about to purchase an item from a seller, and another person precedes him and buys the same item (hereinafter, "an interloper"), the latter is also called "an evildoer." The talmudic commentators and medieval codifiers established the rules governing the application of this principle.
The determining stage of the transaction for the application of the rule is the stage at which the two parties – the seller and the would-be purchaser – agreed upon the sale of the item and set its price. From that stage onwards, any third party who attempts to replace the party interested in purchasing is called an "evildoer" (Maharam of Ruttenburg, cited in Mordechai, Bava Batra §651; Rema, on Ḥm 237:1). According to the Perisha, even prior to the determination of the price – i.e., during the negotiating stage – an acquisition by the interloper will be regarded as an act of trespass (Tur, ibid.).
Where the interloper's potential loss exceeds that of the would-be purchaser, the prevailing opinion among the authorities is that the interloper will not be called an evildoer. The reason is that it resembles the case in which the potential purchaser and the interloper are competing over an abandoned article, in which case it cannot be claimed against the interloper that he could have found an item similar to the one being sold in another place. This view endorsed the opinion of Rabbenu Tam (Tos., Kid. 59a; see also in Asheri, Kid. 3b).
According to the authorities, the legal import of the determination that the interloper is called "evildoer" is that, for as long as he has not completed the transaction, he should be prevented from doing so (Resp. Maharshadam, on Ḥm 259). On the other hand, if the transaction between the seller and the interloper has already been completed, the would-be purchaser cannot take the item away from the interloper (Ritba, Kid. 59a; Responsa Maharik, 132; Rabbenu Tam's view, cited in Ritba, ibid., is that the item can be taken from the interloper). The only sanction is therefore a public declaration in the synagogue that the interloper is an "evildoer" (Hagahot Maimoniot, Hil. Hovel, 5:1; Perisha, Ḥm 237).
The Severity of Damage and the Scope of the Right
Where the effort invested by the potential purchaser exceeds that of the interloper, or if he stands to incur a pecuniary loss if the transaction is not completed, the sages ruled that the interloper was to be regarded as a robber. The Mishnah provides that: "If a poor man gleans on the top of an olive tree [i.e., beats the tree so that its fruit will fall] that which is beneath him is regarded as having been robbed, in the interests of peace" (Mish. Git. 5:8). In this case, even though the fruit is regarded as having been abandoned (shikheḥah; forgotten fruit), the sages made an enactment that, insofar as the poor man had already invested effort and work to acquire them, their appropriation by an interloper would be regarded as robbery (Maharik §132). Admittedly, an object considered as "robbed" by virtue of rabbinic edict cannot be judicially expropriated; nevertheless, during the medieval period this Mishnah served as the basis for the ruling that where a person sought to rent an apartment in the city for purposes of setting up a shop, and during the course of his negotiations for the shop's rental another person came and preceded him in renting it, then the rights of the former prevail, and the latter is enjoined from entering the shop without the former's consent. (Maharik, ibid.).
Consent to Waive an Act of Trespass
The nature of the prohibition against trespass precluded a determination of its precise parameters. Any attempt to fix a determining stage for purposes of this prohibition could be circumvented by a merchant encroaching upon his neighbor's borders and interfering with a transaction about to be completed, at a stage not covered by the prohibition. This possibility induced Rabbi Jair Ḥayyim Bacharach (Germany, 17th century) to rule that it was forbidden to make conditions for reciprocal waiver of the prohibition, even within a defined group of merchants (Resp. Ḥavot Yair, 163).
protection from a competing business – encroaching upon a neighbor's craft
In a Midrash cited in the Babylonian Talmud (Mak. 24a) the amoraim construe the verse "nor taketh up a reproach against his neighbor" (Ps. 15:3) as implying a prohibition against "entering the profession of his neighbor." Ezekiel 18:6, "neither has he defiled his neighbor's wife," is interpreted similarly (Sanh. 81a). This midrashic exegesis does not lay down binding law, but rather establishes a moral threshold; the authorities therefore ruled that it was "a degree of piety" not to do so, even though legally it was permitted (Resp. Maharam of Ruttenburg, 4:67; Resp. Ḥavot Yair §42).
The beraita (bb 21b) refers to a case in which an artisan prevents his fellow from receiving anticipated profit that he would definitely have received: "Fishing nets must be kept away from [the hiding-place of] a fish [which has been spotted by another fisherman] the full length of the fish's swim" (i.e., where a fisherman discovers a place where fish live and leaves a bait there to capture them, it is forbidden for another fisherman to lay down his own traps). According to Tosafot, this case is restricted to a professional fisherman; hence, the other fisherman may apply for and receive a remedy from the court. This contrasts with our earlier comments regarding the poor man beating an olive tree, which did not concern the protection of a person engaged in his craft, thus precluding the possibility of receiving a judicial remedy.
When dealing with craftsmen competing over a group of customers, the issue is not one of absolute denial of profit, but rather of its reduction. Moreover, the profit itself is not certain, being dependent on customers who have complete discretion to decide which craftsman to approach. Consequently, the sages' enactment in this case differed from their enactment in the aforementioned beraita, and considerably less protection is afforded to the owner of an existing business. The Tosefta deals with cases in which the sages made enactments to prevent a craftsman from opening a business in a particular place: "The residents of a passageway can prevent one another from bringing in a tailor or a tanner or any other kind of craftsman, but one resident cannot prevent another resident. R. Simeon b. Gamaliel, however, says that they may prevent one another" [Tosef., ed. Zuckermandel], bm 11:16; a similar formulation is also cited in Bava Batra 21a; cf. Tosef. ki-Feshuta, Lieberman, ad loc.). The aforementioned tannaitic dispute on the question of whether one resident can prevent another one from engaging in a particular occupation is also found among the amoraim – i.e., R. Huna and R. Huna b. Rav Yeshoshua (ibid.) The codifiers and the talmudic commentators disputed the interpretation of this ruling. Who exactly was permitted to prevent another person from engaging in his craft? Who has the authority to prevent him: the craftsman himself or the local residents? And is such prevention justified by the need to protect a person already engaged in that craft in that particular place, or by the need to prevent the environmental disturbance caused by his work?
The halakhah is that the damage to his business ("denial of livelihood; posek le-ḥayuto) does not constitute grounds for preventing one craftsman from opening a business in competition with another craftsman in the same town (Maim., Yad, Hil. Shekhenim, 68; Maharam of Ruttenburg §677; Tur, Ḥm 156:10; Sh. Ar., Ḥm 156:5).
Even so, where the opening of a new business is not merely competition, but will actually eliminate the livelihood of the original craftsman (bari hezekah – lit. definite damage), the Rema ruled, following the view of Aviasaf (cited in the Mordechai, bb 21b, 616) that the businessman can prevent the opening of a competing business by the competitor, even if the person wishing to open it comes from the same town (Darkhei Moshe, Ḥm 156:4; Resp. Rema 10, The First Principle).
When a person comes from another town, the amoraim agreed that the townspeople can prevent him from opening a business in competition with the residents of that town, so as not to harm their businesses, unless he shares in the tax burden of that town (bb 21b; Maim.; Sh. Ar., ibid.). However, according to some authorities, permission to open a competing business on the same street as that of an existing business of one of the town's residents will only be granted if the competitor establishes his residence in the same town (Tos. bb, ibid.; Tur. ibid.; Rema on Ḥm 156:6–7).
In trade, on the other hand, a distinction is drawn between peddlers who regularly go from town to town – not being restricted in any form – and merchants who regularly bring their specific merchandise to the market day and who are only permitted to come on the market day (bb 22a; Maim., Yad, Hil. Shekhenim 6:9–10; Tur, Ḥm 156:9; Sh. Ar. 156:6–7).
