Thinking Ethically in Business 9781847600608

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Thinking Ethically in Business Mireille Ribière

Sandra L. Dwyer

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ISBN 978-1-84760-060-8

Thinking Ethically in Business Sandra L. Dwyer

Tirril: Humanities-Ebooks, 2008

Copyright © Sandra L. Dwer, 2008 The Author has asserted her right to be identified as the author of this Work in accordance with the Copyright, Designs and Patents Act 1988. This edition published by Humanities-Ebooks, LLP, Tirril Hall, Tirril, Penrith CA10 2JE

A Note on the Author Sandra L. Dwyer, Ph.D. is Lecturer in the department of philosophy at Georgia State University, Atlanta, Georgia. She coordinates graduate student teachers who teach critical thinking and business ethics for the departments of philosophy and religious studies.

Acknowledgements My sincere thanks go to Mark Addis for making the opportunity to write this book available to me. My thanks also go to Ness Creighton for her expert help in formatting. Above all, I owe a special debt to Anne Owens for editing with plenty of critical commentary.

Contents A Note on the Author Acknowledgements Introduction Chapter 1: Professional Responsibilities 1.1 Standards of Practice 1.2 Is Being Professional the Same as Acting Professionally? 1.3 Workplace Duties versus Personal Obligations 1.4 Kinds of Commitment: Defeasible and Indefeasible Obligations 1.5 Degrees of Commitment: Perfect and Imperfect Obligations 1.6 Ethically Resolving Conflicts in Business Decisions Chapter 2: Stockholder Theory of Management 2.1 Managerial Capitalism 2.2 Maximization of Profits 2.3 Managerial Expertise 2.4 Managerial Limitations 2.5 Limitations of Stockholder Theory Chapter 3: Stakeholder Theory of Management 3.1 Cui Bono? 3.2 Parameters of “Stakeholder” 3.3 Corporate Social Responsibility (CSR) 3.4 The Need for Accountability 3.5 Limitations of Stakeholder Theory Chapter 4: Critical Thinking in Business 4.1 Making Decisions

Business Ethics    4.2 Cost/Benefit Analysis: the Usefulness of Arguments 4.3 Verifying Premises: Types of Claims in Arguments 4.4 Types of Arguments 4.5 Fallacies Chapter 5: Ethics and Business Decisions 5.1 Introduction: Taking Ethics into Account 5.2 Ethical Egoism 5.3 Utilitarianism 5.4 Problematic Consequences of Consequentialist Theories 5.5 Right Action Oriented Ethics: Kant’s Duty Ethics 5.6 Character oriented Ethics: Aristotle’s Virtue Theory 5.7 Limit and Application of Ethical Evaluation Appendix A: Sources and Resources A.1 Works Cited A.2 Other Resources Appendix B: Charts B.1 Sample Decision Tree B.2 Changing Classification of Jobs Appendix C: Index of Selected Terms Keyed to Section

Introduction Capitalist market economies are based on the widely held belief that competition in business fosters initiative and innovation. Personal economies like households are usually based on ideals of cooperation, reciprocity and sharing of goods and responsibilities. Since cooperation and competition can seem to be divergent, even oppositional, it isn’t always immediately apparent how ethics can properly belong to both methods of accomplishing what needs to be done. Is it possible to practice behaviours like sharing, reciprocity, and honesty in businesses integral to an economic system sometimes referred to as “cutthroat?” Nothing more ardently illustrates the need to find a way to do just that than the current financial crisis with its collapse of trust in markets. Trajectories like the development of increasingly complex Stakeholder Theories of management out of Stockholder Theory show movement in that direction on a theoretical plane, but practical initiatives toward greater transparency, accountability and social responsibility, with notable exceptions, lag behind. The rapidly shifting landscape of business practice cries out for new business models, new business methods and the development of instruments of accountability and regulation able to be effective at every level that impacts market stability. Moreover, these things need to be done in ways that do not suppress creative energy, manoeuvrability, inquisitiveness or any other essential element of enterprise. That is a tall order – one that will require changes in both the theory and the practice of business. The task of making those changes will fall initially to the current and upcoming generation of business people and policy makers. That is why it is important for them to have an understanding of the basic theoretical tools needed to make ethical business decisions. Therefore, this text begins with a discus-

Thinking Ethically in Business   ethical business decisions. Therefore, this text begins with a discussion of certain aspects of professional responsibility that make doing business possible, so that the interested student will have a context for contemplating the commercial events that have taken so many by surprise in recent months. It is also important for students of business to be acquainted with theories of management, since theory often explains past events and influences future practices. My business ethics students at Georgia State University show a marked preference for jumping right in to Stockholder Management Theory (Chapter 2) and Stakeholder Management Theory (Chapter 3) before they learn about traditional ethical theories (Chapter 5), so that is the order I have followed here, although it is not necessary to read the chapters in that order. Because decision procedures based on argument are a vital part of management at every level of business, I have included a chapter on critical thinking in business (Chapter 4). Knowing the difference between a good argument and a fallacious one can be an essential skill when the time comes to judge a business proposal on its ethical merit. Three appendices provide supplemental resources. Appendix A includes works cited and resources on selected topics. Appendix B provides two charts: a sample decision tree for initially evaluating proposed business decisions, and a chart showing status changes over time for selected occupations. Appendix C provides an index to sections of selected key terms.

Chapter 1: Professional Responsibilities

“Always do right. This will gratify some people, and astonish the rest.” ­— (Twain, 1970)

1.1 Standards of Practice Capitalist market economies create, and are created by, cultures in which there is an abiding, arguably an inevitable, tension between doing business and acting ethically. Since wealth accumulation, commodification and exploitation of environments and human populations have, historically, been hallmarks of success in capitalist terms, what does it mean, in capitalist contexts, to speak of “business ethics?” In its most general sense, the word “ethics,” like the word “morals,” signifies principles or rules of conduct and behaviour. Ethics is also a branch of philosophy. In the world of business, “ethics” refers to standards of practice. In the interests of internal accountability as well as external reputation, some businesses adopt codes of professional ethics. Under certain circumstances, they are able to “police their own” so that they successfully establish themselves as reputable. However, in an expanding global marketplace, where the forms of business entities are changing, and in which employees of notable corporations are frequently discovered making unethical decisions of scandalous proportions, governments are increasingly called on to regulate the activities of businesses. But government involvement in business sometimes interferes with the kind of transactions that typify capitalism itself. Market capitalism is assumed to require a “free play of forces” in which too much regulation can have disastrous consequences.

Thinking Ethically in Business   11 Legislation governing business practices usually aims at ensuring conformity to a culture’s widely held values. For example, safety in the workplace and equal opportunity employment have become emblematic of Western business practice, mandated under law and monitored with a view toward enforcement. But even an agency specifically created to perform a standard-setting as well as an enforcing function, such as the Occupational and Health Administration of the United States Department of Labour (OSHA), does not extend its jurisdiction over many thousands of workers in occupations vital to the U.S. economy. According to OSHA’s website, “miners, transportation workers, many public workers and the self-employed” are exceptions to its regulations. According to the Tao Te Ching, “Governing a large country is like frying a small fish.” (Tao, 2008) That is, handling it too much will ruin it. Similarly, controlling economic activity too determinately or entering too far into the daily transactions of businesses can hamper the spirit, and burden the mechanisms, of enterprise. Moreover, doing so is simply beyond the scope or mission of most governments. Legislating, regulating, monitoring and enforcing functions are limited by practical exigencies as much or more than they are by ideological considerations of the role of government. A working balance between governments’ regulatory capacities and businesses’ ability to function in relatively unhindered ways is the signal necessary condition for the existence of market capitalism. On the one hand, without regulation, unbridled capitalism engenders wealth accumulation that smothers competition. On the other hand, too much regulation smothers incentive. Achieving an appropriate balance is like riding a surfboard: it requires constant adjustments to perpetually changing conditions. Companies that promote and maintain internal standards of ethical conduct contribute to that balance, since their way of doing business does not create the conditions that invite excessive regulation. In recent years, certain corporations in the United States and elsewhere have failed to observe ethical standards. Tremendous costs have been incurred because companies came under the management of corrupt executives. Those that could not bear the costs failed, with

12  Thinking Ethically in Business grave consequences for employees, shareholders and sometimes for other businesses and the communities in which they operated. A firm that engages in unethical practices can also negatively affect the livelihood of many innocent employees by damaging the reputation of their profession as a whole. When the accounting firm Arthur Anderson, Inc. underreported debts and overstated profits on behalf of certain top officials at energy giant Enron Corporation (Beauchamp, 2004), it failed in its commitment to provide accurate data so that thousands of investors could make well informed decisions about purchasing stock. Moreover, these two large companies, by their collusion, cost many employees their jobs, harmed their associated businesses and communities, tied up the courts in litigation that resulted in prison sentences for some, and raised questions about the ethical standards of executives of major corporations as well as about the standards of practice of accountants as a class. The United States Congress responded to this and other big business corruption cases with new national regulations intended to better enforce accountability on the part of auditors and financial officers. Accountants’ own professional organizations continue to set standards for practitioners, but those involved with publicly traded corporations must now answer to government regulators who oversee them. Because a few employees of a single accounting firm failed to abide by their profession’s standards of practice, the reputation and status, as well as the autonomy, of an occupation has been affected. The actions of a small minority of business professionals has influenced a wide range of businesses in terms of requirements they must observe, requirements involving greater governmental scrutiny with its attendant red tape. The increasing multinational character of business makes it more important than ever for companies to clean up their acts, since riding the waves of international commerce requires ever more awareness, experience and creativity. Companies themselves face the task of conceiving and developing methods of engaging employees in establishing workplaces where an understanding of the reasons for ethical business practices is fundamental. When employees, at every level, believe that the reputation of the establishment they work for is positively linked to their own success, they will be less likely to engage

Thinking Ethically in Business   13 in or tolerate practices that enrich the coffers of a few at the expense of the company or community, as a whole. Accessibility of documentary evidence that holds management accountable is a direct method of showing interested parties whether, and to what degree, a company’s success benefits its employees. Satisfying legal requirements respecting a company’s financial transactions should not be the only, or the most important, reason for promoting accountability. When an effort to establish transparency as a standard of practice is widely perceived to be self-generated by a company, it is not necessary for each and every employee to understand all the facts and figures for morale to be positively affected. (See more on Transparency in Chapter 3.3.1). There is no reason not to succeed in this effort if it is viewed as a challenge comparable to other company goals. What other ways might a company promote ethical standards of practice? 1.1.1. Cultural Contexts in Business Practices It should be borne in mind that employees in a diverse workforce will not always conceive of ethical behaviour in the same way as other employees from different backgrounds. For example, certain companies doing business in China have encountered deeply rooted business traditions that, from the perspective of Chinese employees, are entirely ethical, even paradigmatically ethical and obligatory, yet these traditions fly in the face of Western conceptions of business ethics. In one case, when executives tried to force local employees to abandon their traditional practices and adhere to Western methods, morale was negatively affected to the extent that production dropped and so did profits. Strategic Forecasting, Inc., a private company providing analysis of global trade and public policy, describes the situation: Western company standards, and the codes of conduct in which these standards are codified, hold that the interests of the company come first. […] An employee […]accepts an ethical obligation to put the company’s interests first. Because of this, an employee who uses his position to have his company

14  Thinking Ethically in Business purchase goods from the employee’s friend that are slightly higher in price or inferior in quality would be considered unethical, even blatantly corrupt. […]When such incidents are discovered, the offenders often are dealt with quickly and harshly by the company hierarchy, and they frequently are even reported to the legal system.   Chinese business ethics, however, are built on the basis of guanxi, which places relationships above other considerations, including an employer’s code of conduct and even the law. […] Thus, a Chinese national hired by a Western company [might] consider it morally obligatory to drive business in a long time friend’s direction, even if the price of his friend’s goods and services are higher than other bidders or if the quality is not as high. […]   What a Western businessperson (and perhaps even the U.S. government) would view as corruption on the part of a Chinese employee would be seen by the Chinese as the normal, natural and ethical process of business—a process that has as its end social harmony, as well as profit. The Chinese would see the Western principle of evaluating all business relationships on a transactional and purely financial basis—and expecting all employees to do so on behalf of their Western employers—as quite unnatural. (Stratfor, 2008) This situation underscores the need for an emergence of clearly stated, accessible standards of practice that can be understood by business associates, even when those associates operate according to different sets of values. Only then can mutually agreeable forms of practice evolve that accommodate all interested parties. When a company is operating in a foreign context, as so many are in today’s global economy, actions taken by employees that appear to be unethical should be carefully considered in the light of cultural differences. What are some ways in which the problems raised by the two different ways of doing business described above might be mitigated or even resolved?

