BUSINESS ETHICS Ethics and Morality of Business Patrick
BUSINESS ETHICS Ethics and Morality of Business © Patrick O’SULLIVAN
BASIC CONCEPTS DEFINITIONS and SCOPE of the subject
BASIC CONCEPTS l l Ethics in general sets out rules for right or morally good conduct Business ethics focuses on rules of good conduct in respect of business practices
BASIC CONCEPTS l l While the study of the rules which actually appear to guide business behaviour (if any) has a place in Business Ethics the main focus of the subject is on consideration of what sort of rules/principles should or ought to guide business activity Hence we say that the subject is ultimately normative
BASIC CONCEPTS l l Positive discourse States what IS the case and so consists of facts or relationships among ideas l l Normative discourse States how the world OUGHT to be and so is a statement of ideals
BASIC CONCEPTS l l A very basic theorem in modal logic shows that normative conclusions can never be drawn from a set of purely positive premises in an argument To get a normative conclusion there must be at least one normative premise present at least implicitly in an argument
BASIC CONCEPTS l l This leads to a conclusion of immense importance to the study of Business Ethics In order to be able to draw normative conclusions about business activity, how businesses ought to act in certain situations, we cannot just rely on a purely positive description/analysis of the situation
BASIC CONCEPTS l l Rather we must recognise that to draw normative conclusions we need to draw on at least some set of normative principles in framing our argument Such normative principles may be readily found in various sorts of conventional social ethical codes, in cultural traditions or in religions.
BASIC CONCEPTS l l The academic study of ethical codes and of their foundation is the province of Moral Philosophy In this course we shall not simply take ethical codes at face value; after all there a variety of such codes extant in the world today and especially when looking at global types of issue in Business Ethics we may face a conflict of codes on a specific issue
BASIC CONCEPTS
BASIC CONCEPTS l l Hence we shall be forced in addition to looking at specific issues to ask what is the appropriate set of normative principles to apply in our evaluations We shall be forced in short to a consideration of Moral Philosophy
BASIC CONCEPTS l It is for this reason that the course may be more accurately described by the title l ETHICS and MORALITY of BUSINESS
BASIC CONCEPTS l l Although the words are often used almost interchangeably when speaking loosely a clear distinction may be made between Ethics and Morality Ethics refers to any set of detailed rules defining in detail a code of (morally) good or right conduct for people in a community
BASIC CONCEPTS l l l Morality refers to the broad general principles which define what is to be regarded as right or wrong These general principles may come from a religious base or they may be derived through moral philosophy These sources are incidentally not necessarily in conflict; indeed to a very large extent they have tended to concur
BASIC CONCEPTS l Ethics may therefore be seen as a detailed code of good or right conduct which is derived from and so presupposes some set of very general moral principles (morality) which define right and wrong in principle
BASIC CONCEPTS l l Ethics therefore presupposes Moral Philosophy Both because this a serious university/grande école level course aiming at going beyond the superficial to get a critical insight into what really underpins business issues and because in any case there can be conflicts among ethical codes on specific issues we will perforce delve into moral philosophy
BASIC CONCEPTS l l If Ethics is a code of right conduct one might reasonably ask the question how it differs from Law after all also sets out a code defining how people are required to behave in a variety of situations and it proscribes certain types of activities just as an ethical code does
BASIC CONCEPTS l l l Over many areas Law and Ethics coincide, e. g. in prohibiting murder However they are by no means entirely coincident There are issues covered in Law which are vital but which have no moral significance per se: for example laws governing on which side of the road cars will drive
BASIC CONCEPTS l l Equally there are significant areas of morality/ethics which have generally been held to be outside the proper domain of the law, e. g. the law would not seek to make every instance of telling a lie into an actionable offence It may be admitted however that this has been a controversial area; there have been great debates on the degree to which law should encapsulate ethics or the particular ethical code prevalent in a community
BASIC CONCEPTS l l However not even the staunchest supporters of the view that the laws of the state should be based directly on religious codes would see the law as embodying morality whole and entire Hence Ethics and Law remain distinct and should not be conflated/confused
BASIC CONCEPTS l l l For purposes of this course the implication is that we must not confuse (as many novices to the field do) the questions of: What a business is legally permitted to do with What would be the morally/ethically right way for a business to behave
SCOPE of the SUBJECT Moral responsibility in business
SCOPE l l There is a fairly widely held popular opinion that the very idea of business ethics is laughable; businesses are seen as irretrievably immoral or beyond any kind of morally responsible behaviour and hence the very idea of the subject as a joke Crane/Matten describe this as the “oxymoron” view
SCOPE In its most usual version this oxymoron view is the argument that in practice as a matter of positive fact businesses ignore any kind of ethical considerations in the ruthless pursuit of profit; hence that business ethics is irrelevant. This we could call the “positive oxymoron” argument.