The Israeli Rabbinical Court of Appeals adjudicated a dispute between a group of ritual circumcisers (mohalim) who had received permission from a particular hospital to offer their services to women who gave birth, and a mohel who had recently joined their number. The group claimed that by joining the group he was encroaching upon their professional domain and damaging their livelihood (File 5730/89, 8 pdr 227). Citing Rema's aforementioned distinction between definite damage caused by the elimination of livelihood and a situation which only leads to increased competition, R. Eliashiv ruled that such a distinction had not been accepted, and that the leading authorities – Alfasi, Maimonides, Semag, Tur, and Shulḥan Arukh – made no mention of the law that "fishing nets must be kept away." Consequently, the Rabbinical Court was unable to prevent the mohel from competing with his colleagues in offering services in the hospital.
R. Yisraeli, on the other hand, felt that the Rema's distinction should be adopted and that as a matter of halakhah one must draw a distinction between a competitor who merely reduced the income of the craftsman, regarding whom "it cannot be said that he damages him at all, because the purchasers still have a choice, and it is in the hands of Heaven," and a case in which the competitor "actively attracts customers to him." In the latter case, "even if he only reduces the income of the original party, he is regarded as if he altogether negated income, because he [the original mohel] cannot say, 'Whoever comes to me will come, and whoever goes to you will go to you.' The reason is that the latter invests efforts and stratagems in attracting people to him" (p. 237 of judgment). According to R. Yisraeli, in this particular case, the new mohel was clearly trespassing upon the domain of the other mohalim and would definitely reduce their income. Hence, it should be regarded as if he was altogether negating their livelihood and therefore engaged in outright robbery, the fruits of which may be expropriated by the bet din.
Nevertheless, R. Yisraeli agreed to dismiss the appeal and allow the new mohel to be accepted for work. The reason was that the new mohel had originally applied for permission to work in the hospital alongside the other mohalim, and the hospital had denied his request for no justified reason.
Price Cutting in Relation to the Market Price. The Mishnah (bm 4:11) cites a dispute as to whether one of the merchants in a city is allowed to reduce the prices of his merchandise below the market price in order to attract customers: "R. Judah said: … Nor may he reduce the price; but the sages say, he is to be remembered for good." The reason cited in the gemara is "because he eases the market" (i.e., reduces the overall market price). In other words, not only will the residents of the town benefit from the price cut, but the suppliers will also reduce their prices accordingly, so that the merchants will not suffer as a result. The halakhah was fixed in accordance with the sages' view; namely, that it is permitted (Maim, Yad, Hil. Mekhirah 18:4; Tur, Ḥm 228:17; Sh. Ar., Ḥm 228:18). However, beyond this the Rema rules that a substantial price reduction is not permitted, because in such a case one can say that the damage is certain "bari hezeka," similar to the rule concerning the opening of a business in competition with an existing business. (Resp. Rema 10, §1).
Some of the authorities restricted the permission given for price reduction, limiting it to the cheapening of basic consumer items only, such as dairy products and fruit, because the consideration of the customers' benefit is only relevant with respect to this kind of item. It is forbidden to reduce the prices of other kinds of produce, such as liquor, because such a reduction would cause a "market failure" and damage the other merchants.(Resp. Mahariaz Amil, §69; Arukh ha-Shulḥan, 228:14).
Price Cutting in Relation to the Agreed Price
The Tosefta states that the residents of the town are permitted to determine prices and rates that will be binding upon all the residents: "The townspeople are at liberty to fix weights and measures, prices, and wages, and to inflict penalties for the infringement of their rules." (Tosef., ed. Zuckermandel, tb, bm 11:23; a similar formulation also appears in Bava Batra 8a; c.f. Lieberman, Tosef. ki-Feshuta, ibid.). This authority also includes the power to adopt decisions that may cause profits to some and losses to others, such as the fixing of low prices that will harm the sellers and profit the buyers. These decisions need not be supported by all of the townspeople, and the communal leaders can adopt the decisions in a manner that binds the entire community (Resp. Rashba 5:125). Similarly, a particular sector of craftsmen are permitted to enact regulations that bind all members of the same craft (Tos., ed. Zuckermandel, bm 11:24–25; cf. Lieberman ad loc; bb 9a). However, according to talmudic commentaries and authorities, the majority has no power to force its position on the minority, and the regulations only bind those who agreed to their enactment. Consequently, a new member of the same craft who came to the town, and did not agree to the regulation regarding the fixing of prices is not bound thereby and can sell his merchandise at a price lower than that prescribed (Resp. Maharshadam 1:117; Leḥem Rav §216.)
marketing and advertising
Both the Mishnah and the Talmud abound with examples of techniques adopted by shopkeepers and craftsmen to advertise their wares in order to attract customers – by presenting their merchandise in an attractive manner (bm 60b; Pes. 37a), and by public proclamation (ibid., Pes. 116a).
The Mishnah (bm 4:11) records a dispute between the tannaim as to whether the shopkeeper is permitted to hand out sweets to children in order to accustom them to come to him. R. Judah prohibits it and the sages permit it. The law was fixed according to the view of the sages (Maim., Yad, Hil. Mekhirah 18:4; Sh. Ar., Ḥm 228:18) – in other words, the other merchants cannot prevent him from doing so.
Regarding the improvement of the merchandise's external appearance in order to promote sales, the rule in the Mishnah is that "men, cattle, and utensils may not be painted [enhancing]" (ibid.). The Talmud explains that the prohibition lies in altering the external appearance of the merchandise in a manner that may mislead the customers as to their real nature (ibid., 60b) The amoraim distinguish between the adornment of old utensils to make them appear new, which is prohibited because of the laws of deception, and the adornment of new utensils, where the merchant's intention is to induce the customers to purchase from him and not from other merchants, which is permitted. Here too the authorities fixed the halakhah in accordance with the position of the sages (Maim., Yad, Hil. Mekhirah, 18:2–4; Sh. Ar., Ḥm 228:9, 17).
the law in the state of israel
The Commercial Wrongs Law, 5759 – 1999, addresses some of the issues dealt with in Jewish Law. Section 3 of the law provides that: "No person who carries on business shall unfairly prevent or impede access by customers, employees, or agents to the business, property or service of another person who carries on business." The law does not specify what kind of action will constitute "prevention" or "impeding" and what manner thereof would be "unfair." In addition, the law prohibits "misleading use" – in other words using the trade name of another so that an asset or service provided by one person will be mistakenly regarded as being the asset or service of another person (§1); false description regarding the occupation or the service of the advertiser or of another person (§2); and theft of trade secrets, defined as the unauthorized receipt, appropriation, or use of commercial information which is not public knowledge, whose secrecy grants its owner an advantage over his competitors (§§5–10). The law permits the court to award damages without proof of actual damage.
[Ariel Ehrlich (2nd ed.)]
additional aspects: M. Elon, Ha-Mishpat ha-Ivri, 1 (1988), 27f., 106 n.118, 136f., 329f., 490, 536, 559, 623, 653, 656, 739, 741f.; 766; idem, Jewish Law, 1 (1994), 291; 106 n.120, 153f., 394f; II, 596f., 652, 680, 770, 808, 811, 911, 913f., 943; idem, "Hafka'at She'arim ve-Hassagat Gevul Misḥarit ba-Mishpat ha-Ivri," in: Maḥanaim, 2 (1992), 8–19; A. Hakham, "Misḥar ve-Khalkalah ba-Mikra," in: Maḥanaim, 2 (1992), 20–39; A. Hacohen, "Mishpat ve-Khalkalah be-Sifrut ha-She'elot u-Teshuvot," in: Maḥanaim, 2 (1992), 62–77; S. Warhaftig, Dinei Misḥar ba-Mishpat ha-Ivri (1990); N. Rakover, Ha-Misḥar ba-Mishpat ha-Ivri (1987). add. bibliography: S. Deutch, "Business Competition and Ethics; Predatory Pricing in Jewish Law," in: Dinei Yisrael (17) (1994), 7–33; Y. Liberman, Taḥarut Iskit be-Halakha (1989); M. Tamari, "Jewish Law and Economic Laws," in: Niv Midrashah (1969), 127–132; A. Levin, Free Enterprise and Jewish Law (1980); E. Zippersten, Business Ethics in Jewish Law (1983).