Thinking Ethically in Business   15 1.2 Is Being Professional the Same as Acting Professionally? There are several different meanings of “professional.” Sometimes the best way to decide which definition applies in a given case is to consider how the word is used. For example, when defending Wimbledon champion Venus Williams was asked in an interview “a question about a predetermined outcome if Serena [Williams] makes the final,” Venus took offense: I’m extremely professional in everything that I do on and off the court, […] I contribute my best in my sport and I also have a ton of respect for myself and my family. So any mention of that is extremely disrespectful for who I am, what I stand for, and my family.”(Williams, here) One of the meanings of “professional” is someone who is paid for what they do. Whereas an amateur golfer plays for enjoyment alone, or for love of the sport alone, a professional plays for pay. Since Venus Williams earns money by playing tennis, she is undoubtedly a professional according to this meaning. However, was this meaning the one she intended the listener to understand when she made the statement quoted above? Another use of the term “professional” refers to someone who conforms to standards of a profession by acting ethically and professionally. It makes sense to think that this latter meaning was closer to the sense of “professional” that Williams intended, since it was not her status as a paid athlete that was being questioned, but rather her conduct within the context of the upcoming match. Her claim is that questioning her own or her family’s ethics, conduct, behaviour or performance in terms of professional standards was “extremely disrespectful.” In this case, an antonym for the term would be “unprofessional” instead of “amateur.” In ordinary parlance, when a colleague’s behaviour is described as “unprofessional,” that person’s standards of workplace conduct are being negatively evaluated. Conversely, if someone describes herself or another person as being “professional,” in the sense that Williams intended, that person’s standards of conduct are being positively evaluated. Does this mean that people who work in trades or other occupa-

16  Thinking Ethically in Business tions not generally considered to be professions can still be properly described as acting professionally or unprofessionally? If being paid for the work one does is the criterion, why are some paid occupations called “professions” while others are referred to as “trades,” “businesses,” or simply, “jobs”? Until recently, “professional,” in general, referred to certain occupations and not to others because practitioners were seen as belonging to a certain class, or having a certain status, not generally available to members of classes held to be more common. As traditional notions of class and status change, so does the meaning of “professional.” University or college education is one of the traditional hallmarks of professional status. Graduates of programs having liberal arts courses as well as special training in a field are considered to have mastered elements enabling them to “profess” a body of knowledge. According to these traditions, master plumbers, who may have more years of training as apprentices and journeymen than some college graduates, have not been described as professionals because theirs is not a university education. They are described as working in a “trade.” Traditionally, membership in a professional association or organization has been desirable or even required for professionals, but membership in a trade union or workers’ alliance has not been considered pertinent for them. Whereas trade unions have traditionally bargained collectively for the interests of workers with respect to wages, working conditions, and benefits, professional organizations provide venues for conferences, develop and monitor standards of practice and govern licensing and censure functions. Both Unions and professional associations provide services to members. Professional associations exist for the benefit of members employed in a given field. Unions exist for the benefit of members as workers practicing a given trade.   Professional organizations are usually voluntary associations. They sometimes have great influence on the occupations they represent. The mission of certain professional organizations is sometimes determined by the relationship between the profession and its given government. For example, in the United States, the American Medical

Thinking Ethically in Business   17 Association assumes regulatory, licensing and censuring functions. In the United Kingdom, where healthcare is nationalized, the British Medical Association does not assume regulatory or censuring functions. However, the General Medical Council of the U.K. does assume regulatory functions and has a membership largely composed of physicians. To a certain extent, physicians formulate for themselves their own standards of practice. Moreover, it is generally physicians who are called to testify in court cases involving other physicians who face charges stemming from questions about the way they practice, or practiced in a given case. It is possible for the status of an occupation to change after practitioners of that occupation earn a reputation for corrupt practices. However, occupational status can also change because of changing social and economic factors. Certain occupations considered professional during one era may be thought of as trades during another. For example, until the 19th century, surgeons were frequently recruited from the ranks of barbers. They were not thought of as physicians. On the other hand, before the rise of gynaecology as a medical specialty, midwives were regarded as professionals, often highly regarded professionals. Even though for a time it was systematically discredited, midwifery in certain areas has regained much of its prestige due to a combination of activism and changes in healthcare delivery systems. In other areas, practicing midwifery outside the presence of a physician is still controversial. See, for example here and here. For a sampling of jobs that have been seen as professions or occupations in the past, or jobs that have only recently become classified as professions or occupations, see the chart in Appendix B. There are widely held expectations that attach to certain occupations. There is an expectation that members of certain professions practice in the public interest. For example, a heart specialist on the links will certainly forget his golf when an elderly gentleman at the next hole drops his club, grips one arm, and collapses. However, his companion, a renowned chef, will be forgiven if he does not leave his own game to prepare a meal for a man who says he has not eaten since the previous day. If he decides to help the man by practicing his craft, it will be as a result of compassion, not as a result of profes-

18  Thinking Ethically in Business sional responsibility. Criteria for distinguishing professional and nonprofessional occupations are less rigid than they once were. The rise of systems of education that accommodate vast numbers of students in expanding curricula, often keyed to rapid technological change, has created new occupations, specialties within specialties, degrees of degrees and a slate of certificate programs intended to teach competence in areas that did not exist just a few decades ago. In such a dynamic business environment, might it be the case that “acting professionally” is as important as “being a professional” in terms of behaviour that matters in workplaces? Does it make sense to continue distinguishing between professionals and nonprofessionals according to criteria developed during a different socioeconomic era?

1.3 Workplace Duties versus Personal Obligations Sooner or later, almost every member of the working population will encounter a situation involving a conflict between workplace duties and obligations held outside the workplace. Certain conflicts are exceedingly common, although they may have profound consequences for individuals and families. For example, almost everyone knows someone who has experienced distress when the demands of work conflict with time spent with family and friends. There is no template for resolving this kind of problem, since every case is unique, but it may help to understand that this particular conflict may be systemic. That is, conflict over how time is allocated may be an inextricable feature of work within certain business environments. In such cases, individuals must decide for themselves where to draw the line between competing demands, keeping in mind that the kind of self-examination systemic conflicts require can be beneficial for the development of an individual’s ability to set professional parameters and define personal goals. The Greek philosopher Aristotle described a conflict between a business obligation and a personal duty (Nicomachean Ethics 1165a). A man borrowed a sum from a lender. On his way to pay it back, he received word that his father had been kidnapped and was being held

Thinking Ethically in Business   19 for ransom. His love or filial piety for his father surely required him to pay the ransom. However, if he did, he would have no money to repay the loan. His good name and business reputation could be destroyed. What should he do? In an attempt to resolve this type of conflict, ethicists distinguish between prima facie responsibilities and absolute responsibilities. “Prima facie” is a Latin phrase roughly translated as “at first glance.” At first glance, or upon hearing only the first part of this story that someone borrowed money, one would assume that, in order to act ethically, the man should pay his business debt. However, on second thought, or upon hearing the rest of the story about the man’s father, one would probably decide the man’s duty to his father overrides his financial obligation. His duty to his father is absolute. Whether or not a decision is an ethical decision can be determined only when context is taken into account. Does this mean there is a range of conduct according to which obligations may be judged as more or less binding? Some ethicists would say “yes.” Responsibility for the welfare of one’s father trumps paying back a loan on time: in most cultures, it is seen as absolute, or indefeasible. That is, it is not the sort of obligation one can negotiate or annul.

1.4 Kinds of Commitment: Defeasible and Indefeasible Obligations What if the lender turns out to be the man’s brother who needs the money immediately for an operation or he will surely die? In circumstances where one is faced with two conflicting absolute duties, is there a rule for deciding what to do? Some ethicists would say this is where judgement comes into play. Getting as much information as possible, thinking creatively and asking others for help can contribute to being able to make difficult decisions. What other avenues might the man explore that could help him avoid sacrificing either obligation to the other? In business, most obligations are defeasible. That is, business transactions are activities based on negotiation within the limits of

20  Thinking Ethically in Business custom, or law, or both, that take into consideration the likelihood of contingencies. For example, many factors – heavy traffic, heatwaves, systems failure – can cause deliveries to be late, produce to spoil, payments to be skipped, without agreements being jettisoned or contracts annulled. The company not meeting its obligation is, in general, given an opportunity to “make good.” It should be remembered that there are customs in all cultures respecting differences in types and degrees of commitment. In many circumstances, it is considered reasonable to renegotiate agreements for all sorts of reasons. However, in most cases filial obligation is not seen as negotiable. In legal terms, the most binding commitment is an agreement made by formal contract drawn according to customary procedure, signed by all interested parties and witnessed. The least binding is an unwitnessed verbal agreement that is vague with respect to specifics. There is a great deal of difference, legally, between these two types of commitment, yet a great deal of business is carried out under the auspices of each of them every day, in every part of the world.

1.5 Degrees of Commitment: Perfect and Imperfect Obligations Professional responsibilities are sometimes distinguished by ethicists as duties that are “perfect” or “imperfect.” Obligations are perfect or imperfect “according to the degree of latitude they have with respect to time, place, object and manner” (Rainbolt, 2000). Whereas personal commitments may be viewed as different in kind from workplace commitments, obligations internal to the business sphere may differ from each other in degree. In terms of professional responsibility, the duties agreed upon involve a range, or latitude, with respect to the accomplishment of specifics. That is, commitments are more or less precise. The terms “perfect” and “imperfect” refer to the degree to which an obligation’s terms are specified, so that, on a scale, imperfect agreements are least thoroughly made and perfect agreements are most thoroughly made. Consider the following three business arrangements. A florist has

Thinking Ethically in Business   21 signed a one year contract to deliver a dozen long-stemmed red roses to the local academy of music every Friday evening, at seven o’clock, beginning the first week of October, ending the last week of May. A company that delivers spring water has taken a telephone order from the same academy of music and has agreed to deliver seven fivegallon bottles of water every Friday during the same eight month period. A pet-sitter has signed a contract to visit Mimi and Fidelio, the academy director’s cat and dog, at the rear apartment in the same academy, twice a day during the director’s annual June trip to Italy. Are these agreements different from each other in kind, in degree, or both kind and degree? In the above example involving business arrangements made with the director of an academy of music, each of three businesses has made an arrangement with the same individual to provide something to or at the same establishment. For the florist, punctuality is part of the agreement: there is a perfect obligation with respect to time. The other two agreements are specific with respect to dates, but imperfect with respect to time of day. All of the agreements are perfect with respect to location; that is, there is no question or variability about where obligations will be met. With respect to legal formalities, the water company’s agreement is less perfect than the other two, although operating in the absence of a contract in no way means there is not an obligation to honour an agreement. With respect to complexity, the pet-sitter’s agreement is most perfect, since the contracted duties explicitly include disarming and rearming a security system, dispensing oral medication to an ailing animal, monitoring an apartment’s temperature and, when necessary, resetting the thermostat, using the director’s computer to send daily e-mail updates to Italy, in addition to feeding and playing with the cat and dog. Do not confuse the terms “perfect” and “imperfect” when used to refer to degrees of specificity of arrangements with the use of the terms to refer to whether or not agreements are “perfectly” executed. Consider the following case. An archival supply company agrees to send acid-free tissue paper to a museum of natural history at a stated cost. However, the company imperfectly fills the order. Here, “imper-

22  Thinking Ethically in Business fectly” refers to how an order is executed, not to degrees of specificity in an agreement. The agreement stipulates sending the paper by express mail, next day delivery. In this case, there is latitude with respect to time, since, as long as the paper is delivered during the next day, irrespective of the exact time, the temporal obligation is fulfilled. With respect to date, the agreement is perfect. With respect to time of day, the agreement is imperfect. With respect to object, the agreement is perfect, since there is no latitude respecting the type of paper the museum needs. When the museum receives regular tissue paper instead of acid free paper, no one can reasonably expect the museum to pay for the paper, since it has not received the object it ordered. If a retail store distributes its weekly flyer showing a given item on sale for a certain price, it has a perfect obligation to sell the item at the stated price during that week. There is no latitude with respect to the price or time period. However, if the store runs out of the advertised item due to unforeseen factors, standard business practice based on social consensus allows it to issue “rain checks” to customers. Because the store agreed to sell the item at the stated price, it has a responsibility to sell that item to a customer bearing a rain check for it at a later date. On the other hand, if a fire rips through a store leaving much of the inventory damaged, the store might post a sign in front that says, “Fire Sale.” An intention to sell items at a price lower than the prefire price is implied, but how much lower is not specified. In order to honour the commitment made in the store’s advertisement, employees must mark items down, but have great latitude with respect to the degree of the mark-down. The store’s obligation is imperfect with respect to sale price.

1.6 Ethically Resolving Conflicts in Business Decisions Laws respecting conflicts of interest among legal and medical professionals can be quite technical in their delineation of precisely what kinds of behaviour constitute such conflicts. However, in general, “conflict of interest” denotes a situation in which one’s stake in something adversely affects one’s obligation to something else.

Thinking Ethically in Business   23 Many such conflicts are handled, resolved or dissolved every day in ways that are perfectly ethical. No one outside the immediate circle of interested parties in these cases ever hears about them, since there is no reason for notoriety. Companies as well as individuals encounter conflicts of interest. In an era when environmental consequences of industrial activities are increasingly brought to public attention, it is not difficult to imagine the conflicting interests of companies faced with remaining competitive while simultaneously revolutionizing their procedures to answer the demands not only of regulating entities, but of public opinion. Documented cases of companies whose decision makers failed to discover ethical methods for managing conflicts of interests are easy to find. However, information about companies whose management taps into creativity and resourcefulness needed to develop ethical, sometimes even beneficial, methods of negotiating conflicts can also be found. See Appendix A for some examples of both. The tension between profitability on the one hand, and ethical practices on the other, can be conceived as a challenge to find ways to accommodate both—a challenge inherent in market capitalism that is more interesting than either the cynical pursuit of profits alone or the equally cynical abandonment of efforts to foster markets that promote enterprise and equitable distribution of resources and opportunity. In the following chapters, you will become acquainted with two competing theories of management that provide models for doing business. When considering these models, evaluate them in terms of the historical contexts that engendered them as well as in terms of their relevance for today’s emerging forms of economic activity. Can either of these models provide effective conceptual tools for doing business?