SCOPE l l However this overlooks the normative character of the subject. Business ethics is not primarily a study of how businesses actually behave but rather of how they ought ideally to behave; it is a normative discipline. To such a normative business ethics considerations of how businesses actually behave are very largely irrelevant
SCOPE l The fact that large numbers of people or businesses actually behave in a certain (immoral) way is entirely irrelevant to the question of how they ought ideally to behave and not a reason for not studying and recommending what would be better behaviour
SCOPE l l Therefore this version of the oxymoron argument fails completely to obliterate business ethics In effect it seeks to draw conclusions about a normative subject from a set of purely positive considerations and is thus logically fallacious
SCOPE l In any case it is not even true as a matter of fact that all business seek ruthlessly to maximise profit to the exclusion of any type of CSR.
SCOPE l Another version of the oxymoron view which at least is logically sound might argue that business ethics does not exist or is irrelevant simply because what happens in business ought not a matter for moral evaluation in the first place. This we might dub the “normative oxymoron” argument.
SCOPE l l The normative oxymoron is the view that business is and ought to be a complete free-for–all beyond any kind of morals; a kind of competitive war of all against all in which the fittest survive Some of the most extreme proponents of free market capitalism might argue that such a free-for-all is actually ultimately the most beneficial for societies (Market Fundametalism).
SCOPE l l This normative oxymoron can be detected in decreasing degree of virulence in the works of three leading thinkers who have influenced the philosophy of free market capitalism: Albert CARR (1968): “Is Business bluffing ethical? ” in Harvard Business Review, January 1968 Adam SMITH (1776): “An Enquiry into the nature and causes of the Wealth of Nations”, Penguin London reprint 1982. Milton FRIEDMAN (1970) “The social responsibility of business is to increase profits” in New York Times Magazine, 13 September 1970
Albert CARR l l Carr’s approach is to start from the economic notion that every business can be considered as a game; and that in games we suspend the everyday rules of moraility for purposes of playing the game: poker, boxing, rugby union. Hence he argues that in the business game all of the conventional rules of everyday morality may be abandoned in an evolutionary free-for-all in which the fittest businesses will survive.
Albert CARR l l However it would be a brave person who would seek to hold absolutely to the view that no business practice whatever raises moral issues. For example deliberately misleading advertising or even outright fraudulent selling (as with various mobile phone scams) quite apart from being in many cases illegal are surely also immoral, morally wrong
Albert CARR l l A key defect in Carr’s approach is also that he completely overlooks the role played by such basic moral values as honesty, trust and plain decency in the smooth functioning of everyday business. It would hardly be an exaggeration to say that if all business followed the Carr approach of anything goes in the business game then, to borrow a famous phrase from Hobbes, the life of most businesses would be “solitary, poor, nasty, brutish and short”.
Albert CARR l A further related defect in Carr’s aproach is that all of the other games like boxing or rugby suspend everyday rules but only to operate within another separate and carefully refereed set of game rules. One can hardly argue that the legal framework of the state provides the analogous rules for business and indeed Carr like most free market protagonists would seek to minimise the regulatory role of the state.
ADAM SMITH l l This at least is not the case with Adam Smith: despite his defence of a free market system he clearly saw a role also for the state in enforcing certain rules of the market game. Adam Smith’s famous argument is that in a market economy if every actor ruthlessly pursues their own interests through market forces of supply and demand they will be led « as if by an invisible hand » at the same time to promote the well-being of society as a whole.
ADAM SMITH l l This has been one of the most popular and influential defences of free market capitalism and of profit maximisation as the overriding goal of business. But Smith also held very clearly that for the market system to produce its magical results good for all there had to be perfect competition in all markets.
ADAM SMITH l l Smith was indeed scathing about the damaging effects of monopoly in a market system; and he even underlined the tendency of capitalist business to seek monopoly positions, a viewpoint he shares ironically with …Karl Marx Hence Smith in the end advocates what we would recognise today as some kind of « mixed » or social market economy.
ADAM SMITH l l Moreover in a work written before the Wealth of Nations Smith had argued that human beings are fundamentally motivated by two natural propensities: self interest and sympathy. Sympathy will then curb the worst excesses of narrow self-interest. But does it represent too optimistic a view of human nature? ? ?