Business ethics names both a phenomenon (the ethics espoused and practiced in business) and the field of study of that phenomenon (the serious study of business ethics). As a branch of ethics (or moral philosophy), the field of business ethics is interested in how judgments of right and wrong, good and bad, moral obligation and responsibility, rights and duties, and the like, are made and justified. As a branch of applied ethics it explores how these judgments are carried out in the specific domain of work, commerce, and economic activity.
As a descriptive enterprise, business ethics is an analytical exercise in understanding and explaining how people and organizations make their ethical judgments and decisions. As a prescriptive enterprise, business ethics seeks to arrive at defensible, normative, moral judgments of business matters in ways that are helpful to the actual practice of business. Business ethics overlaps significantly with what is often called corporate social responsibility—a movement calling on corporations to be responsible not just to shareholders but to the society (and the ecosystem) in which it operates. The field of business ethics is interested in more than just social and environmental responsibilities but those are certainly critical component areas.
Science and technology share a long, close, and mutually-influential relationship with business. Business needs and opportunities drive much scientific research and technological development, on the one hand, while discoveries and technological innovations transform business, on the other (Burrus 1993, Martin 1996, Tapscott and Caston 1993). Technology is widely accepted as the primary, dominating force that has transformed business around the world with rising intensity since the 1950s. Business ethics, as a reflective and sometimes reactive discipline, has typically lagged behind business changes and began to address this technological transformation only in the late-twentieth century (Gill 1999).
Historical Development of the Field
The basic questions of business ethics (for instance, fairness in wages and prices, responsibility for defective or dangerous products, fulfillment of contractual agreements, and morality of interest rates) have been of interest throughout human history and throughout the world. For example, the Jewish and Christian scriptures and the ancient Greek philosophers pay considerable attention to issues of wealth and poverty, honesty in transactions, liability for injury, justice in compensation, and other matters generally considered to be in the business ethics domain. So too, Buddhist tradition provides guidance about right livelihood. Medieval Catholicism considered the morality of usury and interest on loans. Karl Marx put capitalist economics on trial and called for justice and freedom for workers. Sociologist Max Weber famously studied the Protestant ethic and the spirit of capitalism. Thus while the constraints of nature and of social tradition have determined the work and economic experiences of most people throughout history, there have been recurring discussions of whether various aspects of this experience are right or wrong.
The rise of modern industry and the factory system, along with the great migrations of peoples across oceans and continents, especially during the nineteenth and early-twentieth centuries, brought major changes and disruptions to the ways people worked and the ways business was carried out. Business moved from a rural, agricultural, and familial base to an urban, industrial, and organizational one. The impact of these changes on individual workers, on families and communities, and on the environment, and the rise of a new class of wealthy business leaders—and of new forms of poverty—provoked intensified ethical debate not just among academic professionals but writers, politicians, preachers, poets, and populists.
Nevertheless as a discrete, self-conscious, academic field, business ethics emerged only during the 1960s and 1970s and grew steadily through the 1980s and 1990s and on into the twenty-first century. The rapid emergence of this field during the last quarter of the twentieth century was truly remarkable. Business schools created courses in business ethics; students began pursuing Ph.D degrees in the field; and centers for business ethics sprang up at many campuses. Associations, such as the Society for Business Ethics, Business for Social Responsibility, and the Ethics Officers Association, were formed to bring together scholars and practitioners in the new field. Journals were launched, such as Business and Professional Ethics Journal in 1981, the Journal of Business Ethics in 1982, and Business Ethics Quarterly in 1991. The quantity and quality of textbooks, monographs, and other literature on business ethics was first impressive, then daunting to those wishing to keep up with it. In the corporate arena itself, companies increasingly created ethics codes, statements, and training programs. By the turn of the twenty-first century, business ethics had won a respected and significant place in virtually all business education programs and in the consciousness of business managers (Freeman 1991, Werhane 2000).
The impetus for the development of business ethics as a field of study and of professional practice has come from several factors: First the rapid development of technology and its multifaceted deployment in business has modified and intensified the traditional list of business ethics challenges. Technology amplified old problems, created new ones, and complicated and speeded everything up.
Second social and cultural developments, in the 1960s and since, gave rise to a widespread questioning of traditional ethical authorities. Demands for recognition and equal treatment by students, women, and ethnic minorities, a new sense of urgency to care for the environment, and a growing ethnic, religious, and cultural diversity in the workplace all helped to put in question traditional ways of running businesses and of thinking about ethical right and wrong. Thus just as the technology-enhanced business ethics challenge was increasing, the assumption of a widely-shared consensus on values and ethics was becoming untenable.
Third across the intellectual and academic horizon, academic specialization grew, fueled partly by the scope and complexity of various old and emerging fields of research and partly by an explosion in the quantity of data available for consideration. The development of a specific field of business ethics (just like that of medical/bioethics) became logical, possible, and necessary. The growth of the business ethics challenge combined with the loss of a common set of values and ethics to create a fertile field of inquiry and service for a new academic specialization.
Fourth a growing number of high profile business ethics crises and scandals provoked calls for both better government regulation and oversight of business, on the one hand, and for better business ethics education and practice, on the other. Among the high profile ethics cases were trading, accounting, and financial scandals; the manufacture and sale of dangerous products (automobiles, tires, drugs); the use of child labor and sweat shops; ecological disasters (the Exxon Valdez, Bhopal); industrial pollution and depletion of natural resources; and vastly growing inequalities in wages and compensation for executives and workers. The 1991 U.S. Federal Sentencing Guidelines for white-collar criminals specified that law-breaking companies could reduce their penalties by up to 40 percent if they instituted compliance and ethics training programs.
Business Ethics: The Central Issues
The organizing question in business ethics is how to do the right thing (not just the profitable or possible or popular or even legal thing). Various philosophies, religions, and individuals answer the what is right and how does one know it? question in different ways, but there is widespread (if not universal) agreement that at its core, something becomes wrong when it harms (or seriously risks harm to) people. The Hippocratic Oath argued that the first duty of medical ethics was to do no harm. The same is true with respect to business ethics: An ethical business is one that seeks to avoid harm. What is ethically right and good is what can help people toward a free, healthy, and fulfilled human life. Obviously harm and help are elastic and debatable concepts but thinking about ethical right and wrong in these simple, historic, classic terms helps focus the ethical enterprise around a common language and concern in an important way.
In raising its questions of right and wrong, the scope of business ethics is as broad as business itself. Business ethics, perhaps because it is such a young field, has no single dominating method or paradigm. To arrive at a relatively inclusive understanding of the field, business ethics can be approached from five different perspectives. The first is a review of the range of typical ethical dilemmas and problem cases that arise across the business spectrum. The second briefly examines the ethical values and methods of analysis typically used to address the range of business ethics dilemmas. The third perspective is an analysis of the major stakeholders in business ethics so as to understand who is involved and what their ethical interests might be. A fourth perspective examines the basic components in a comprehensive organizational ethics. And finally, while the interaction of science, technology, and business ethics will be discussed as appropriate throughout this entry, a summary of business ethics will be drawn from the science/technology viewpoint.
Ethical Dilemmas and Critical Cases
One way to approach business ethics is by an analysis of specific problem cases or dilemmas (quandaries). An ethical dilemma arises when there is a question of determining the right thing to do. It often occurs because of a conflict of moral values or principles either within an individual or between two or more agents. Focus on the case method is called casuistry (Jonsen and Toulmin 1988; Brown 2003; Goodpaster and Nash 1998; Jennings 1999; Ferrell, Fraedrich, and Ferrell 2000). Casuistry analyzes ethical dilemmas and quandaries to aid in wise decision making and right action.
CLASSIFYING ETHICAL ISSUES. Ethical dilemmas and problem cases can be classified in several different ways. A threefold distinction can be made among (a) personal, micro-ethical issues; (b) organizational, organizational issues; and (c) systemic, macro-ethical issues. Another categorization can follow the functional areas of business, such as management, finance, accounting, human resources, marketing and advertising, supply chain management, sales, manufacturing, and more. Still another approach could focus on cross-cutting, thematic areas such as technology, communications, meeting, relationships, and the like.