Chapter 2: Stockholder Theory of Management

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. […] [The business owner] neither intends to promote the public interest, nor knows how much he is promoting it. […] He intends only his own security, and by directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand, to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (Smith, 1776) An “invisible hand” guiding business owners to act, unwittingly, in the interests of society by merely pursuing their own interests was a credible idea to Adam Smith. After all, the economic activity he observed typified a capitalism in which the butcher, the brewer and the baker were “owner-operators,” personally involved in the day to day practices of their businesses. However, even as Smith wrote and reflected on market capitalism in his era, a revolution in industry was transforming companies from provincial enterprises into multinational corporations. As companies grew and operations became more complex, many business owners hired managers to run their businesses for them. That is, they began practicing managerial capitalism. Certain companies became publicly traded entities. These companies sold “shares” to investors in order to raise capital to finance ventures. To take just one economic sector, the automotive industry, for example, compa-

Thinking Ethically in Business   25 nies like U.S. based Ford Motor Company (founded by Henry Ford in 1903, with 12 investors) and U.K./India based Jaguar Cars, Ltd (founded by British motorcyclist enthusiasts, William Lyons and William Walmsley, in 1922, now owned by Tata Motors of India), underwent unprecedented growth, outlasting, as corporate entities, the life spans of their individual founders.

2.1 Managerial Capitalism Managerial capitalism retains the descriptive designation “capitalist” because its form of enterprise has as primary objective the earning of profits—the same objective sought by 17th, 18th and 19th century capitalists. After all, capital is the defining motive of all capitalisms. However, managerial capitalism is different in several important respects from earlier forms of capitalism. For one thing, when a company becomes a publicly traded corporation, there is a fundamental change in the meaning of the word, “owner.” When a single individual owns a business and is involved in its day to day operations, that individual is in a position to make decisions at every level. In such cases, that individual is also responsible for the consequences of those decisions. This remains true, in general, even for companies with two owners. However, if an enterprise is large enough to support levels of operations requiring a hierarchy of managers who are answerable for their decisions to a board representing investors, questions involving the nature of and degree of responsibility for decisions arise. In other words, on what basis and for whom is a manager making decisions? Since “the owner” of a company in such cases is a group of individuals, or even a group of other groups, do these shareholders, or stockholders, as a group, embody the company’s ownership in such a way that managers are accountable to them, and only to them, for decisions made and actions taken? According to Milton Friedman’s stockholder theory of management, a leading economic theory during the twentieth century, the answer is unequivocally “yes.”

26  Thinking Ethically in Business 2.2 Maximization of Profits Friedman claims that a publicly traded corporation’s manager works toward one goal: the increase, preferably maximization, of profits for owners. (Friedman, 1962) Owners are individuals who buy stock in a company; so they are referred to as stockholders or shareholders. Friedman’s stockholder theory is also known as the Shareholder Wealth Maximization Theory (SWM). Investors buy shares of stock in a company, hoping that the shares will increase in value due to the company’s success. If share value increases, a stockholder can sell shares for a profit. The success of a company measured in profit or loss of the value of shares depends on various factors, including growth or diminution of markets. When stock loses so much value that it drops below the price at which it was bought, a stockholder cannot realize a profit and may stand to lose some or all of the initial investment. Thus, stockholders are said to undergo risk. Risk is Stockholder Theory’s primary axiomatic justification for holding managers accountable to investor-owners, since, by this strictly fiduciary definition of “risk,” it is owners alone who assume it.

2.3 Managerial Expertise According to Stockholder Theory, the relationship of stockholders to managers is, in effect, a relationship of employer to employee. As employees, managers should do what their employers ask to the best of their ability, so long as the employer’s requirements are within the bounds of reason and moral justification. When employers ask that their investments be protected and increased, it follows that managers should base their executive and operational decisions on factors they perceive as being conducive to that outcome. Since the aim of their activity is to increase profits for investors, managers are hired by investor-owners on the basis of perceived knowledge of and experience in an area that qualifies them to assume responsibility for its operations. In other words, they are hired for their expertise. On this view, managers at executive, operational and other levels have agreed, usually explicitly, to perform certain duties and carry out

Thinking Ethically in Business   27 certain functions designated and defined by their employers, which sometimes include intangibles like “employee loyalty,” “team spirit,” and so forth. Stockholder theorists argue that individuals hired for their expertise should not be required to make decisions outside their area of expertise. In other words, since managers are hired expressly to conduct company business in a way that maximizes profits, they should not also be expected to deal with situations that may arise that do not bear directly on profits. As you now see, Stockholder Theory is based on the idea that managers should (a) observe the traditionally expected duties entailed by the employer-employee relation, (b) not act outside the expertise for which they were hired, and (c) act according to their position and expertise so that maximum profits are sought for the company. The primary justification for this view of the responsibilities of managers is investor risk.

2.4 Managerial Limitations In addition to practical considerations, Friedman claims there is an ethical consideration in Stockholder Theory. Since managers are hired to spend company money in an effort to maximize stockholder profits, he argues, managers who spend company money for any other reason are spending stockholders’ money without stockholders’ consent. Spending someone else’s money without consent is equivalent to imposing a tax on them. For example, suppose a manager decides to spend company profits on a day care centre for employees’ children. Building and maintaining the facility accrues costs the stockholders did not agree to assume. Therefore, the manager’s decision amounts to levying an unrepresented tax on shareholders. Friedman argues that managers making such decisions act in a governmental, not a business, manner. Since democratic governments require that functions such as taxation be carried out by elected officials, any managers who “tax” their stockholders are usurping functions appropriate to elected officials. Friedman concludes that managers who make decisions on grounds other than maximization of corporate profit are,

28  Thinking Ethically in Business in effect if not intention, illegally replacing functions of elected government with their own inappropriate executive decisions.

2.5 Limitations of Stockholder Theory Stockholder Theory can be seen as a corporate version of Adam Smith’s doctrine, since it presupposes that the self-interested motive of profit maximization on the part of company owners is sufficient for running companies that contribute to vital economies. According to both of these views, it is the autonomous nature of economic entities that allows them to flourish in free market systems. Moreover, Stockholder Theory provides a critical tool for reflecting on the reasons employees in positions of authority sometimes bring their own and other companies to ruin when they act from motives other than maximizing stockholder profits. However, Friedman’s views have serious theoretical and practical deficiencies, according to certain critics, who claim that there are always responsibilities on the part of the business community that go beyond the imperative to earn profits. According to them, duties to stockholders should not always be the only considerations for employees in decision making positions. In the following chapter, a theory formulated in response to Stockholder Theory, called Stakeholder Theory, tackles questions the former theory leaves outside its purview. When it comes to deciding what considerations and concerns are appropriate for businesses and for the business community as a whole, should the following questions even be asked? What about a company’s employees, who may own no shares, but whose lives are certainly impacted by managerial decisions, and whose role surely is vital to sustaining the company’s operation?  What about a company’s customers, who may rely in some way on what a company provides, and whose purchases are what make it possible to justify the company’s production and service?  What about local communities, often significantly and even determinately affected by the decisions made by managers of companies operating in their area, and whose land, water, air, and population provide the base for a company’s home office or factory?

Thinking Ethically in Business   29 To what extent and in what way, if any, is a corporate entity of great size and indeterminate longevity accountable to these and other nonshareholders who are likely to be affected by it?

Chapter 3: Stakeholder Theory of Management

Without society, stakeholder theory is incomplete. Civil society is not an optional stakeholder, it is a fundamental stakeholder, indeed, the most important of all. (Lepineux, 2005) Stockholder Theory’s managerial reductionism stimulated the emergence of alternative theories that focussed on the following question: is a company obligated to acknowledge entities other than stockholders as parties with legitimate interests in company operations? If the answer is “yes,” what kind and what degree of responsibility on the part of the company, if any, is entailed by that acknowledgement? In the 1980s, about 20 years after Milton Friedman’s stockholder theory was first advanced in Capitalism and Freedom, a theory of management called Stakeholder Theory appeared. In opposition to Stockholder Theory, this new theory held that there is a range of interests wider than profit maximization that a company should consider when forming its plans and policies. According to stakeholder theorists, interested parties other than stockholders--interested because they affect, or may be affected by, company actions--are seen as having a “stake” in that company. Nonstockholding individuals and groups whose lives may be impacted by management decisions deserve, according to these theorists, to be taken into account. Several different versions of Stakeholder Theory quickly developed from its initial formulation. All of the versions grant that stockholders are certainly legitimate stakeholders in a company. In addition, all of the versions hold that stockholders are not the only stakeholders. Moreover, stakeholder theorists agree with each other, in marked contrast to stockholder theorists, that corporate stockholders’ interests have no priority over the interests of other stakeholders.

Thinking Ethically in Business   31 However, while they agree among themselves that stockholders are only one kind of stakeholder in a company, they disagree with each other over the parameters of the concept, “stakeholder.” How they envision the concept “stakeholder” determines their respective views about corporate responsibility.

3.1 Cui Bono? “Cui bono?” is a Latin phrase that frequently appears in arguments. It means “for whose good?” When someone asks, “cui bono?,” what that person seeks to know is who benefits from a given action or series of actions. The impetus that led to the development of Stakeholder Theory was the belief that answers to the question “cui bono?” should reflect business environments in which “bono” is construed to mean more than “profit,” so that even those who do not share in profits will share in something good. That is, the operation of a company in their vicinity will bring them some kind of benefit. For Stakeholder Theory to be practiced, employees who have power to make decisions on behalf of companies would have to consider their company as part of a community, with shared interests in the community’s well being. They should not think of their company as isolated from the community in which it is physically or virtually located. In addition to considering the interests of those who have assumed risk by investing in a company (stockholders), those employees making decisions would be concerned with the broader implications of the company’s plans and projects. Stakeholder theorists argue that the possible consequences for communities of companies’ intended projects should be seriously investigated. Moreover, if necessary, a company’s plans should be advanced, adjusted or abandoned on the basis of the findings of those investigations. For stockholder theorists like Milton Friedman, the idea of company employees concerning themselves with matters outside the immediate task of maximizing profit for shareholders is an idea so bad it has practically felonious implications. Yet stakeholder theorists maintain that they should do precisely that. According to them, there

32  Thinking Ethically in Business are good reasons for companies to consider constituencies other than stockholders even when that consideration results from an ultimately self-interested point of view. It is not difficult to find cases that illustrate the pitfalls of pursuing profit maximization to the exclusion of everything else. Dangerous working environments, unhealthy conditions or practices, lack of or disregard for safety procedures, unfair labour practices and exploitation of employees can result in costly litigation or, worse, can have tragic consequences. To name just two examples, see here for information about the tragic 1911 Triangle Factory Fire in New York City or here to find out about the Union Carbide disaster in Bhopal, India. In certain cases, irresponsible practices of businesses have led to the passage of laws placing stockholder interests below those of other stakeholders. R. Edward Freeman, an early advocate of Stakeholder Theory, points out that civil rights and labour laws support the interests of employees over company goals of maximizing profit, that manufacturing liability laws sometimes support customers’ interests over stockholders’, and that clean air and water acts protect the environment, for the benefit of all, from business practices that would otherwise damage it in the interest of making a profit (Freeman, 2001). For examples, read about the Safe Drinking Water Act, the Pesticide Act, the Resource Conservation and Recovery Act, or the Toxic Substances Control Act here—all of which were enacted in response to business debacles. Because it promotes business policies that consider possible beneficial or adverse effects on a broader spectrum of society than Stockholder Theory advocates, Stakeholder Theory might appear reformist, as a socialist, or otherwise anti-capitalist economic theory. However, encouraging the development of social responsibility in the business world does not, in itself, make an economic theory a socialist theory. In fact, since its arguments derive from premises that take market forces as the legitimate foundational elements of economies, Stakeholder Theory is, in principle, a capitalist theory of management.

Thinking Ethically in Business   33 3.2 Parameters of “Stakeholder” It was mentioned above that stakeholder theorists agree that stockholders are only one group of stakeholders in a company, but they disagree on how broadly to interpret the scope of the appellation, “stakeholder.” According to Freeman, stakeholders in a company may be determined narrowly or widely. Determined narrowly, stakeholders include stockholders, employees, customers, suppliers and the local community; who are “vital to the survival” (Freeman, 2001) of the corporation. Determined widely, stakeholders include those who affect or are affected by the corporation, whether or not they are vital to its existence. Notice that, even according to Freeman’s narrow interpretation, those considered to have an interest in a company’s actions constitute a broader swathe of the population than Stockholder Theory considers interested by any determination. Critics of Freeman say he only backs up the problem so that “those having a vital interest” replaces “stakeholder” as the concept with parameters that are hard to define. One way to clarify Freeman’s distinction is to classify stakeholder groups as divergent interest groups: that is, on the one hand, as groups that are internal to the business, who are deliberately and knowingly involved in or dependent on the company; and, on the other hand, as groups external in some way, including those who are affected by the company peripherally, indirectly or intermittently, who have no knowledge about or interest in the continued operation of the business. Canadian economist and stakeholder theorist Jacques Chevalier raises the question of what part ignorance of a company’s activities plays in determining whether or not someone is a stakeholder in that company. He points out that people living downstream from a company whose operations affect the quality of the stream’s water may be unaware of what is happening, yet are affected nonetheless by what the company is doing. That is, they have a stake in the company whether or not they are aware of the circumstances influencing them. Chevalier calls these interested parties “unorganized stakeholders.” For more by Chevalier, click here.