FRIEDMAN l l Finally there is the view about the proper scope of the subject has been put forward by Milton Friedman and which has been hugely influential on a whole contemporary generation of economists and strategic management theorists. Though fairly extreme, looking at it should help to focus views about the scope of the subject. FRIEDMAN, M. (Sept. 1970) “The social responsibility of business is to increase profits”
FRIEDMAN l l Friedman notes that the vast bulk of businesses take the legal format of some sort of limited company Legally the company is said to have a personality separate from the collection of individuals who make it up. It is a distinct entity/person with legal rights and duties
FRIEDMAN l l Note that with this conception the shareholders DO NOT own the company’s assets; ownership is vested in the separate legal person of the company Moreover the company is distinct from the shareholders in that even though the shareholders may all die off the company lives on as a separate entity
FRIEDMAN l l However managers in a company have got a legal responsibility to manage the company in the best interests of the shareholders Friedman then turns this into the sole moral responsibility of managers; and if we can presume that shareholders are solely interested in the profits of a business then managers sole responsibility is to concentrate on maximising profits
FRIEDMAN l l Friedman’s argument therefore coincides essentially with that of Adam Smith even if reached in a different manner. He sees maximisation of profit as the only moral responsibility of a business and business as thereby contributing to the well-being of society as a whole. We now examine this in more detail
FRIEDMAN l l Friedman begins by noting correctly that virtually all businesses are limited companies of one sort or another. He then goes on to draw on traditional Anglo. American corporate governance to argue that managers’ overriding and only legal responsibility is act in the best interests of shareholders as owners.
FRIEDMAN l l Strictly speaking this is only true in Anglo-American corporate governance (and even there today there can be “public benefit corporations” with broader social goals legally stipulated). Within this narrow framework Friedman then equates legal and moral responsibility which is of course not automatic and here is highly debateable; and concludes that the managers are to act as agents of the shareholder owners who can be considered to be principals in a classic principal-agent relationship
FRIEDMAN l l Managers should not therefore trouble themselves with broader moral implications of the wider social impact of business; and to use company profits for social responsibility projects is in effect to steal from shareholders. A further step in Friedman’s argument is to suggest that if there are broader social impacts which raise moral issues it is for the STATE to deal with these by suitable intervention and regulation.
CRITIQUE of FRIEDMAN l This last argument is really quite amazing coming from Friedman. Much of the rest of the article and almost all of his other work in Economics is a defence of a free market fundamentalist approach to the economy; then at the end he suddenly allows that if there are ethical issues it is for the state to intervene and regulate these. The point is that if this set of issues turns out to be large Friedman will have made an argument for a very significant degree of state regulation of markets!
CRITIQUE of FRIEDMAN l l Whatever about this strange twist at the end of Friedman’s article there are other aspects that can be seriously challenged. The centrepiece of his argument is that the only moral responsibility managers (seen as agents) have is to maximise profits for the shareholders (as principals).
CRITIQUE of FRIEDMAN l l It is likely that Friedman in making this assertion may therefore be falling into the classical mistake of identifying moral with legal responsibility However in today’s world it is not even true at the purely legal level that the only responsibility of managers is to make maximum profit for shareholders
CRITIQUE of FRIEDMAN l l There a variety of legal obligations which managers either collectively or even individually have beyond that of acting in the interests of shareholders; duties of care both to consumers and to workers, health and safety regulations. Moreover there are other systems of corporate governance (e. g. German, Chinese) where the legal obligations go far beyond furthering just shareholder interests.
CRITIQUE of FRIEDMAN l l Hence even if we equate legal with moral responsibility that would not lead to the Friedman ethical imperative of profit and so shareholder wealth maximisation. This conclusion is further reinforced by the recognition that many shareholders are not in any case solely motivated by profits in their investment choices and strategy: they may wish to be ethical investors in various ways (e. g. green investment funds…)
CRITIQUE of FRIEDMAN l l Friedman uses the principal-agent framework to describe the shareholder managemet relationship but this opens up the dilemmas associated with such situations which are well known in moral philosophy: e. g. concentration camp guard type dilemmas. Should an agent abjure entirely their own sense of moral responsibility to act exclusively on behalf of the principal? Are agents absolved of all critical reflection and should they follow blindly the principal’s moral norms?
CRITIQUE of FRIEDMAN l l Arguably to do so a classic moral copout whereby people try to abjure moral responsibility for their actions by hiding behind some role or function or behind the decisions of others. Sartre has regularly reminded us of how terrified many people are of free choice …and the ultimate responsibility for our actions which that implies.