Conflict of interest cases are often at the root of ethical dilemmas in these categories. For example, one's personal interest (for instance, a bonus for meeting a sales target or a personal gift) may conflict with one's professional responsibility (such as serving client needs and employer standards). A business interest in a foreign country may conflict with the social or environmental interest there. Bribes, kickbacks, insider trading, inappropriate use of company information, resources, or contacts to advance personal/noncompany interests, or hiring a talented friend are all examples of possible conflict of interest.
Dilemmas about truthfulness and accuracy in communication are also to be found throughout the business arena. Internal communications up and down the line, press releases and public relations, advertising and product labeling, financial reporting, and handling proprietary information and intellectual property, among other business activities raise difficult questions of ethical communication. How much information is owed and to whom? While it is clearly not right to publish immediately and fully all information one has to all people who ask for it, falsehood, deception, and evasion undermine trust and are often harmful.
Justice and fairness in policies and relationships are also a recurring ethical challenge throughout organizations. Relationships among employees at various levels and in different areas of the company may be disrespectful, inequitable, unfair, and harmful. Hiring practices, compensation, promotion, and workload differences might be unfair. Suppliers and business partners may not be treated fairly and honestly. The community may be unjustly burdened with the costs of an environmental cleanup due to a company's decision not to manage its wastes responsibly.
Technology has had a major impact on the ethical dilemmas faced in business. As the technological tools become more powerful, ever more vigilance is required to make sure they are used for good and not evil. Technologies also produce unanticipated consequences, bite back effects, that ethics must review (Tenner 1996). Old practices present new challenges when technology is introduced. Marketing and advertising ethics must now evaluate e-marketing practices. Customer data issues have become important as computerization makes possible tracking, profiling, and commoditization of what customers may assume is their private information.
Relationship issues are given a radical new spin when distant, extended enterprises, enabled by technology, become the order of the day. E-mail as the primary form of communication, the expectation of anytime/anywhere connectedness, and the management of employees in multiple, extremely diverse political-social settings around the world are technology-driven challenges that beg for ethical perspective.
RECOGNIZING, ANALYZING, AND RESOLVING ETHICAL DILEMMAS IN BUSINESS. A focus on ethical problem cases requires, first of all, determining whether a truly serious ethical dilemma that requires attention exists. Two compliance-oriented questions will often (though not always) identify a serious dilemma: (a) Is there a serious question of illegality? and (b) Is there a possible violation of the ethics and standards spelled out by the business's organizational code or by a related professional association? If the answer to either of these is positive, the issue is probably of serious ethical concern.
Some ethically important situations may slip under the radar of the two compliance test questions so four others must also be considered: (c) Is someone liable to be harmed by this? (d) Would individuals want this done to them or their loved ones? (e) Does this really bother human conscience and values? and (f) Would this continue if it were publicized in the evening news or on the front page of a newspaper?
If the answers to some or all of these questions are positive, the next stage is to analyze the case carefully. The facts of the situation must be clarified. Who is involved? What has happened? What are the ethical values and principles at stake? (The ultimate decision will need to be justified by appealing to such values). What are the options for response and the likely consequences of each response, short- and long-term? What help can others provide (colleagues, experts, veterans of similar cases) in analyzing and understanding this dilemma?
The third stage (after recognize and analyze) is to resolve the dilemma by choosing the best possible option available, acting on it with courage, and then following through, fully and responsibly. Not only the immediate decision and action but longer-term reforms might be appropriate to minimize recurrence of such dilemmas.
Casuistry is certainly an important part of business ethics. If ethics remains only a set of ideals or an abstract theory, unapplied (or inapplicable) to particular cases, it has failed. One of the virtues of casuistry is that it can quickly focus the participants' attention on something concrete, specific, and shared: the problem. Trying to begin with an agreement on abstract, general principles and values is often much more elusive. On the other hand a focus on cases alone can reduce business ethics to a reactive damage control. Decision making and action in response to extreme cases must not be allowed to become the whole enterprise. Even if one starts with concrete cases, part of the follow-through after responding to the case at hand is to move upstream in the organization and its practices to locate the sources and contributing factors to those downstream dilemmas.
Ethical Values, Principles, and Methods of Analysis
A second way into business ethics is to equip oneself with theories and insights from moral philosophy and carry these tools into the business domain (Beauchamp and Bowie 2001, DeGeorge 1999). Business ethics courses and textbooks, which frequently are designed and taught by people trained in philosophy, typically present two or more options in moral philosophy as potential tools for determining the right thing to do in business.
The two most common theories are the consequentialist utilitarianism of Jeremy Bentham and John Stuart Mill, and the non-consequentialist deontologism of Immanuel Kant. In addition to these two prominent options in Enlightenment modernity, business ethicists sometimes add brief discussions of ethical relativism, egoism, a feminist ethics of care, and some account of virtue (character) ethics. It is also common to include discussion of theories of justice (economic or distributive justice), often including the work of John Rawls and Robert Nozick.
After sketching such options in basic moral philosophy, business ethics textbooks of this type then counsel readers to choose one of these ethical theories to help moral philosophy to help decide ethical questions." Of course, virtually every moral philosophy (and moral theology) has some valuable insight to contribute to business ethics. Just as it can be useful to ask questions to identify an ethical dilemma, it can be helpful rather than confusing to examine one's ethical options from the perspective of several of these theories. With the utilitarians one could ask which possible response to the ethical problem would produce the best consequences for as many people as possible. With the Kantians one would ask how individuals would respond if they thought all people in comparable circumstances would copy the response. One could ask the egoist question—What is truly in the individual's best interest?—and, so too, questions about genuine caring, about the guidance of conscience and feeling, and about what surrounding culture thinks is right. Every insight and every theory is not equally insightful in every case, of course, so wisdom and discernment are always called for.
By focusing on moral philosophy in this way business ethics is actually showing its historic debt to Enlightenment thought. Kant and Mill and their contemporary philosophers were products of the modern scientific revolution of Isaac Newton and his colleagues, in which the physical universe was redescribed in terms of rational, universal, objective laws. In the footsteps of the scientists, the philosophers wished to discover moral laws of a universal, rational, objective character, independent of any notion of purpose or particularity of community. While this way of thinking about rational, universal, disinterested, objective laws contributes some helpful insights to the moral life, it has proven to be insufficient by itself (MacIntyre 1984, 1990). The young business ethics guild has slowly been waking up to the failure of Modern ethics. Viewed negatively, the Postmodern rejection of Enlightenment styles of moral philosophy points away from certainty and toward relativism or even nihilism.
Viewed more positively, the path has been opened up to explore new ways of thinking about business ethics that draw together the ethical insights of many voices and that more closely fit the actual ethical experiences of people in business. The success of some efforts to bring people together to formulate and implement business ethics principles, such as the Caux Round Table Principles, has been promising.
Business Ethics Stakeholders: Who Matters?
Business ethics can be approached by a problem focus, a theory focus, or, thirdly, a people focus, often called stakeholder analysis. To the traditional term shareholder (stockholder or investor/owner) has been added the term stakeholder (Freeman 1984; Weiss 1998; Post, Lawrence, and Weber 1999). A stakeholder is anyone affected by, or having a significant interest in, a business. They may not own financial shares of stock but they still have a significant stake, an interest, in what the business does. The assumption is that people have a moral right to some say in decisions that significantly affect their lives. In stakeholder relationships, the ethical questions concern the rights and responsibilities appropriate to each party to the relationship. Stakeholder analysis emerged from a realization that some parties were bearing costs (or reaping benefits) from business operations without being recognized. The following is a brief discussion of six major stakeholder groups.
OWNERS. One well-known view has it that the only responsibility of business is to maximize profits for its owners, provided this is done without fraud or other illegality (Friedman 1970). Certainly the owners (investors, shareholders, and financiers) of a business have a right to have their investment managed in their financial interest. It is not true, though, that profits are the only concern, even for the owners. Owner/investors also have a legitimate claim to adequate, accurate information about the business and its financial affairs.