34  Thinking Ethically in Business Some of the most interesting cases involving stakeholders have to do with someone’s attempts to get information about a company’s activities to unorganized stakeholders whose lack of knowledge about a given company’s operations, or the effects of its operations, place them in jeopardy. See Appendix A.2 for examples. Not being self-identified as a stakeholder is not a sufficient condition, then, for corporations to eliminate their concerns from consideration in managerial decisions. 3.2.1 Distinguishing Types of Stakeholders Recall that, for Stockholder Theory, the fundamental managerial imperative is to maximize profits for stockholders while avoiding entanglements requiring decisions to be made outside fiduciary responsibilities to a company’s owner-investors. By now, you also know that this insular strategy of Stockholder Theory stimulated the development of theories with increasingly broad interpretations of “stakeholder.” These developments culminated in theories that posit economic environments as complex systems. According to these theories, complex economic systems yield fields of enterprise for management that go far beyond strictly profit driven limits. For example, French economist Francois Lepineux distinguishes between “business stakeholders” and “societal stakeholders.” (Lepineux, 2005) Business stakeholders include not only those in Freeman’s “narrow view,” that is, shareholders, managers, employees, customers, and suppliers, but also include trade unions, subcontractors, banks, competitors, and trade or professional organizations. Societal stakeholders, by contrast, include local communities, governmental and non-governmental organizations, activist groups, civic associations, and civil societies of all countries in which a corporation operates. In fact, Lepineux claims that civil society is itself the primary stakeholder of corporations, since corporate activity affects it in its entirety. In making this claim, he alters the point of view from which management decisions can be made. Lepineux’s analysis begins with an assumption that corporate practices are at least part of the cause of

Thinking Ethically in Business   35 social inequalities. He therefore contends that on that basis, corporations should hold themselves responsible, then, for helping to better society. At this point, recalling the caveats of stockholder theorists, it makes sense to ask: is it reasonable to expect an employee hired for a limited purpose to make decisions when the whole of civil society is held to be inside the purview of corporate responsibility? Clearly, changes ranging from re-articulation of missions and goals to rethinking personnel requirements would have to take place in a company in response to such an idea. However, it is exactly those sorts of innovations that have been taking place recently in certain companies. See Appendix A.2 for examples of rubrics that have been proposed to help managers classify stakeholders according to importance, influence, power, legitimacy and urgency. These sorts of innovations have been taking place in spite of the fact that they represent significant alterations in traditional ways of doing business and in spite of the variety of difficult decisions they engender. A more influential method increasingly employed by corporations involves a concept known as corporate social responsibility.

3.3 Corporate Social Responsibility (CSR) In the last few years, a concept called CSR (corporate social responsibility) has gained currency among some economists. Practitioners of CSR intend to broaden the realm of a company’s responsibility beyond its traditional limits so that it includes the community or communities that sustain the company. In other words, CSR characterizes corporate policies that positively affect stakeholders. Commitment to CSR has had dramatic effects on certain corporations. A worldwide survey of 1,122 corporations (42% in Europe, 23% in Asia-Pacific, and 19% in Canada and the U.S.) conducted in November and December of 2007 for The Economist found a significant increase in the assessment by corporations of the importance of CSR over the last several years. When asked how high a priority CSR was to their company 3 years ago [2004], 11.3% said it was very high. In 2007, 16.7% said it was a very high priority, and 25.7% said

36  Thinking Ethically in Business they believed it would be a very high priority three years from now. (Economist, 2008, to see chart, click here) When CSR was beginning to be recognized as a desirable goal, it was initially assumed that the best course of action for businesses would be to maintain neutrality toward different stakeholders. However, it became apparent that conflicting interests of different stakeholder groups required an admission that neutrality was nice in theory, but difficult to practically attain. After all, company interests are still paramount to company managers, even when they are personally and professionally committed to CSR. Sensibly accommodating the legitimate interests of different stakeholders requires a new set of managerial skills. For example, sometimes the need for employee wage increases conflicts with customers’ inability to afford higher prices. Moreover, both may conflict with suppliers’ need to charge more for materials. When the interests of each of these groups are considered important, how can management solve the problem without ignoring or even jeopardizing the interests of some stakeholders? Chevalier argues that it is impossible for managers, or, for that matter, for government officials or any other stakeholders to present their own points of view while simultaneously adopting a stance of neutrality. They should not attempt it, since, by definition, stakeholders cannot be disinterested. Neutrality is an impossibility for them. Can the path to a negotiation of differences be found through a thicket of pretended disinterest? 3.3.1 Transparency Rather than pretending disinterest, managers should work toward achieving openness about their action. This openness, called transparency, is increasingly being seen as the best way to foster cooperation among stakeholder groups. When all parties understand each others’ interests, negotiations can begin. Transparency increases the chances for a mutually amenable resolution. This practice is also sometimes referred to as “disclosing one’s interests,” or “acting in the interests of full disclosure.”

Thinking Ethically in Business   37 Recognition of the importance of full disclosure led to the founding in 1993 of a global network called Transparency International (TI). TI currently has 90 national and local chapters, is politically non-partisan, encourages students to get involved with campus chapters, and is comprised of corporate as well as government parties interested in finding ways to battle corporate corruption. TI defines corruption as “the abuse of entrusted power for private gain.” For more on TI, click here.

3.4 The Need for Accountability Some companies are beginning to make information about their practices and decision making procedures public in order to show they take CSR seriously. However, since there are as yet no universally agreed upon standards or even guidelines for corporate transparency, some of these efforts may not adequately address stakeholders’ interests. For it to be clear that the management of a company is making a genuine attempt to provide information to the public in the interests of transparency, the information they provide needs to be accessible, if the corporation is in any real way to be held publicly accountable. In this case, accessibility means that information is presented in ways that can be understood by someone reasonably well versed in the operations and procedures of the kind of business the information represents. In order for businesses to be able to do this, they need to have guidelines to follow and criteria that are standard for business sectors. However, implementing standards for transparency that will make it possible for businesses to provide accurate, accessible evidence to the public is an undertaking that brings with it a whole new set of problems. For example, imagine that a company embraces the goal of demonstrating responsible policies toward stakeholders in the community who are not necessarily stockholders or employees. To that end, the company’s managers provide evidence in the form of numerical data showing that their company, a retail business, supports more local sports teams than any other retail establishment in the area. Management claims the company is committed to corporate social

38  Thinking Ethically in Business responsibility and they have produced facts and figures that prove that commitment Now imagine that the company, which turns out to be a link in a long chain of retail stores, has been pursuing policies that undermine much smaller local businesses by consistently under-pricing them. In a short time, its operations have driven almost all its competitors out of an area in which many of them had done business for generations. Clearly, in a case where a company’s operations have been affecting its host community in ways that many local residents find damaging, its demonstrated support of sports teams in that community does not, in and of itself, confirm a commitment to CSR. Evaluative criteria for demonstrating CSR need to reflect more than elements that can be used for promotional purposes. They need to demonstrate commitment to CSR in ways that are accessible to reasonably wellinformed members of the public by the use of evidence that is comprehensively indicative of total impact on a locality. However, to what extent is it reasonable to expect a company to provide evidence of its own activity in ways that satisfy those requirements, when doing so may require translating highly technical information into “accessible” forms that may not accurately reflect it? 3.4.1 A False Dilemma Suppose that companies are willing to make information about their business operations public. Some of that information might be more or less accessible to the general public. However, some of it might include highly technical accounts involving complex, industry-specific data. In many cases, it is precisely the technical, industry-specific information not easily understood by the general public that provides the most accurate representation of company activities. When accurate representation of company activities is the goal, the people most able to provide or understand the company’s data may be the very people who need to be held accountable by virtue of their undeniable connection to the company. How can a company be held accountable to the public if its infor-

Thinking Ethically in Business   39 mation is generally inaccessible by virtue of its technicality? Does it follow from this state of affairs that businesses cannot really meet the criterion of transparency? Is it possible that these kinds of businesses cannot be held accountable in a way that actually benefits the public even in cases where being accountable is a company goal? This situation creates what some perceive to be a dilemma. That is, when information describing a company’s activities is technical enough to render it generally inaccessible so that the public must rely on the company’s own employees to translate the data, what meaning does “accountability” have, since the public must trust the company’s own interpretation or go without any account at all? British philosopher Onora O’Neill argues that the perceived dilemma of trust versus accountability in these cases is a false dilemma. (O’Neill, 2004) She claims that, in the majority of cases, individuals or teams who can decipher data describing a company’s operations can be found. Informed judgment is based on expert knowledge—that is, specific technical knowledge. To avoid the problem of lack of trust about whether corporations provide accurate reports, experts examining company data to evaluate it in the interest of transparency must be “external”—that is, independent of the company in question. In other words, experts should not have ties, financial or otherwise, to the companies they evaluate. Moreover, independent experts should be experienced in the same sort of business they are called in to examine. Standards of transparency can then be upheld by companies willing to provide information to independent experts, so long as those experts are available. O’Neill’s position is reflected in the Sarbanes-Oxley Act (the “Sox Bill” seen in its entirety here.) which, as mentioned earlier, provides an example of the mutually sustaining relationship between business and government. The Sox Bill is an attempt to minimize corporate fraud. Ostensibly, corporations that comply will have demonstrated transparency. Theoretically, greater accountability will increase public confidence. The law requires all publicly traded corporations (that is, those listed on a U. S. exchange or having over 300 U.S. shareholders) to disclose financial information in a timely manner. It requires senior managers to sign off on the accuracy of company

40  Thinking Ethically in Business reports. Audits must be carried out by independent auditors following accepted accounting practice. Finally, it provides that whistle blowers who report lack of compliance with any of the above regulations be protected.

3.5 Limitations of Stakeholder Theory We have seen much development in stakeholder theory over the past two decades. O’Neill and others work on the problems of accountability and trust in experts, as well as Lepineux’s analysis of stakeholder-as-civil-society give a much better account of the complexity of the relations between corporations and society than did the simpler arrangements found in stockholder theory. However, these strategic advances still do not make it clear how managers could use these insights in their day-to-day decision-making. So while these insights increase our understanding of the modern world, stakeholder analysis still has problems demonstrating that it is practically feasible for corporate managers to implement within their decision-making procedures. For this, much more specific tactics are needed. One element in this line of discussion will be the use of arguments as decision procedures, to which we now turn.

Chapter 4: Critical Thinking in Business

These statements are not valid inferences: “I am richer than you; therefore, I am superior to you,” or “I am more eloquent than you; therefore, I am superior to you.” But rather these are valid: “I am richer than you; therefore, my property is superior to yours”, or “I am more eloquent than you; therefore, my speaking is superior to yours.” But you are identical neither with your property nor with your speaking.” (Epictetus, 44, 1992)

4.1 Making Decisions Every business sets goals and every business encounters obstacles to attaining those goals. Anyone who has agreed to accept responsibility for making decisions in business—be it a manager, supervisor, foreperson or executive—benefits from critical thinking skills when the time comes to figure out how to set those goals and how to deal with those obstacles. Critical thinking is important in every walk of life, but it has special significance in business for several reasons. Business is one of the foundational elements of society and culture. Governments direct and delimit the sphere of business, but without business there can be no governments. Business is prior to government in the sense that it is often responsible for the forms government takes. For example, commerce precedes departments of commerce, agriculture precedes departments of agriculture, aviation precedes commissions of aviation, communications precede commissions of communications, and so forth. As was noted in the Chapter 1.1, bad or unethical business decisions can cause increases in regulations and other interventions. In other words, business decisions can have con-

42  Thinking Ethically in Business sequences that actually change the shape of governments. Business decisions are important at every level. Whether made by a sole proprietor of a store or by the chief executive officer of a global enterprise, business decisions can have incalculable consequences. For example, how important is it that the restaurant dish someone places before you, or before your child, is prepared by employees who follow appropriate procedures for serving food?