CRITIQUE of FRIEDMAN l Finally and more subtly what is involved in Friedman’s overall position is a highly atomistic vision of human society. In effect for Friedman as for Margaret Thatcher there really is no such thing as society. There are only individuals and companies each pursuing their own atomistic self interest.
CRITIQUE of FRIEDMAN l But this conceptual approach (an extreme methodological individualism) is highly challengeable. Human beings are social animals (Smithian sympathy) and they seek to live a social existence; society or at least a socialised existence is therfore an inevitable and indestructible feature of a fulfilled human existence.
SOCIAL CONTRACT l l But if human beings thus live in societies this will imply that both individuals and companies they will have some sort of « social contract » explicit or implicit which must govern their behaviour within the wider social community where they operate and from whose good effective functioning they draw huge benefit. : (Think of the difficulties of doing good business in a war zone…)
SOCIAL CONTRACT l l With this social contract individuals and companies will of course be guaranteed certain rights (freedom of thought, freedom from violent attack, property rights etc). But with rights go responsibilities and so just as much as individual citizens will have civic responsibilities so also will companies as corporate citizens have corporate social responsibilities
SOCIAL CONTRACT l It is this sense of a social contract for companies which is entirely missing in Friedman’s approach; and once seen in this way it becomes, to say the least, extremely implausible to argue that the social responsibility of a company is entirely exhausted in the maximisation of profits for shareholders.
SOCIAL CONTRACT l Rather the interests of companies as much as individuals must always be seen as subordinate to the greater good of the community/society and to the demands of the social contract, demands incidentally which are far from static and which may evolve through time as technology and society develop
CSR → CSV l 61 In an important development of this approach dating from the work of Michael Porter and Mark Kramer (2006 and 2011) it is today becoming more common in business strategy to think in terms of the creation of shared value: CSV.
CSR → CSV l 62 What this means in effect is that for a contemporary business it is no longer sufficient or at least no longer morally acceptable to think of strategy purely in terms of maximisation of shareholder wealth or shareholder value (profit maximisation in effect).
CSR → CSV l l 63 Rather a socially responsible business will aim to promote shared value for the wider community or society with whom it may be deemed to have a social contract; or in other words for all its stakeholders. Business along with governments and other actors is expected to contribute to social progress.
ETHICS as SOCIAL CRITIQUE l These last reflections on the linkage between social responsibility and some notional social contract for business in society lead to an important methodological classification of the levels at which the normative critiques of business ethics may be carried out
ETHICS as SOCIAL CRITIQUE l l Any normative discourse which outlines how the world ought ideally to be involves taking a critical attitude in relation to existing practice and will in effect seek to show this practice can be improved or transcended. In the case of normative business ethics this will mean putting forward critical views as to how the role and activity of businesses in the community can be changed/improved to make a better society.
ETHICS as SOCIAL CRITIQUE l l We can now recognise three distinct levels at which this critique may be conducted: Level 1: A critique of the moral responsibility of individual workers and managers within the company. Here issues like pilfering, whistleblowing loyalty, confidentiality and employee surveillance will be examined
ETHICS as SOCIAL CRITIQUE l l Level 2: A critique looking at the wider responsibility of the company in relation to the community(ies) in which it operates in the framework of its « social contract » to that community. At this level Business Ethics enters into the domain of Critical Social Theory as developed by the Frankfurt School of Habermas and others. It can indeed become an important expression of that theory.
ETHICS as SOCIAL CRITIQUE l Level 3: For some of the more complex problems of international businesses operating in a range of different cultural settings it may become necessary to make decisions as to which of a number of competing critical moral codes to apply in seeking to reach a definitive normative recommendation for action and improvement. This will involve entering into a field known as metaethics.
ETHICS as SOCIAL CRITIQUE l Metaethics is in effect the development of a « critical morality of moralities » in which we use the resources of moral philosophy to weigh the merits of different normative moral systems with a view ideally to reaching a universal value or at least a universally valid recommendation.
ETHICS as SOCIAL CRITIQUE l We call it level 3 because it clearly marks a further deepening in the level of critical reflection in which the social theorist is involved.
ETHICS as SOCIAL CRITIQUE l As you go through themes and the cases of the subject you may find it interesting to reflect on the levels at which the critique is being conducted. You may for example find that American business ethics writing is dominated by Level 1 critique while Level 2 critique is much more prevalent in European thinkers. To date there has not been any extensive level 3 discussion in Busines Ethics although some hints of can be found it in some of the discussions of issues such as child labour and sustainability.
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