What are the ethical rights and responsibilities of business owners in various circumstances? How does this differ under different ownership structures? What responsibility and accountability do business owners have toward other stakeholders? Are there ways of evaluating the legitimacy, fairness, and appropriateness of the owners' return on investment relative to what employees, customers, executives, and other employees receive? A stakeholder analysis approaches the business ethics arena with this sort of wider and deeper interest.
Technology has affected the ownership of business by facilitating complex, vast, high-speed new ownership patterns in the marketplace. Mutual funds own large percentages of many businesses. Under these fluid and impersonal circumstances, who are the owners to be held responsible for a business's behavior? How do small investors assume any of that responsibility even if they would like to? Perhaps the answer will become clear as information and communication technology renders the operations of both corporate management and fund management more fully transparent and as Internet-based movements organize small investors into effective lobbyists for reform (Tapscott and Ticoll 2003).
EMPLOYEES. If anyone has a clear stake in a company, it is the employees whose livelihood and vocation lies there. Business ethics pays attention to employees (including management) in several ways. First most of the ethical cases and crises that come along involve employee participation. The ethical analysis of employee choices, communications, and behavior occupies a good deal of the attention of business ethics. How managers and owners treat employees is another ethical concern. Job security, compensation, safety, harassment, prejudice, and even the quality of employee work experience, are ethically important. How should the personal ethical convictions of an employee be expressed (or not) in the workplace? How are employees trained in the company's ethics? How are ethical responsibilities related to various business roles?
Technology has modified the spectrum of ethical problems faced by employees. Perhaps the most striking impact of technology is when it eliminates employee jobs, either by replacing workers with robots and machines or by enabling jobs to be moved to locations where employees cannot follow. Is there a moral responsibility to help displaced employees to find other work?
Technology can be used or abused in monitoring employee communication and activity. Privacy must not be violated. Confidentiality must be protected. New stress-related injuries have emerged among computer users. Computers and the Internet have enabled some employee abuses such as game playing, pornography downloading, excessive personal use, and distribution of vulgar, hateful, or time-wasting messages to other employees. The same technology, however, allows for telecommuting from a home workstation, assisting a parent tending to a sick child. New issues of health and ethical management also arise concerning possible employer expectations of employees to be connected to their work anytime, anywhere.
CUSTOMERS. The most cynical non-ethical stance toward customers in the past was characterized by the Latin phrase caveat emptor—let the buyer beware. Viewed by stakeholder analysis, however, business ethics explores customer-related issues in marketing, advertising, product pricing, safety, quality, service, and support. What are the rights and responsibilities of customers vis-à-vis a company? Technology has made a huge impact on the development of products and services available to customers in the early twenty-first century. It also has modified marketing and advertising, as well as sales and service, by utilizing electronic media for all of these activities. Customer service and support and the privacy of customer data are among the ethical issues raised in new ways by technology. The Internet has also enabled some customers to help support each other in various user groups.
BUSINESS SUPPLIERS AND PARTNERS. Business-to-business relationships have become even more important and challenging in an era of outsourcing, complex supply chains, and virtual corporations. Government regulations and legal contracts simply cannot guarantee integrity in these relationships. The essential ingredient is trust, which depends on voluntary adherence to shared values and ethics (Fukuyama, 1995). What are the ethical responsibilities of business partners to each other? As technology enables businesses to create working relationships in distant and culturally-diverse settings where laws and local ethical values may permit child or slave labor, discrimination based on gender or religion, bribery, and environmental pollution—or where Euro-American business practices may be viewed as hopelessly corrupt, vulgar, and unjust, the challenge to business ethics is to figure out the ethically right thing to do in relation to the business partner stakeholders.
GOVERNMENT. As the presumptive guardians of the law, justice, order, and the well-being of nations, governments are also important stakeholders in business. This is true of all business-to-government interaction but in the economy of the twenty-first century, business's capacity to have both positive and negative impacts on states and their populations is extraordinary. Several multinational corporations have larger annual budgets than most nations in the world. The kind and extent of governmental regulation and oversight of business results in part from ethical values and choices. The influence of business on government (lobbying, campaign contributions) also is, and needs to be, subject to moral debate. In an era of globalization of business, earlier understandings of the proper relationship of governments to businesses must be rethought.
COMMUNITY. Communities often benefit both directly and indirectly from business. A strong business climate can bring jobs, income, and skills to communities. Even those who are not investors, employees, or customers of a business can benefit from its presence. But costs of the business are often externalized into the host community. Traffic congestion and environmental cleanup are two examples of costs to communities. A community may grow up around a business, creating schools, roads, and other cultural and social infrastructure that make it possible for that business to recruit good workers and thrive economically. If the business then relocates to China, based on investor demands for higher profit margins, an ethical issue arises. Communities have a stake in business.
Clearly there are other potential stakeholders in a business, such as professional associations, non-profit organizations, and schools. The strategy is to identify the relevant stakeholders and put the ethical focus on their respective rights and responsibilities.
The Basic Components of an Organizational Ethics
A fourth approach to business ethics is to work from a practical analysis of the way values actually work in organizations and communities (Solomon 1992; Batstone 2003; Trevino and Nelson 1999). This approach draws from historical and social scientific studies of business and other organizations, as well as from classical philosophical and theological approaches to ethics and values. The goal is to understand business ethics in a way that is simultaneously holistic, integrative, deep, and practical. In this approach six components in a holistic organizational ethics can be identified.
MOTIVATION. WHY BE ETHICAL IN BUSINESS? It is not at all self-evident why businesses should be run in ethically. The argument for doing so must be made in a way that will motivate business leaders and employees to make ethics a priority. A complete argument for operating a business in an ethical manner includes the following: (a) avoidance of litigation and the penal system (ethical companies generally steer clear of breaking the law; legal compliance is a sort of minimum standard of ethics); (b) regulatory freedom (increased laws and regulations result from patterns of unethical behavior); and (c) public acceptance (unethical businesses are often punished by journalistic exposes, citizen watchdog groups, and bad reputations).
In addition to the preceding three external reasons, having to do with the political and cultural environment in which business operates, there are four internal reasons to be ethical, connected to the four basic parts of any business in the early 2000s: (d) investor confidence (financial resources will be withheld from untrustworthy businesses); (e) partner/supplier trust (more than ever in the era of extended enterprise, business partnerships depend on trust, ethics, and integrity);
(f) customer loyalty (customers avoid businesses that treat them in an unethical manner and also avoid brands that are associated with the unethical treatment of workers); (g) employee recruitment and performance (good employees are attracted by ethical employers; especially in the knowledge economy, employee sharing and teamwork flourish best in an atmosphere of trust and ethics).
Finally there are three deep reasons for running an ethical business: (h) personal and team pride and satisfaction (business success that comes by virtue of ethical behavior is rewarding to the individual; being ethical aligns with human nature and conscience in important ways); (i) intrinsic rightness (individuals and organizations should be ethical simply to be in alignment with a moral universe—God, reason, and human tradition argue for doing the right thing even when there is no immediate or direct payoff); and (j) missional excellence (being ethical is fundamentally about the essential values woven into the fabric of an excellent organization; ethics is less an external measuring stick than an internal set of traits).
CORPORATE MISSION AND PURPOSE. Assuming a business organization is adequately motivated to operate in an ethical manner, the next priority is to clarify the core mission and purpose of the organization. This is an Aristotelian, biblical, and traditional starting point for ethics. "The values that govern the conduct of business must be conditioned by the why of the business institution. They must flow from the purpose of business, carry out that purpose, and be constrained by it" (Sherwin 1983, p. 186). The first focal point in the positive construction of a sound business ethics is to clarify the telos of the business. An inspiring, unifying business mission that taps into basic human drives (e.g., to be creative or to be helpful to others) can leverage and guide sound ethics in an organization. For Aristotle, things, people, and organizations are embedded with final causes, purposes, and destinies to fulfill, and ethics is about how to achieve these. For biblical ethics, the determination of who is God (the First Command) is decisive for the ethical standards related to that choice (Commands Two through Ten). For great and enduring businesses, preserving the core mission and values is of primary importance (Collins and Porras 1994).