4.2 Cost/Benefit Analysis: the Usefulness of Arguments Cost/benefit analysis is sometimes referred to as “weighing the alternatives.” In business this process usually involves numbers, since businesses prosper or falter in proportion to their profits or losses. The larger the company, the longer the balance sheet and the more complicated the algorithms for determining types and degrees of success. However, weighing alternatives in business contexts also involves argumentation. Arguments are vital parts of decision making processes. Sometimes those processes involve groups of people, but arguments are equally important parts of one’s ability to decide for oneself before or apart from their presentation to a group. Understanding how to weigh alternatives for oneself by making arguments for and against a certain course of action is an invaluable tool. Anyone whose position involves making decisions and directly acting upon the decisions, anyone whose position involves presenting various courses of action before a committee or board, anyone whose position involves promoting particular courses of action, anyone who feels compelled to act against a certain policy or plan of an employer will do well to understand the elements of argument. An argument is formed from premises that are intended to lead to a conclusion. A premise is a claim, or a statement, that asserts something. In other words, it says that something is the case, that it is a fact, that it is true, or untrue. A premise is offered to provide evidence for drawing a certain conclusion. It provides the reason to draw that conclusion. Arguments may provide several premises, or reasons, as evidence for drawing a conclusion. However, the reasons given, in most cases, lead to a single conclusion. In the following example,

Thinking Ethically in Business   43 notice how reasons are stated so that a particular conclusion will be drawn. A regional manager for a chain of breakfast cafes intends a single conclusion to be drawn when he makes the following argument at a meeting: Our company policy is to buy the cheapest eggs we can find The price of eggs in China is the lowest we can find Therefore, we should buy eggs from China

In this argument, there are two premises and one conclusion. After considering the argument, another regional manager makes the following counterargument: Our company includes the cost of transport in the price of eggs Transport costs make the price of eggs from China higher than that of local eggs Therefore, we should not buy eggs from China

In this argument, there are two premises and one conclusion. After considering these arguments, a district manager makes the following argument: Our company policy is to obey the law Our country has laws governing importation of foodstuffs Eggs from China are on the list of prohibited foods Therefore, we should not buy eggs from China

In the district manager’s argument, there are three premises and one conclusion. The conclusion is identical to the conclusion of the counterargument above. Therefore, this argument is also a counterargument to the first argument. In order to make decisions in business environments, it is frequently necessary to consider competing arguments that may include any number of premises. Under ideal circumstances, premises are simply statements that are widely accepted as true. They are facts. In such cases, arguments can be considered on their rational merit, apart from the need for more information. However, circumstances are rarely ideal. Companies of a certain size have research departments that perform functions intended to make or keep the company competitive. Among those functions are information gathering, market analysis, and economic forecasting. The purpose of these activities is to provide decision makers with the data they need to make informed decisions.

44  Thinking Ethically in Business Analysis of information pertinent to the subject at hand is an important first step in making an argument. In business contexts, this step is called background analysis. In the first argument above, background analysis amounted to researching relative prices of eggs in view of a company’s policy of comparison shopping. However, it was a simple comparison that left out pertinent information. Analysis underpinning the premises of the second argument included calculating transport costs. Because of this additional information, the second argument is more convincing than the first. The third argument included legal information pertinent to the debate over buying eggs from China. Because of this additional information, the third argument is also more convincing than the first. However, the second and third arguments taken together produced the following argument: Taking company policy into consideration, Total costs of purchasing imported eggs is prohibitive Purchasing imported eggs is against the law Therefore, purchasing imported eggs is not an option

Background information contributes many different kinds of data to decision makers. Conclusions to arguments can amount to recommendations about which course of action to follow or, as in the case above, which course not to follow.

4.3 Verifying Premises: Types of Claims in Arguments There are different sorts of claims that can be fruitfully employed in making arguments to support a business decision. We will discuss several here. 4.3.1 Descriptive Claims Since the first step in making an argument is stating one’s premises, it is important to understand that there are different types of statements. That is, statements assert, or claim, different sorts of things. For example, the statement, “Dexter was a fine, solid, Victorian brick church, standing on Montgomery’s handsome public square.” (King, 1969, 1993)

Thinking Ethically in Business   45 is true only if Dexter was, in fact, a brick church. The statement is descriptive, and descriptive statements are either true or false. They can be verified by showing that they accurately describe something. Determining the truth, or factual accuracy, of claims such as this one involves observation or investigation of whatever it is that is claimed, unless it is already known that a claim is true or false, or unless a claim is true by definition. 4.3.2 Claims that are True by Definition Definitions are the limitations of meaning and sense that convention imposes on words so that their use will be more or less standard. Statements that are true by definition are statements that are considered to be obviously true, since they do little more than assert what is already contained in the definitions of the words they use. In other words, claims that are true by definition often bear little or no information. “The Loch Ness monster either exists or does not exist”

is such a statement. The statement is clearly true, but it does not actually tell us whether or not the monster really exists. Arguments can be formally expressed by using letters. In formal notation, using the letter “L” to stand for the Loch Ness Monster, the statement “The Loch Ness Monster either exists or does not exist”

can be expressed as L or not-L

The statement exhausts the possibilities for the existence or nonexistence of the monster, so it has to be true. Using letters to stand for the key elements of one’s argument often facilitates being able to determine whether or not one has a good or bad argument. We will say more about this below in section 4.4. Claims that are true by definition also include identity statements. “Hesperus is Phosphorus”

46  Thinking Ethically in Business is a famous identity statement that asserts the identity of the planet Venus as “the morning star” with the planet Venus as “the evening star,” although before the discovery that “Hesperus,” “Phosphorus,” “morning star” and “evening star” all denote the planet Venus, the statement would have appeared to be untrue. (Frege, 1980; Kripke, 1980) In most cases, knowing the meaning of the words in a claim that is true by definition, or in an identity statement, is enough for deciding whether or not the claim or statement is true or false. However, in a descriptive statement, knowing the meaning of the words may not be enough to determine the truth value of the claim. To take a simple example: we can know that “A bachelor is an unmarried man” is true as soon as we understand the meanings of each of the words in the statement. The statement, “Sherlock Holmes is a bachelor,” by contrast, cannot be known to be true unless and until we find out if the wily Holmes was ever married. The difference between descriptive and definitional statements has a long history in philosophy. To explore this history, read The Stanford Encyclopaedia of Philosophy’s article. 4.3.3 Claims that Use Technical Terms A statement using technical terms, whether it is descriptive or definitional, requires an understanding of the meaning of those terms before the truth value of a statement can be known. Most occupations involve some terminology that is specific to their activities. Occupations requiring years of education or apprenticeship may involve comprehension of the meanings of many technical terms. For example, an anatomy and physiology instructor masters and frequently employs thousands of technical terms that name, define and describe structures and functions of living organisms. In addition to occupationally specific terminology, companies use financial terminology. For example, knowing the difference between the definition of “gross profit” as opposed to “net profit” is fundamental for any business owner, manager, board member or anyone else with an interest in the business.

Thinking Ethically in Business   47 4.3.4 Normative Claims Normative claims are assertions about something that are made within a context that has its own standards, principles or rules. The last argument from the breakfast café series of arguments above concluded with “Buying eggs from China is not an option.”

When the Chief Operating Officer reported to the Chief Executive Officer on the results of the meeting, he reworded the conclusion as a recommendation. “We shouldn’t buy eggs from China,” he said. “We should continue buying eggs from local suppliers. In fact,” he continued, “we should encourage local poultry farmers to begin shifting their operations in the direction of free range and free roaming organic practices, so that the quality of our eggs and the reputation of our company both improve.” “How do you propose we accomplish that?” the CEO replied. “Simple,” said the COO, “We advertise what we are doing so that we become known as a health-oriented, eco-conscious business. That will bring us new patrons and, besides, it’s what a responsible café chain should do!”

Notice that the COO makes several normative claims. Normative statements frequently contain the words “ought” and “should” because they assert something in terms of a standard, principle or rule. In the context of running a business that is both legal and profitable, the COO argues that eggs should be bought locally. The normative context for that argument is what is good for the company. However, when he argues that the company should encourage farmers to upgrade their practices in terms of health and eco-sensibility, the normative context includes social responsibility as a company goal. Certain theorists classify normative claims as a type of descriptive claim, in part because both types of claims require evidentiary verification. (Brink, 1989) However, the kind of evidence required to verify descriptive claims may be more accessible than the kind needed to verify normative claims, since normative claims are prescriptive—that is, they prescribe behaviours or actions—while descriptive claims are often uncontroversial matters of fact.

48  Thinking Ethically in Business 4.3.4.1 Legal Claims and Ethical Claims Two of the main types of normative claims one uses in business are legal and ethical claims. Although legal claims and ethical claims are both normative claims, it is important to distinguish them. Laws are rules emanating from governing authorities. They include procedures to be followed and penalties to be exacted in cases where they are ignored, disobeyed, or “broken.” In a system of laws that works well, society in general benefits from their enforcement in innumerable ways. Statements or assertions about the legality or illegality of actions or operations can usually be verified by consulting codes or contacting government agencies. Since a business operates at the focal point of concentric legal jurisdictions, it is subject to a wide variety of laws. For example, consider the difference in scope between a city ordinance governing the sale of snacks at municipal events and an international treaty governing the disposition and use of territorial waters. Moreover, businesses are subject to laws governing different sectors, or aspects, of economies. Often such laws come in highly detailed, highly codified form. Businesses must also, of course, observe and follow requirements of tax laws governing their operations. It is the responsibility of the owners of companies to know and observe the laws pertinent to their operations, or to ensure that qualified employees know and observe them on the company’s behalf. Laws emanate from political authorities, whereas ethical principles emanate from society’s cultural beliefs. They are foundational parts of ideologies on which political systems are based. As such, they are commonly held to transcend political authority. For this reason, in many political systems, there are procedures for challenging laws so they can be amended or overturned if they are judicially found to be unethical. In other words, legislation and law enforcement practices are products of institutions that are conditioned by ethical values that shift and change over time. In business, ethical claims are statements about actions or policies that affect stakeholders, when “stakeholder” is broadly conceived. Consequently, whereas legal claims can be used to support actions

Thinking Ethically in Business   49 or policies, ethical claims are evaluative statements that judge those actions and policies. Claims chosen for premises decide what kind of conclusion will follow. For example, if premises in an argument all make descriptive claims, those claims will not lead to a normative conclusion. For more on how to verify normative claims, in particular, see the work of American ethicist Christine Korsgaard.

4.4 Types of Arguments We will only briefly introduce types of arguments in this book. For more on arguments, both their specific types as well as detail about what makes a good argument, see Philosophy Insights eBook, Critical Thinking and Informal Logic by Timothy Crews-Anderson. 4.4.1 Deductive Arguments Deductive arguments are arguments in which the premises are claimed to be sufficient to prove the conclusion. In other words, the claims made intend to provide enough evidence to guarantee the conclusion. Arguments are said to be “constructed.” In a well constructed deductive argument, the conclusion follows logically from the premises. If it does not, then the argument is said to be invalid. “Valid” and “invalid” are technical terms in argumentation. They refer to an argument as a whole, not to its component parts. Saying, “That’s a valid statement” makes no sense in arguments, since statements are either true or not true, and validity is not the same thing as truth. Premises and conclusions are true or not true. Arguments are valid or invalid. The following is a valid deductive argument: A bachelor is an unmarried man Jim is an unmarried man Therefore, Jim is a bachelor

The argument is valid because the conclusion follows necessarily from the premises. The first premise is true by definition and the second premise can be known to be factually true or not, depending on whether Jim is, in fact, married (in our example, Jim, the paper

50  Thinking Ethically in Business salesman on the television show, “The Office,” is not married). When both premises are true, the conclusion is true as well. Because the truth of the conclusion follows logically from the truth of the two premises taken together, the argument is valid. In all valid arguments, the truth of the premises is said to guarantee the truth of the conclusion. Valid arguments whose premises are all true are called sound arguments. 4.4.2 Inductive Arguments Inductive arguments are arguments in which the truth of the premises is not said to guarantee the truth of the conclusion, but the conclusion derived from them is likely to be true. Since an inductive argument does not claim to guarantee the truth of its conclusion, it is important to have an index of the reliability of the argument. One such index is the way the argument is constructed. If an argument has a premise that does not bear any clear relation to the conclusion, then the argument is not well constructed, and is called weak. For example, consider the following argument: A laptop was stolen from the office last night Jim has a key to the office Therefore, Jim stole the laptop

Even if both premises are true in this argument, it is a weak argument. The truth or falsity of the conclusion cannot be decided from what is claimed in the premises, since Jim’s legitimate stewardship of the key does not entail his stealing the laptop. However, consider the following argument: A laptop was stolen from the office last night Pam saw Jim leaving the office after dark with something tucked under his arm Therefore, Jim stole the laptop

Even if both premises are true, it is still not enough to prove Jim stole the laptop. The something tucked under Jim’s arm bears no necessary connection to the stolen laptop. However, in terms of reliability, the second argument is stronger than the first. Arguments made in courts of law frequently employ this kind of argument in building circumstantial cases against defendants. If the conclusion were “Therefore,

Thinking Ethically in Business   51 Jim’s activities last night make him suspect with respect to the theft,” the argument would be strong, because the wording of the premises, taken together, makes them relevant to that conclusion. In business, it is important to know the difference between strong and weak, or reliable and unreliable arguments. A weak or unreliable argument does not add anything helpful to a business meeting or to efforts to make a decision. On the other hand, a reliable argument in which premises are relevant to the conclusion can help clarify options in a way that facilitates decision making. 4.4.3 Simple and Complex Arguments By now it is clear that the conventional way to construct an argument is, first, to list premises, then say or write “therefore,” and then say or write the conclusion. The argument is now in “standard form.” Putting an argument in standard form allows its structure to be clearly perceived. SIMPLE ARGUMENT 1. Premise 2. Premise Therefore, 3. Conclusion

For example, suppose the following deductive argument was made by a company manager: 1. Productivity falls when employees are absent 2. On site day care for employees’ children reduces employee absences Therefore, 3. On site day care for employees’ children raises productivity

In this argument, the premises are relevant to the conclusion and the conclusion follows from them, so the argument is well formed. However, are both of the premises true? The burden of proof is on the manager making this argument. In other words, the manager needs to have done background analysis to support these claims. Is data available that shows how absences affect productivity in businesses similar to this one? Is there enough information available about on site daycares’ influence on employee absences to support the second

52  Thinking Ethically in Business claim? If supporting information shows these premises to be true claims, then this is a valid argument. With the results of the background analysis handy, the manager attends an executive meeting. When the conversation turns to increasing productivity, the previous argument is presented, with pertinent supporting details. The others look quizzical. The manager hesitates, then continues: 4. We want to increase productivity 5. On site day care for employees’ children raises productivity Therefore, 6. We should institute onsite day care for employees’ children

The manager has now constructed and presented an argument with the following form: COMPLEX ARGUMENT 1. Premise 2. Premise Therefore, 3. Conclusion 4. Premise 5. Premise Therefore, 6. Main Conclusion

This complex argument is comprised of one deductive and one inductive argument. The manager chose to keep the argument as simple as possible for this particular presentation. However, when asked to flesh out the case for day care for presentation to the board, the manager brought more of the background information into the argument itself. Suppose further that in an effort to improve the argument, the first premise was changed to, 93% of companies with on site day care experience a rise in productivity within one year, according to a comprehensive survey done last year by Business Fortnight.