CORPORATE CULTURE AND VALUES. Given a clear and compelling mission, the next focal concern of a sound business ethics is the formal and informal corporate culture. Does the culture empower or impede the achievement of this mission? Corporate culture is not a neutral or arbitrary construction as far as ethics is concerned. No matter how excellent the mission and no matter how impressive the ethics code of a company, a defective or misaligned culture will present an insurmountable obstacle to sound ethics and business excellence. The formal systems of review, promotion, recognition, and discipline—and the informal culture of communication styles, office set-up, and so on—are what enable or disable the mission. The positive traits that assist the mission are the virtues, the values that must be embedded in what the organization is, not just what it does.
BUSINESS PRACTICES AND GUIDING PRINCIPLES.
But businesses not only are, they do. After the culture, business ethics focuses on the practices of the company, the basic things the company needs to do, how its people spend their time and energy. The business must identify its basic practices (specific areas such as marketing, accounting, and manufacturing as well as cross-cutting activities like communicating and meeting). For each area of business practice, the company must decide which ethical principles should guide. Ethical principles and rules establish negative boundary conditions that must not be transgressed and positive mandates and ideals to pursue. Leaving important areas of practice with inadequate guidelines undermines the capacity of the business to achieve ethical excellence, the importance of the company ethics code.
TROUBLESHOOTING AND CRISIS MANAGEMENT. Even in the best of circumstances, ethical dilemmas and crisis cases will emerge from time to time. It is therefore essential to create a method and framework for managing crises effectively. Making damage control and ethical crisis management the focal point of business ethics can unwittingly serve as an invitation to an unremitting succession of such crises. But as a component subordinated to a broader, more holistic business ethics, the crisis management, dilemma resolution part of the ensemble is essential. Corporations are increasingly creating ombudsmen, ethics and compliance offices, ethics hotlines, confidential means of raising questions or reporting questionable activities, whistle-blowing protocols, and the like. It is essential that businesses make clear what their employees and other stakeholders should do when apparent ethics questions and problems arise.
ETHICAL LEADERSHIP. Finally business ethics requires that attention be focused on leadership and management. Exemplary ethics does not exist without leadership. Ethics and values leadership must come from the executive and board levels of a company in the form of communication as well as action. Leaders must be heralds of the values and ethics that matter. They must exemplify the highest ethics in their own behavior and they must create systems, structures, and policies that support and reward ethical excellence and sanction unethical actions. Business leaders must create and maintain ethics training and evaluation programs throughout the organization. Without good leadership, good business ethics cannot be created and sustained.
The Impact of Science and Technology on Business and its Ethics
While business has often been conducted in a non-scientific and non-technological, traditional manner, ambition, competition, and the pressing need to solve business challenges of all kinds have encouraged businesses to learn from, and even sponsor, scientific and technological work. Since the eighteenth century, particularly, business, science, and technology have worked closely together. Manufacturing, construction, and transportation technologies decisively reshaped modern business beginning with the Industrial Revolution. Communication and information technologies have been the center of the most influential developments since the mid-twentieth century. Biotechnologies may be the most significant arena for business/science/technology interaction in the twenty-first century.
Science and technology have affected business and its ethics in several important ways. First they introduced radical change in the products of business. Technological products dominate virtually every area of people's lives, virtually every hour of the day. A host of specific ethical questions may be raised about these technological products, regarding their safety, reliability, cost and value, appropriateness, and side effects. Is their manufacture, usage, and disposal conducted in an environmentally responsible way? Are the trade-offs, the winners and losers, and the side effects, ethically appropriate and justifiable?
Science and technology have also transformed the workplace in important ways. The mechanization and automation of the workplace has continued unabated since the beginning of the nineteenth century. Information technology has enabled businesses to extend their operations all over the world and around the clock. How should people evaluate the outsourcing and exporting of jobs and the disruption of local economies by technologically-enabled global business? How do traditional safeguards against unethical acts by the powerful, such as national borders, local customs, and face-to-face, human-scale accountability relationships, get replaced in the early 2000s? What are the ethics of allowing, or even encouraging, workers to stay connected and available to their work twenty-four hours per day, seven days per week?
Technology acts as an amplifier of both problems and possibilities (for instance, the greater accessibility of medical records has both positive and negative sides). It also creates greater speed, reducing the time that individuals can devote to careful ethical reflection, which is required by the growing scale of the problems. Technology is much better at increasing the quantity of information and communication than the quality of knowledge and the wisdom of relationships. Technology creates many new opportunities for diversity, but also fosters standardization and repetition. Technology produces significant democratization of knowledge even as a new digital divide is emerging around the world.
In 1911 Frederick W. Taylor's Principles of Scientific Management promoted a new way of thinking about business management that privileged expert, technical judgments over those of ordinary workers and citizens. Taylor argued that efficiency was the primary goal of human thought and labor and that what could not be measured did not count. Henry Ford's automobile assembly line famously applied this kind of thinking. Workers became virtual appendages of machines. While there were certain gains in production from this approach, by the 1970s it became clear that even greater productivity was possible through the humane and respectful treatment of workers.
What is sometimes overlooked in discussions of business and technology is the way that technology itself is embedded with certain basic values, such as efficiency, quantifiability, power, speed, repetition, predictability, rationality, and so forth. As long as technology is viewed as a set of tools and methods to help a business achieve its mission, those technological values can be located in a richer cultural context that also preserves values such as openness, innovation, risk, human caring, beauty, and quality. If technology is put in the driver's seat rather than the toolbox of business, it will eventually come into conflict with human values, at a considerable (if not total) cost to workers, businesses, and the larger economy. In short business ethics in the coming years will need to pay serious attention not just to the complexities of particular technological innovations but to their collective impact on the mission and culture of businesses and their surrounding communities (French 1995).
DAVID W. GILL
Batstone, David. (2003). Saving the Corporate Soul. San Francisco: Jossey-Bass. Excellent review of ethical values and perspectives related to key aspects of contemporary business.
Beauchamp, Tom L., and Norman E. Bowie. (2001). Ethical Theory and Business, 6th edition. Upper Saddle River, NJ: Prentice-Hall.
Bowie, Norman E. (1999). Business Ethics: A Kantian Perspective. Oxford: Blackwell. Norman Bowie is the leading Kantian business ethicist.
Brown, Marvin T. (2003). The Ethical Process: An Approach to Disagreements and Controversial Issues, 3rd edition. Upper Saddle River, NJ: Prentice-Hall.
Burrus, Daniel. (1993). Technotrends: How to Use Technology to Go Beyond Your Competition. New York: HarperBusiness.
Collins, James C., and Jerry I. Porras. (1994). Built to Last: Successful Habits of Visionary Companies. New York: HarperBusiness. Influential study of successful companies shows that corporate mission and values ("more than profits") play key role in long-term success.
DeGeorge, Richard T. (1999). Business Ethics, 5th edition. Upper Saddle River, NJ: Prentice-Hall.
Ferrell, Odies Collins, John Fraedrich, and Linda Ferrell. (2002). Business Ethics: Ethical Decision-Making and Cases, 5th edition. Boston: Houghton Mifflin.
Freeman, R. Edward. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman. Freeman is the pioneer of business ethics stakeholder approaches.
Freeman, R. Edward, ed. (1991). Business Ethics: The State of the Art. New York: Oxford
French, Peter. (1995). Corporate Ethics. Orlando, FL: Harcourt Brace.
Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits." The New York Times, September 13, 1970, Magazine section. A now-classic argument against corporate moral and social responsibility.
Fukuyama, Francis. (1995). Trust: The Social Virtues and the Creation of Prosperity. New York: Free Press. A thorough comparative historical study of high-trust and low-trust societies and their business and economic consequences.
Gill, David W. (1999). "The Technological Blind Spot in Business Ethics." Bulletin of Science, Technology, & Society 19(3): 190–198.