Now the argument has become a statistical argument. Note that the business magazine, Business Fortnight, like this entire case, is invented. Statistical arguments are inductive arguments, so premises are not taken as guarantees of conclusions. However, 93% of companies

Thinking Ethically in Business   53 showing productivity increases, provides evidence for the manager’s argument. How good is this kind of evidence? How many companies were surveyed? If a thousand companies returned the survey, most statisticians would consider the sample sufficiently large to make the data significant, so the manager might rephrase the premise as, Out of one thousand companies surveyed, 93% that instituted on site day care showed a rise in productivity after one year, according to BF.

Citing the size of the sample makes the claim stronger. However, gauging an argument’s strength is easier when samples adequately represent the population under consideration. In other words, wouldn’t it be helpful to know what kind of companies returned the survey? After all, company characteristics undoubtedly affect survey results. After realizing this, the manager rephrased the premise as, Out of one thousand companies similar to ours in the ways noted in my report, 93% of those surveyed that instituted on site day care showed a rise in productivity after one year, according to BF.

Adding information about “companies similar to ours” and arguing that similar steps taken would have similar results makes the argument analogical as well as statistical. Taking into account as much relevant data as possible makes an argument more and more complex. However, due to changes in a single premise, the argument is now much stronger by far than it was initially. Since the manager’s argument for on site day care depends on the claim that it would increase productivity, a counterargument might claim the cost of day care would offset any rise in productivity it would engender. How might such an argument be constructed? Assume that someone has made a fairly convincing counterargument that constructing a day care facility would cost the company as much as an attendant rise in productivity would engender. After considering the counterargument, the manager replies that planning a day care facility entails a longer term strategy than that of the opposing arguer. Sure, the cost of building a day care facility constitutes a considerable expense in the short run, but look at the ultimate advantages. Using the background data already assembled, the manager argues that the company’s own data show that production was higher when

54  Thinking Ethically in Business services like day care were accessible to employees. In the company’s former location, a day care centre was next door. When the company moved its location to a relatively remote area, productivity fell. Lack of accessible day care is one of the factors that affected that drop, because of the additional burden it creates on parents who must arrange for day care elsewhere, drop off and pick up children at a different location before and after work, and drive to that location when there is an accident or possibility of illness or some other problem involving their child or children. The manager constructed the following argument: When day care was available, productivity was high When day care was unavailable, productivity fell Therefore, Availability of day care positively affects productivity

This is a causal inductive argument. It claims that a certain circumstance caused productivity to fall. However, there is a weakness in this argument that makes it possible to construct a counterargument to the effect that some other factor or factors caused the drop in productivity and that the correlation between productivity and availability of day care is accidental or coincidental. That is why it is important to have relevant background data available and to be able to show how it is relevant by constructing different types of arguments. Having available the information that allowed the manager to construct the statistical and analogical arguments above, makes the causal argument stronger, since that information shows that the correlation is not merely coincidental. In arguing for an on site day care facility for children of company employees, the manager has used causal, statistical and analogical inductive arguments. Notice that it is not possible or necessary in every case to include all of the background data in the argument when it is put into standard form. The manager’s explanation of time demands on working parents is not, strictly speaking, part of any of the constructed arguments. Sometimes explanations of why certain circumstances came about or how certain courses of action might improve them are more effective tools for influencing policy than are arguments. However, understanding the elements of construct-

Thinking Ethically in Business   55 ing good arguments is indispensable for organizing material, making good presentations and avoiding common fallacies—one’s own or someone else’s.

4.5 Fallacies Fallacies are flawed arguments. Fallacious deductive arguments are invalid, and fallacious inductive arguments are weak, because something is wrong, either with the form of the argument, or with the content of the claims being made. Consider the following argument: Whales are mammals Seals are mammals Therefore, Whales are seals

Almost everyone who encounters this argument knows intuitively that it is invalid, although the reason it is invalid (the class word “mammal” is “undistributed”) is expressed in technical terms. Even without the technical explanation, one can intuit that the argument is invalid because it has all true premises, yet results in a false conclusion. Remember the definition of a valid argument is an argument in which the premises successfully guarantee the truth of the conclusion. Since the true premises in this argument did not lead to a true conclusion, it clearly fails. In a similar way, people encountering the following argument, All warm-blooded animals are mammals Whales are warm blooded Therefore, Whales are mammals

know intuitively that it is deductively valid, because the descriptive phrase “warm blooded” is part of the definition of both the class word “mammal” and the species word “whale.” In this argument, the true premises are the reasons why the conclusion is true, and thus the truth of the two premises guarantee the conclusion. In business, certain kinds of fallacious reasoning are common. We will mention a few here, although more than a hundred fallacies have been noted by logicians and historians. (Fischer, 1970). For example, the following argument commits a kind of statistical

56  Thinking Ethically in Business fallacy that is frequently made, especially in economic forecasting. It argues that because something characterizes a relatively small area or population, it will also characterize a large area or population. It is called a “biased sample.” Theft of computers from offices showed a marked increase in Scranton, Pennsylvania Therefore, Theft of computers from offices is on the rise all across Pennsylvania

Other fallacies commonly committed in business contexts include the following: Equivocation is a fallacy that occurs when using one word in two or more ways within the same argument, without specifying which meaning is meant. For example, one might see the word “profit” used in one part of an argument that indicated “gross profit” was the reference, and then without specifying later in the argument, use the term to refer to “net profit.” Fallacy of accent occurs whenever someone intentionally or unintentionally misplaces the emphasis on a part of someone else’s claim. For example, take the following argument: A Chief Executive Officer should always consider the welfare of investors Therefore, It is fine to disregard the welfare of everyone else

Ad hominem fallacies occur whenever one argues that something is true or false based solely on the character or circumstances of the arguer. An example would be, That manager is generally disliked in our region; therefore, we should disregard his comments.

Appeals to force occur when someone substitutes a threat of force for premises. One example of this type of mistake: If you release that memo questioning the practices of our accountant, you’ll be fired!

False analogy is a fallacy in which two items are compared due to their numerous similarities but upon inspection, it turns out that the

Thinking Ethically in Business   57 two items also share an important dissimilarity, so the comparison is weak: Take the following for example: The missing laptop measured approximately 10 X 10 X 1 inches The thing Pam saw under Jim’s arm looked to be approximately 10 X10 X 1 inches Therefore, the thing under Jim’s arm must have been a laptop

False dichotomy is probably one of the most common and damaging fallacies in business decisions. In these cases, the arguer erroneously assumes that there are only two alternatives, when really there are more than two. The arguer also assumes that one of the two is the right one, when in fact, it might be the case that both of those alternatives are wrong, or there is some third alternative that is the right one, or even that both of the two alternatives are right in different contexts. Take the following for example: Low productivity is caused by a sluggish economy or it is caused by lack of day care. The economy is sluggish. Therefore, low productivity is not caused by lack of day care

Here is another false dichotomy: Either Jim had a box of dark chocolates under his arm or he had a laptop under his arm. Jim had a box of dark chocolates under his arm Therefore, Jim did not have a laptop under his arm.

Good arguments form the basis for one’s business decisions, but before acting on one’s decisions, one must determine whether such actions would be ethical. The next chapter provides the tools for carrying out evaluation of one’s decisions.

Chapter 5: Ethics and Business Decisions

In weighing pleasures against pleasures, one must always choose the greater and the more; in weighing pains against pains, the smaller and the less; whereas in weighing pleasures against pains, if the pleasures exceed the pains, whether the distant, the near, or vice versa, one must take the course which brings those pleasures, but if the pains outweigh the pleasures, avoid it. (Protagoras 356b; Plato, 1980)

5.1 Introduction: Taking Ethics into Account After reading Chapter 4, you should understand why it is important to be able to formulate and present good arguments and to understand the arguments of others. In business, recommendations based on conclusions to arguments frequently provide the basis for decisionmaking. Making good decisions in business involves understanding how arguments provide or fail to provide reasons for choosing one course of action over another, or instituting one policy over another. However, understanding how to present coherent proposals and knowing how to choose among several well presented recommendations is only part of what it takes to make good decisions in today’s competitive marketplace. Even though the ability to grasp whether an argument has informative, verifiable premises that are relevant to its conclusion is an invaluable business skill, it is not the only skill you will need if your goal is to excel at doing business. To put it another way, understanding arguments is a necessary condition for knowing how to make the best possible decisions, but it is not a sufficient condition. Decision makers from executives and managers to supervisors at every level need to have another indispensable ability. Can you think what it is?

Thinking Ethically in Business   59 While an understanding of the logic of argumentation is a vital element for making decisions, that understanding does not, by itself, provide an ethical foundation for those decisions. Anyone in a decision making position in business should be able to both distinguish good arguments from bad ones and be able to determine whether or not actions recommended on the basis of the conclusions of those arguments are ethical actions. In other words, in business, as in other walks of life, a person needs to develop judgment. Judgment is necessary because it is possible for an argument to be technically sound and appropriate within an insular context, but inappropriate in a wider context. For example, in Chapter 2, you learned that economist Milton Friedman makes a good argument in the context of investor risk that stockholder interests subsume all others. However, you also learned in Chapter 3 why, in a wider context that takes the health of an entire community into consideration, recommendations for action that ignore other kinds of risk can lead to poor decision making. It is also possible to make a good argument for a policy that makes sense in an ordinary context, but makes no sense under extraordinary circumstances. For example, a certain area of a firm contains confidential records of clients, so access is restricted. However, when smoke from a boiler room explosion causes a clerk to pass out, unauthorized employees who enter the area to pull him to safety should not be penalized. Developing the kind of judgment that enables one to make decisions in cases of competing stakeholder interests, or in extraordinary circumstances, or in cases where policies of companies are being formed or reformed to include good standards of practice takes effort, experience and a desire to contribute to a principled working environment. That effort, in turn, may contribute to the development of moral strength in the individuals who participate in it. Becoming acquainted with several classical ethical theories is one way to begin the process of taking ethics into account. Comparing theories provides a beginning point for developing judgment, since theories attempt to explain the universal, fundamental characteristics of something—in this case, of behaving ethically. .

60  Thinking Ethically in Business While you are familiarizing yourself with the following classical theories, keep these questions in mind: (1) is there a way to evaluate argument-based recommendations to a company’s decision makers in terms of ethics? (2) is it likely that a procedure for ethically evaluating decisions would increase the chances for business outcomes that optimally serve both company and community?

5.2 Ethical Egoism Ethical egoism is a theory based on a principle called Consequentialism. Consequentialism is the principle that ethical actions should be chosen on the basis of their projected effects—that is, on their consequences. According to ethical egoism, those actions should be chosen that will likely have effects that represent what is best for oneself. In business contexts, “oneself” is taken to refer to the company, not to one individual decision-maker. Stockholder Theory is usually understood to be supported by an ethically egoistic theory. Since “oneself” is taken to be the company, and the company is defined as owners and investors, then the principle of maximizing stockholder profits exemplifies acting in a way that is best for oneself. Why is this idea considered ethical at all, since it seems to represent plain self-interest? Recall from the beginning of chapter 2 and 2.5 that Adam Smith, in his Wealth of Nations, posited an “invisible hand” that guided the effects of laissez-faire capitalism toward creating wealth—or benefits—for everyone. This idea still has considerable currency among many who believe that creating optimal conditions for businesses to flourish creates wealth that “trickles down” to everyone. 5.2.1 Restricted Egoism Ethical egoists who promote adherence to the laws under which a company operates are called “restricted egoists,” since laws can entail certain restrictions on a company acting in its own interest. Restricted egoism, in fact, can look so different in practice from

Thinking Ethically in Business   61 plain ethical egoism that it forces recognition of the power legal systems have to colour and shape corporate policies. This is especially true when companies operate in several different countries. For example, consider the insurance giant AIG. AIG was founded in 1919 in Shanghai and is now based in New York. It employed in 2008, 116,000 people in more than 100 countries (BBC News, 2008). Imagine how the laws of over 100 different nations, not to mention local laws and ordinances, change the shape of corporate practice for multinational enterprises like this one. Moreover, companies like this one can become so integrally part of international finance that governments feel they cannot afford to let them fail.