Goodpaster, Kenneth E., and Laura L. Nash. (1998). Policies and Persons: A Casebook in Business Ethics, 3rd edition. New York: McGraw-Hill.
Jennings, Marianne M. (1999). Business Ethics: Case Studies and Selected Readings, 3rd edition. Cincinnati, OH: West.
Jonsen, Albert R., and Stephen Toulmin. (1988). The Abuse of Casuistry: A History of Moral Reasoning. Berkeley, CA: California. The leading exponents of casuistry in business ethics.
MacIntyre, Alasdair. (1984). After Virtue: A Study in Moral Theory, 2nd edition. Notre Dame, IN: University of Notre Dame. Macintyre's works have influenced many to abandon Kant, Mill, and modern ethical theory in favor of Aristotle and a more holistic approach.
MacIntyre, Alasdair. (1990). Three Rival Versions of Moral Enquiry. Notre Dame, IN: University of Notre Dame.
Martin, James. (1996). Cybercorp: The New Business Revolution. New York: Amacom. How technology changes businesses.
Post, James E.; Anne T. Lawrence; and James Weber. (1999). Business and Society: Corporate Strategy, Public Policy, Ethics, 9th edition. Boston: McGraw-Hill.
Sherwin, Douglas S. (1983). "The Ethical Roots of the Business System" Harvard Business Review 61(6): 183–192.
Solomon, Robert C. (1992). Ethics and Excellence. New York: Oxford. Solomon is the leading Aristotelian, virtue business ethicist.
Tapscott, Don, and Art Caston. (1993). Paradigm Shift: The New Promise of Information Technology. New York: McGraw-Hill. Tapscott and his various co-authors are superb analysts of the impact of technology on business.
Tapscott, Don, and David Ticoll. (2003). The Naked Corporation: How the Age of Transparency Will Revolutionize Business. New York: Free Press.
Taylor, Frederick W. (1911). Principles of Scientific Management. New York: Harper and Brothers. The classic argument for subordinating business to science and technology.
Tenner, Edward (1996). Why Things Bite Back: Technology and the Revenge of Unintended Consequences. New York: Alfred A. Knopf.
Trevino, Linda Klebe, and Katherine Nelson. (1999). Managing Business Ethics, 2nd edition. New York: John Wiley. Excellent holistic, practical approach to business ethics.
Weiss, Joseph W. (1998). Business Ethics: A Stakeholder and Issues Management Approach, 2nd edition. New York: Dryden.
Werhane, Patricia H., ed. (2000). Business Ethics Quarterly 10(1). Special tenth anniversary edition. Leading figures in the field of business ethics take a retrospective look at the field.
Caveat emptor. This ancient Latin proverb, let the buyer beware, tells us that business ethics has been a societal concern going back a long ways indeed. Richard T. De George, a distinguished student of the subject, dates the modern interest in business ethics to the 1960s when changing attitudes toward business began to manifest in environmental concerns, the rise in consumerism, and criticism of multinationals—and large corporations began to embrace the idea of social responsibility as a business value. Since that time business ethics has also been associated with civil rights, women's rights, the international fight against Apartheid, and many other issues on which Moral Man and Immoral Society (title of a book by Reinhold Niebuhr, the theologian) collide.
Webster's defines ethics as "the discipline dealing with what is good and bad or right and wrong or with moral duty and obligation." (Unabridged, 1961.) The word derives from the Greek word meaning "moral," a Latin word with roots in "mores" or "customs"—in other words the values held by society. Ethicists point out that law represents an ethical minimum and that ethical behavior is something more than being within the law. Individuals—and by extension institutions—obtain their values from religion, philosophy, culture, law, and the special requirements of particular professions. An individual may hold that morality is absolute (what is wrong is always wrong) or may hold that morality is relative (the good is defined in part by other factors). In either case, all but the tiniest minorities assert that good and bad exist and can be determined. Very sophisticated theories exist which assert a hierarchy of good even when morality is held to be absolute; thus, for instance, lying is always wrong, but to lie to save the life of a fugitive Jew during the Nazi era was good: it prevented a worse evil. Given these definitions, business ethics is at minimum something more than operating a business under existing laws; the values to be applied arise from values currently held by society; but the ethics a company may define as its own may hold to an even higher standard.
ETHICS IN A COMPETITIVE ENVIRONMENT
The key difficulty surrounding business ethics is that ethics, by definition, goes beyond the merely legal—but how far beyond? No institutionalized rules exist defining an upper limit. Public opinion is not a very good guide. It is subject to change. Opinions even on environmental issues are subject to change depending on such pocket-book issues as the cost of gas. By its very nature, therefore, business ethics is embroiled in philosophical and operational difficulties.
The traditional concept of business based on Adam Smith's imagery of the market's "hidden hand" assumes that business entities bring about social goods by maximizing profits while operating within the law. Social goods are thus a by-product of market forces—not an objective assigned to corporate management to meet. This viewpoint has been long asserted by free market economists like Milton Friedman. Friedman, in The New York Times Magazine, criticized those who insisted that executives and business owners had a social responsibility beyond serving the interests or their stockholders, saying that such views showed "a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud."
Thus the movement to embrace social responsibility has an ambiguous character. It is not formally mandated but may be rewarded by customer and/or employee loyalty; it may also, indirectly, fend off intrusive legislation. But while it may be easy to be moral when all is going well, it gets tougher when markets shrink. An article in Nilewide Marketing ("Fat profits and slim pickings") puts the matter succinctly: "While the majority of companies claim that employees are their most important asset, they seem to act as though they can do without them, or pay the ones they have a minute proportion of the top salary."
On the face of it, the business that avoids extra costs associated with ethical behavior, and bears only costs necessary to meet the law, will be more profitable, all things equal. A more complex approach to this subject, used by many corporations, is based on the insight that high ethical values have positive consequences (in consumer acceptance, brand valuation, employee loyalty, and so on) which may be difficult to measure but are real. In line with this insight, corporations have invented the notion of a Return on Values (ROV) but find it difficult to give it a numerical expression. At the same time, there is an awareness abroad these days that corporations that set their sights no higher than bare legality may foster an environment where managers may slip across the border of legality and create disasters like the Enron bankruptcy in 2002.
BUSINESS AND EMPLOYEE VALUES
Aside from the structural problems presented by the societal roles of business, corporate policies based on well-formulated ethical principles appear to produce real benefits. A. Millage recently reported in Internal Auditor, about the findings of the "2005 National Business Ethics Survey" (NBES), conducted by the Ethics Resource Center. "Seventy percent of employees from organizations with a weak ethical culture," wrote Millage, "reported observing at least one type of ethical wrongdoing, whereas only 34 percent of employees from organizations with a strong ethical culture said they have witnessed misconduct." Problems listed included abusive or intimidating behavior toward employees; lying to employees, customers, vendors, or the public; violations of safety regulations; misreporting of time worked; theft; sexual harassment; and other problems. Undoubtedly such unethical activities ultimately translate into lost sales, higher turnover, and lower profits. Internally, therefore, ethical behavior is efficient, all else being equal. Whether measurable or not business ethics has a positive "ROV."
BUSINESS ETHICS IN SMALL BUSINESS
Business experts and ethicists alike point to a number of actions that owners and managers can take to help steer their company down the path of ethical business behavior. Establishing a statement of organizational values, for example, can provide employees—and the company as a whole—with a specific framework of expected behavior. Such statements offer employees, business associates, and the larger community alike a consistent portrait of the company's operating principles—why it exists, what it believes, and how it intends to act to make sure that its activities dovetail with its professed beliefs. Active reviews of strategic plans and objectives can also be undertaken to make certain that they are not in conflict with the company's basic ethical standards. In addition, business owners and managers should review standard operating procedures and performance measurements within the company to ensure that they are not structured in a way that encourages unethical behavior. As Ben & Jerry's Ice Cream founders Ben Cohen and Jerry Greenfield stated, "a values-led business seeks to maximize its impact by integrating socially beneficial actions into as many of its day-to-day activities as possible. In order to do that, values must lead and be right up there in a company's mission statement, strategy and operating plan."
Most importantly, business owners and managers lead by example. If a business owner treats employees, customers, and competitors in a fair and honest man-ner—and suitably penalizes those who do not perform in a similar fashion—he or she is far more likely to have an ethical work force of which he or she can be proud.
Di Norcia, Vincent, and Joyce Tigner. "Mixed Motives and Ethical Decisions in Business." Journal of Business Ethics. 1 May 2000.
Fandray, Dayton. "The Ethical Company." Workforce. December 2000.
"Fat Profits and Slim Pickings." Nilewide Marketing Review. 12 December 2005.
Felsher, Louise M. "Improving Workplace Ethics: How to become a better manager, employee or co-worker." Meetings & Conventions. December 2005.
Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits." The New York Times Magazine. 13 September 1970.
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Hillstrom, Northern Lights
updated by Magee, ECDI
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.
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.
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.
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.
See also Applied Ethics; Aristotle; Cicero, Marcus Tullius; Engineering Ethics; Ethics and Economics; Kant, Immanuel; Marx, Karl; Philosophy of Economics; Plato; Rawls, John; Sen, Amartya K.; Smith, Adam; Thomas Aquinas, St.
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Donaldson, Thomas, and Thomas Dunfee. Ties That Bind: A Social Contracts Approach to Business Ethics. Cambridge, MA: Harvard Business School Press, 1999.
Frank, Robert H. "Can Socially Responsible Firms Survive in a Competitive Environment?" In Codes of Conduct: Behavioral Research into Business Ethics, edited by David M. Messick and Ann E. Tenbrunsel, 86–103. New York: Russell Sage Foundation, 1996.
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Thomas Donaldson (2005)
When discussing the subject of business ethics, points of view range from those who believe that ethics in business is one of the most pressing issues if companies are to ensure creditability and trust to the cynic who is of the view that the term business ethics is an oxymoron, a contradiction in terms, and that the concepts of ethics and business are inherently incompatible. In the early twenty-first century, the general public, fueled by the general media, is quick to seize upon ethical wrongdoing by both small and large companies and is anxious to spotlight ethical violations. In doing so, demands are also increasing for greater levels of accountability in business. The reality, therefore, is that the term ethics —the expectation of appropriate behavior—and business —the current mercantile environment—cannot be separated as one experiences increasing expectation of higher standards of ethical behavior in organizations.
The factors promoting ethical awareness in both business organizations and business education programs are varied. Societal expectations and tolerance of what constitutes appropriate business conduct have also broadened. For example, companies such as Nike and Reebok have had to fend off criticisms of sweatshop practices in their off-shore contract manufacturing facilities by posting their factory labor audits on the Fair Labor Association (FLA) Web site. Both consumer and shareholder attitudes toward an organization and its ethical profile are increasingly impacting on purchasing decisions and investment strategy. Examples are the consumer boycotts, as historically experienced by Nestlé, and also the growing popularity of ethical investment funds. Undoubtedly, media attention has been instrumental in highlighting ethical misdemeanors. The popular press has been littered with high-profile cases such as Enron, WorldCom, Parmalat, and Adelphi Communications, as well as the audit companies who appear to have been complicit in their oversight of the financial practices of those organizations. The potential cost of ethical violations is also a motivating factor for organizations to reassess their stance. Companies such as Ford, for example, have been subject to significant compensation claims in relation to endangering consumer welfare as a result of faulty tires used on the Ford Explorer.
Ethical violations, when made public, can have a damning effect on publicly listed companies, as supported by the efficient market hypothesis, which maintains that markets are very efficient in interpreting data and arriving at equilibrium prices. Share prices reflect publicly available information, and it appears that any unethical conduct that is discovered and publicized impacts the corporation and shareholders by ultimately lowering the value of a company’s shares for an appreciable period of time. Similarly, for unlisted companies it is assumed that when an ethical violation is made known it will erode the trust of consumers and will ultimately be reflected in diminished sales.
The relationship between ethical behavior and company performance is intriguing. More than ninety-five empirical studies have examined the effect of the relationship between ethics and corporate social responsibility on financial performance, with the outcomes being both positive and negative. Positive relationships prevailed but it is not entirely clear whether increased ethical activity leads to increased performance or, alternatively, whether higher performance provided firms with additional resources that they could devote to social and ethical activities. Furthermore, there are varying levels of ethical engagement by organizations. The first level is one of self-protection; that is, ethical behavior is promoted in order to avoid criminal liability or additional costs. The next level is reputational awareness and the associated benefits that accrue to the organization. The final level is when an organization has an interest in being ethical because it believes it is, in fact, the right thing to do; it is the way the company does business.
While it is tempting to think of business entities as the primary moral agent, business organizations are, in fact, commonly comprised of a number of individuals making decisions that may have an ethical dimension. These ethical dimensions could relate to environmental and social considerations, such as pollution; stakeholder interactions, for example, product liability; competitive dealings, for example, price collusion; employer obligations, for example, employee safety; or personal behavior, for example, conflict of interest, so it is important to realize that the ethical performance of an organization is a reflection of the individual behavior of its employees. What guides this behavior? Essentially, morality relates to principles of right and wrong and is comprised of numerous moral norms or standards. These moral expectations have a number of sources such as family, society, church, education, training, and even one’s organization or employment. This is the intellectual base one frequently refers to when faced with an ethical dilemma (the head part). Ethics is the discipline of dealing with moral duty and obligation and might be described as the practice of morality (the actual behavior part). Business ethics is, therefore, the practice of morality as it applies to business behavior.
There is extensive scholarly debate on whether moral principles apply universally, or whether ethical judgments are relative to their context. The ethical relativists assert that there is no consistency of beliefs because moral principles are relative to individual persons and cultures, so moral standards will differ between individuals, groups, circumstances, and across time. The absolutists, however, contend that there are common moral standards upon which ethical reasoning rests and that, despite variations in ethical behavior, individuals are rooted in common moral standards. In support of the absolutists, it has been suggested that because the purpose of morality is to help make social cooperation possible, moral principles are universally necessary for that to occur.
As one witnesses the differing ethical behavior being exhibited in companies it has been suggested that there are varying levels of moral development. According to Lawrence Kohlberg’s well-established stages of moral development, there are six stages of moral development that can be summarized into three levels: the preconventional level is one at which individuals are motivated by a childlike avoidance of punishment, obedience to authority, fear, and self-interest. At the conventional level, individuals are motivated by loyalty to a group or professional norms. At the highest level, postconventional, individuals have a wide view of what is right and wrong and of those who might be affected by their decisions. An individual operating at this level has broad ethical principles in place and his or her decisions are based not on the current norms of the group or standards of society, but on personal conscience grounded in these principles.
Historically the literature on business ethics has been anchored in normative philosophy and can be seen to be broadly delineated into three areas: prescriptive/hortatory literature, which attempts to sermonize and instruct the business community and education in raising ethical standards; descriptive/positive literature, which is characterized by extensive empirical research into, for example, ethical attitudes of students and business personnel; and meta ethical/analytical literature, which investigates meaning and justification relating to the corporate and individual decision-making process. Naturally, the field of business ethics is readily evolving. The colloquy on business ethics is being extended with the lexicon broadening and being claimed by related terminologies such as corporate social responsibility, stakeholder management, corporate governance, sustainability, and corporate citizenship.
SEE ALSO Corruption; Efficient Market Hypothesis; Hypothesis and Hypothesis Testing; Information, Economics of; Lying; Morality
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Kohlberg, L. 1969. Stage and Sequence: The Cognitive Development Approach to Socialisation. In Handbook of Socialization Theory and Research, ed. D.A. Goslin, 347-380. New York: Rand McNally.
Trevino, Linda K., and Katherine A. Nelson. 2004. Managing Business Ethics: Straight Talk About How to Do it Right. 3rd ed. Hoboken, NJ: John Wiley & Sons.
Gael M. McDonald