5.3 Utilitarianism Another consequentialist ethical theory, perhaps the most wellknown, is a form of Social Hedonism called Utilitarianism. Hedonism is the view that benefit or pleasure should be the guiding principle for taking action. Social hedonism takes an action’s possible benefits— and harms—to all interested parties into account. Utilitarianism is that form of Social Hedonism that attempts to discover, in a given case, which actions would likely maximize benefits for the greatest number of people involved, while doing the least harm. Although versions of social hedonism go back as far as the ancient Greek philosopher Plato (see the quote at the beginning of this section), the first modern formulation of Utilitarianism is usually credited to early 19th century British economist Jeremy Bentham. Philosopher John Stuart Mill, the son of Bentham’s friend, James Mill, improved Bentham’s formulation. It is Mill’s version that is most often practiced in business today, most notably in medical fields and in public policy. 5.3.1 Bentham’s Hedonistic Calculus Jeremy Bentham was a social reformer. He was interested in finding a way to maximize the beneficial effects of actions for the largest possible number of people, while minimizing harmful effects. To

62  Thinking Ethically in Business that end, he wanted to develop a theory that would provide a “decision procedure” for public policy makers. In other words, Bentham’s point of view derived not from considering what an individual ought to do out of self interest, but from what would maximize benefits for the general population. For more on his life and work, click here. According to Bentham, because all sentient creatures are capable of feeling pleasure and pain, all sentient creatures are worthy of regard. His brand of Social Hedonism is comprehensive as well as egalitarian. The economic theory perhaps most closely aligned with his ethical theory is one with a broad conception of “stakeholder,” like Lepineux’s (discussed at Chapter 3.2.1), since clearly, for Bentham, all of civil society (and beyond) are parties who may be affected by business practices. Bentham claims that the only real good is pleasure. Moreover, the only real evil is pain, according to him. Therefore, in order to choose rightly when faced with several different ways to act, one should separately consider each potential act. For each potential act, one should calculate as accurately as possible, taking all concerned parties into consideration, what the consequent amount of pleasure or pain would be that would result from the act. The method Bentham devises for determining those consequences is called the “hedonistic calculus.” For businesses, applying the hedonistic calculus involves figuring out as accurately as possible what beneficial, or harmful, consequences will follow from company actions, taking all stakeholders into consideration. After determining beneficial consequences, the possible harmful consequences are figured. Finally, harmful consequences are subtracted from beneficial consequences. This is a simplified version of Bentham’s theory (Bentham, 1948). According to utilitarian social economics, applying the hedonistic calculus makes it possible to figure out how to choose actions that maximize the quantity of pleasure (benefit) for the greatest number of stakeholders and while minimizing the quantity of pain (harm) for those same stakeholders. The comprehensive, egalitarian character of this theory has a strong appeal for many. However, the calculus as Bentham formulated it failed to take several important factors into account. In an attempt to

Thinking Ethically in Business   63 salvage the theory, John Stuart Mill made several emendations. 5.3.2 Mill’s Improved Theory: Eudaimonian Utilitarianism John Stuart Mill’s father was Bentham’s friend, so young John Stuart grew up under the influence of utilitarian ideas. He was well placed and temperamentally inclined to weigh the virtues of the theory against its defects. Mill’s first improvement of the calculus was to emphasize happiness rather than pleasure. His version is called “Eudaimonian Utilitarianism,” since eudaimonia, a Greek word, is often translated as “happiness.” For more detail about Mill’s life and his work, see here. Replacing “pleasure” with “happiness” improves the theory of utilitarianism in two ways. First, since “pleasure” usually refers to immediate feelings whereas “happiness” connotes a state of well-being that persists over an extended period, one is better able to assess the potential consequences of actions, including long term consequences. For example, Mill’s version of Utilitarianism requires that company decisions that affect employees are made in a way that takes those employees’ entire working lives into account. In Mill’s day, this did not seem to be an unreasonable burden to place on businesses, since companies often stayed in a location for generations, and generations of employees spent their working lives contributing to those companies. Today, assessing beneficial effects on employees’ working lives is more likely to be construed in terms of opportunity for advancement, workplace health and safety, benefits including employer contributions to retirement accounts, and so forth. Second, since “pleasure” usually refers to sensations whereas “happiness” connotes a wider range of experience, Mill’s version of Utilitarianism provides greater opportunity to consider effects of different kinds, including consequences that impact people on more than one level. Using Bentham’s method, it is possible to calculate benefits so that a large number of relatively insignificant “goods” outweigh one or several important “evils.” In other words, it is possible to skew the data so that results do not reflect or predict probable consequences in

64  Thinking Ethically in Business terms that matter to affected parties. Mill, however, recognized that benefits (or harms) may not all have the same quality. That is, benefits (or harms) can be qualitatively different from each other. One way to understand the concept of qualitative difference is to distinguish between intrinsic and instrumental goods. Intrinsic goods are those things that are valued as “good in themselves,” without reference to anything else. Instrumental goods are those things valued because they are connected in a causal way to associated goods, such as good consequences. For example, being healthy is generally considered to be an intrinsic good. On the other hand, a policy that contributes to company growth is considered to be instrumentally good by that company’s owners, since it maximizes profits. However, what if following the policy requires cutting corners so that workplace safety is jeopardized? For Mill, the intrinsic good of promoting human health is a qualitatively greater value than the instrumental good of maximizing profit. Occupational health and safety laws instantiate evaluations of “benefit” that reflect Mill’s ideas: they recognize that health is an intrinsically valuable ingredient of human happiness.

5.4 Problematic Consequences of Consequentialist Theories As a consequentialist theory, Eudaimonian Utilitarianism can be an effective tool for analyzing assumptions about the nature of that good called “happiness.” It provides a way to theoretically balance potential results of actions on the basis of that analysis. However, it has certain limitations that it shares with other consequentialist theories. One of the best known critics of utilitarian ideas is 19th century Russian writer, Fyodor Dostoevsky, who satirized rational egoisms in several novels. For Dostoevsky, utilitarian ideas presented moral questions as problems that could be solved by mathematical calculations. Moreover, these “solutions” could have tragic consequences, like those he imaginatively portrays in his books. See Appendix A for an example. Historically, slavery, “ethnic cleansing” and other horrors have been justified on grounds that some have construed as utilitarian.

Thinking Ethically in Business   65 However, recall that Bentham was concerned with the well being of all sentient beings. There is no doubt that neither he nor Mill would have condoned the use of their theories to promote injustice, yet it can be argued that these theories lend themselves to such uses due to an intransigent weakness in consequentialism. Because consequentialism focuses solely on measurable effects of actions, it does not take into account culturally important, but immeasurable, concepts like freedom, justice, rights and duties. In the context of doing business, this constitutes a stark limitation, since, as you saw in Chapter 1, immeasurable concepts like obligation and reputation are grounding principles that make business transactions possible. They are conditions for, not results of, business activity. Without them, there would be no “art of the deal.”

5.5 Right Action Oriented Ethics: Kant’s Duty Ethics Immanuel Kant, an 18th century philosopher born in Konigsberg, Prussia , formulated a theory of ethics that has come to be called Duty Ethics. What follows is a simplified version of Kant’s ethical theory. For more detail about Kant’s life and work, click here. For more detail about the specifics of Kant’s ethical theory that goes considerably beyond what is presented, click here to see British philosopher Jonathan Bennett’s translation into contemporary English, Kant’s Groundwork for the Metaphysics of Morals. For an interesting commentary on Kant’s ethical theory, click here. The term “duty” in the name Kant’s “duty ethics” refers in this context to our duty to choose the morally correct action. This is a much more technical and limited sense of the word than the way it was used in the first chapter with reference to a variety of obligations and responsibilities. Kant’s Duty Ethics constitutes an attempt to provide a method for evaluating decisions in terms of ethics that avoids the weaknesses of consequentialist theories. Toward that end, he develops a method for ethically evaluating contemplated actions that takes elements other than assessment of potential effects into account. Because his decision procedure is not based on analyzing the possible effects of

66  Thinking Ethically in Business actions, it is called “nonconsequentialist.” According to Kant, certain actions are wrong actions even if they result in good effects for a majority of interested parties. This is because his ethics are based on respect for the rights of others as well as on the belief that some acts are inherently right or wrong regardless of their consequences. Utilitarian theory and Kantian theory are both egalitarian in their view that every individual ought to be taken into consideration. However, whereas utilitarians base their egalitarianism on sentience, Kantian theory, by contrast, holds that every functional adult human being is intrinsically valuable because that individual has the ability to act morally. For Kant, because functional adult humans can decide for themselves how to act, no human should be used solely as a means to another human’s goals. Furthermore, Kant holds that the ability to act morally entails a duty to act morally. That is, having the capacity to choose moral actions engenders the obligation to so choose. However, since Kant’s theory rejects projected consequences of actions as sole determinants for deciding how to act, what does it supply instead as a basis for making ethical decisions? In simplified form, Kant’s argument is basically this: all rational beings are autonomous beings capable of making their own moral choices; as such, they should not be forced to act against their own moral choices. Therefore, do not attempt to force them to act against their moral choices, since forcing them to do so would be to act in a way that is itself immoral. Sometimes Kant’s insight here is formulated in the following way: Act always in such a way that one does not exploit another rational being (e.g., another stakeholder) solely as a means to one’s own gain.

Notice that Kant’s reasoning takes a proscriptive form: it states what should not be done. Because they intend to help decision makers avoid the pitfalls of unethical choices, ethical formulations are frequently expressed in negative terms. There are many examples of this, from the famous eight word summary of the Wiccan Rede, “An’ ye harm none, do as ye will” (click here for internet source of quotation)

Thinking Ethically in Business   67 to the much longer World Medical Associations’ Declaration of Geneva (an updated version of the Hippocratic Oath), part of which states, “I will not use my medical knowledge to violate human rights and civil liberties, even under threat.” (click here for internet source of quotation) Such proscriptions are stated in general terms because they are intended to be guiding principles that can be invoked in widely varying circumstances. By knowing what not to do, one reduces the field of potential choices. It may not always be clear what the best course of action would be, but it is generally fairly clear whether or not a given course of action would be unethical, upon applying Kant’s formula or any number of other ethical prescriptions. Both stakeholder and stockholder management theorists can use Kant’s theory to support their management theory, but not surprisingly, they emphasize different elements of Kant’s approach. To take one example, recall R. Edward Freeman’s stakeholder theory discussed in chapter 3. Freeman’s theory is based on Kant’s claim that no autonomous being should be used solely as a means to another. In this way, stakeholder theory supports its view that stockholders’ should not use other stakeholders merely for their own gain. (For an example of a stockholder use of Kant’s theory, see the note on Younkins in Appendix A.) 5.5.1 Limited Scope of Both Kant’s Duty Ethics and Utilitarianism It is clear that Kant’s non-consequentialist theory takes an entirely different approach to evaluating moral decisions than utilitarians do. However, there is a limitation that Kant’s theory shares with consequentialist theories. Both Kant’s Duty Ethics and Utilitarianism have limited their scope entirely to the evaluation of acts. Much business activity, however, follows directly from the character of individual decision makers. One’s character has a significant influence on the way in which one interprets the context out of which decisions are made. Thus, both the particular acts that are chosen for evaluation as well as the manner in which they are evaluated will be greatly

68  Thinking Ethically in Business affected by the kind of character the decision-maker has. If executive officers at Enron or Arthur Anderson or Lehman Brothers, to name just a few, had had different characters, they no doubt would have interpreted their situation entirely differently, and those three corporations might still be in existence today. An ethical theory which takes character into account is called Virtue ethics.

5.6 Character oriented Ethics: Aristotle’s Virtue Theory The virtues are implanted in us neither by nature or contrary to nature: we are by nature equipped with the ability to receive them, and habit brings this ability to completion and fulfilment. (Nicomachean Ethics 1103a25) Virtue ethics theories focus more on character rather than on single acts. One of the most well-known versions of virtue ethics theory was developed by the Greek philosopher, Aristotle. For more on Aristotle’s life and work, click here. You have already encountered the Greek word eudaimonia in the discussion of Mill’s utilitarian ethical theory. Aristotle was also interested in happiness. However, for him happiness is a state of being toward which one aims, not a variable in a formula for assessing consequences of actions. For Aristotle, living a happy life—or, what some translators call “flourishing”—is the purpose of human endeavour. Aristotle claims that achieving a life of happiness is attained through practicing virtuous living. That is, when one is living virtuously, one is happy. Happiness is intrinsically related to virtuous action so that they become, in effect, inseparable. In other words, when someone is being brave or behaving honourably or practicing generosity or engaging in any other virtuous activity, that individual is happy. Conversely, when someone is being cowardly, or practicing treachery, or succumbing to greed or any other vicious activity, that individual cannot be happy, according to Aristotle.

Thinking Ethically in Business   69 5.6.1 Virtue as the Mean Between Extremes Aristotle describes certain virtuous actions as a mean between two extremes. The extremes can be thought of as excess and deficiency. For example, courage represents a mean between the excess of rashness and the deficiency of cowardliness; equanimity represents a mean between the excess of irascibility and the deficiency of apathy; generosity represents a mean between the excesses of a wastrel and the deficiencies of a tightwad, and so forth. There are certain important virtues that do not follow this pattern. For example, honesty is a virtue that does not represent a mean, since one cannot be excessively honest. Similarly, but with respect to vice, one cannot be deficiently adulterous, since, for Aristotle, the vice of adultery is always wrong. However, in many cases virtues can be thought of as means between two extremes, so that the cultivation of a habit of moderation is seen as a good thing for the development of virtue in an individual. Since different individuals have different traits, predilections and tastes, self-knowledge is indispensable for deciding what kind of excesses and deficiencies one has, so that one can work toward “moderating” them. For example, suppose Winston is a natural born performer who enjoys public speaking. Brian, on the other hand, feels nauseated at the prospect of addressing a group. When Brian stands up to speak his mind, he is acting courageously, since he is inculcating in himself the habit of overcoming his fear. When Winston does so, he is enjoying himself—in terms of virtue, nothing is gained or lost. For Aristotle, practice and imitation of worthy models are ways to help develop oneself as a virtuous person. The more brave acts one performs, the braver one becomes. The more brave people one regularly encounters, the more likely it is that through emulation of them, one will also become brave. In a similar manner, but with respect to vice, constant exposure to corrupt behaviour encourages the development of corrupt attitudes and actions. In a way, business environments are an optimal staging ground for experiencing the practical manifestations of Aristotle’s theories, since

70  Thinking Ethically in Business an employee is, in most situations, formally and informally “trained” into a position through imitation and practice. Corrupt practices run the gamut from, for example, any manufacturer who chose to sell supplies to Hitler to those who regularly steal paperclips from the office. Virtuous practices setting examples for employees also run the gamut from NGOs such as “Doctors without Borders” who choose lower executive compensation to increase their income used for eleemosynary purposes, to Bill and Melinda Gates Foundation, to Milton Friedman’s own non-profit organization begun in his retirement. One’s choices will determine possibilities for a life of happiness. 5.6.2 Is Virtue Ethics practical? Virtue ethics elucidates the need for development of the kind of character that, over time, will enhance one’s ability to recognize what is needed in a given situation. Developing moral virtues helps one become a better leader, since the ability to make appropriate decisions depends on an understanding of the importance of the meaning of “benefit.” It is sometimes maintained that virtue theory is not as useful as other theories because it does not emphasize decisions that lead to one single act. However, it can be argued that virtue theory is a preeminently practical theory in that it advocates practicing virtue—that is, it encourages the development of habits that result in the development of characteristically virtuous activity (Annas, 2004). After all, without a virtuous character, how would it be possible to perform the ethical analyses of Bentham, Mill, or Kant, since they presuppose a practical understanding of what is good? Without a virtuous character, how could one begin the assessments concerning consequences of actions that would lead to the best outcome for the maximum number of people, since understanding what that outcome would look like presupposes a practical understanding of what is good? Without a virtuous character, how could one figure out whether a given action would benefit stakeholders, since understanding what “benefit” entails in a given case presupposes a practical understanding of what is good?

Thinking Ethically in Business  71 5.7 Limit and Application of Ethical Evaluation Ethical perspectives are not intended to provide templates for action in particular situations. For one thing, many problematic situations lend themselves to a variety of solutions. In other cases, it may be easier to identify improper actions than to effect appropriate remedies for the circumstances that made them possible. In fact, some ethicists hold that ethical perspectives are most useful for avoiding improper actions and that their usefulness for guiding good actions is more limited. However, familiarity with these three major ethical theories will give one the necessary frameworks to ethically evaluate any recommendations stemming from conclusions to arguments advanced by corporate advisors or managers. Recall our earlier example in which arguments pro and con were advanced for building an on-site day-care centre for children of employees. How might familiarity with ethical theories contribute to a discussion of the ethical merits of the case for or against building the centre? Consider, for example, the following questions: Which ethical theory, if put into practice, would require figuring out long term consequences for all interested parties? Would the building of the day-care centre maximize benefits over harms for all stakeholders? Although it is obvious that a day-care centre would benefit employees with children, could it be argued that it might disadvantage employees without children, since their share of the cost of building the centre would constitute a diminution of income? Which ethical theory, if put into practice, would entail figuring out whether building the centre would violate anyone’s rights or would constitute injustice toward anyone? Would the proposed action lead to one group of stakeholders being used for the benefit of other stakeholders? Which ethical theory, if put into practice, would constitute an analysis of the problem in terms of intrinsic and instrumental values? What would those values be, in the case of arguments pro and con building a day-care centre?

72  Thinking Ethically in Business Can a convincing argument be made that a day-care centre would contribute to character development? Can a convincing argument be made that a day-care centre would (or would not) contribute to the happiness of all stakeholders?

Two general guidelines emerge out of these major ethical theories. Hopefully, you have been considering how they might apply to making actual decisions. First, if an action or policy cannot be supported by any of the ethical theories discussed above, in all probability that action or policy should be rejected as unacceptable. Secondly, and conversely, if an action or policy is supported by most or all of the ethical theories discussed above, then, prima facie, that action or policy is, in all probability an acceptable action to take. However, in the final analysis, these two general guidelines are not enough. There is no template with a finite list of rules or principles or “decision trees” that can guarantee the right decision. (There have been many attempts at constructing “decision trees,” so see Appendix B for an illustration). In order to make the best decisions, and importantly, to recognize bad decisions, one must exercise judgement. Developing judgment in business contexts sometimes takes years of experience in a given sector, industry, field or practice. Taking ethics into account when considering company plans will contribute to an individual’s ability to weigh potential benefits against potential harms for all stakeholders. Disagreeing with decisions or policies in the presence of pressures created by company hierarchies can sometimes take a great deal of moral courage. However, by taking a stand when necessary, individuals create in themselves a personal tradition of ethical action. The strength of character such a tradition can help create will be a pivotal element for facing the challenges of creating economic systems in which companies can compete in socially responsible ways. So, take your vitamins!

Appendix A: Sources and Resources This appendix begins with a list of the works cited in the text, followed by a list of other resources on selected topics, keyed to the section in which they were discussed.

A.1 Works Cited Annas, J. (2004) ‘Being Virtuous and Doing the Right Thing’. Proceedings and Addresses of the American Philosophical Association, 78 (2): 61–75. Professor Julia Annas, philosopher at the University of Arizona, gave this address when she was President of the Pacific division of the American Philosophical Association. BBC World News online report, no author given. (2008) ‘US Government Rescues Insurer AIG’. BBC World News Business Section, published Wednesday, 17 September, 2008. Available from: http://news.bbc.co.uk/2/hi/business/7620127.stm [Accessed October 4, 2008]. Beauchamp, T. L. (Ed.). (2004) Case Studies in Business, Society, and Ethics. Pearson, 72–76. Professor Tom L. Beauchamp is a philosopher at Georgetown University, in Washington, DC, and Senior Research Scholar at the Kennedy Institute of Ethics. Bentham, J. (1781, 1948) An Introduction to The Principles of Morals and Legislation. New York: Hafner Press. British economist and social reformer Jeremy Bentham constructed a complex calculation for his utilitarian decision procedure. This handbook presents a simplified version. For an internet source of the complexities of the calculus, including intensity, duration, proximity, and certainty of possible actions, see http://utilitarianism.com/jeremy-bentham/ index.html.

74  Thinking Ethically in Business Brink, D. (1989) Moral Realism and the Foundations of Ethics. Cambridge: Cambridge University Press. Professor David Brink is Chair of the philosophy department at the University of California, San Diego and Director of the Institute for Law and Philosophy. Burton, F. et al, China: Guanxi and Corporate Security.(2008) Stratfor, [Internet]. Strategic Forecasting, Incorporated Available from: www.stratfor.com [Accessed 16 January 2008]. Dostoevsky, F. (1866) Coulson, J. (Trans.). Gibian, G. (Ed.). (1989) Crime and Punishment. New York: W.W. Norton. In this novel, Dostoevsky’s character, Raskolnikov, is portrayed as falling prey to making a utilitarian decision that led to murder. Economist Intelligence Unit. (2007)‘Global Business Barometer Survey on Corporate Responsibility’. [Internet] Economist. com. Available from: www.economist.com/markets/indicators/ displaystory/.cfm?id=1106652 [Accessed on June 14, 2008]. The Economist Intelligence Unit is a research and advisory firm with more than 40 offices worldwide, with a stated mission “to provide executives with authoritative analysis and forecasts to make informed global decisions” See their website at http://www. eiu.com. This global online survey was conducted in NovemberDecember 2007, and provides data from over 1,000 corporations. Epictetus. White, N. Trans. (1992) Handbook of Epictetus (#44). Indianapolis: Hackett. Fischer, D. H. (1970) Historian’s Fallacies. New York: Harper and Row. David Hackett Fischer is University Professor and Earl Warren Professor of History at Brandeis University. Freeman, R. E. (2001) ‘A Stakeholder theory of the Modern Corporation’. In: Snoeyenbos, M. et al. Eds. Business Ethics, 3rd ed. Amherst, NY: Promethues Books: 101–114. Friedman, M. et al (1962) Capitalism and Freedom. Chicago: University of Chicago Press. Available from: http://www.ditext. com/friedman/title.html [Accessed May 27, 2008]. Lepineux, F. (2005) ‘Stakeholder Theory, Society, and Social Cohesion’. Corporate Governance: 5 (2): 99–110, quote at 101. King, C. S. (1969, 1993) My Life with Martin Luther King, Jr., rev.

Thinking Ethically in Business   75 ed. New York: Henry Holt and Company, 93. O’Neill, O. (2004) ‘Accountability, Trust and Informed Consent in Medical Practice and Research’. Clinical Medicine 4 (3): 269– 276, esp. 272. Baroness Onora Sylvia O’Neill of is a member of the British House of Lords and a professor of philosophy at the University of Cambridge. Plato. Guthrie, W. K. C. Trans. Hamilton, E. et al (Ed.) (1980) Protagoras in The Collected Dialogues of Plato. Princeton: Princeton University Press. Rainbolt, G. W. (2000) ‘Perfect and Imperfect Obligations’. Philosophical Studies, 98: 233–256, quote at 243. Professor and Chair of the philosophy department at Georgia State University, George Rainbolt is an American philosopher who points out in this article that the distinction between perfect and imperfect duties has been drawn in at least nine different ways. Smith, A. (1776) The Wealth of Nations. Book One, Chapter 2. Available from: http://www.bibliomania.com/2/1/65/112/frameset. html. [Accessed October 4, 2008]. Tao Teh Ching Comparison Project (2008) Tao Teh Ching Comparison Project Chapter 60, Sentence 1 Bryn. [Internet] St Xenophon Library. Available from: http://wayist.org/ttc%20compared/ chap60.htm#top [Accessed 18 July 2008]. Twain, M. (1970) Man is the Only Animal that Blushes or Needs to: The Wit and Wisdom of Mark Twain. New York: Random House. Younkins, E. (1997) Stockholders as Stakeholders. The Freeman: Ideas on Liberty [Internet], April 1997. Available from: http:// www.fee.org/vnews.php?nid=3743. [Accessed March 21, 2004]. Professor Edward Younkins, a contemporary stockholder theorist, cites Kant’s duty ethics for support of his stockholder management theory. Younkins argues that all stakeholders are autonomous beings, thus are responsible for making their own choices. As long as no one is forced to be a stakeholder, then it can be assumed that all stakeholders are voluntary participants. Corporations then are not responsible for their welfare. For more on his view, see http:// www.wju.edu/academics/bus/iscm/Younkins.asp

76  Thinking Ethically in Business A.2 Other Resources The following articles and websites are places to go for more advanced information about some of the concepts and topics introduced at a more elementary level in the text. The resources listed below are keyed to the section to which they refer. Section 2.6 Ethically Resolving Conflicts in Business Decisions. 1.  For theoretical discussion on the resolution of conflicts, consider John Rawls’ concept of “reflective equilibrium” discussed in, for example, http://plato.stanford.edu/entries/reflective-equilibrium/. 2.  For information about companies whose management taps into creativity and resourcefulness needed to develop ethical, sometimes even beneficial, methods of negotiating conflicts, see for example:   Vermont-based U.S. company, Seventh Generation, who claims on its webpage to be “committed to becoming the world’s most trusted brand of authentic, safe, and environmentally-responsible products,” taking its name from the Great Law of the Iroquois Native Americans that states, one “must consider the impact of our decisions on the next seven generations.” Available from: http://www.seventhgeneration.com/about.   For a long list of investment companies and financial professionals who take ethical factors into consideration before choosing investments, see the Social Investment Forum (SIF). Available from: http://www.socialinvest.org/about/ and http://www.uksif. org/uksif. Section 3.2 Parameters of “Stakeholder”: 1.  For more recent work since R. Edward Freeman’s initial publications on stakeholder theory, see the following: a. Freeman, R.E. et al, (2003) ‘What Stakeholder Theory is Not’. Business Ethics Quarterly, 13 (4): 479—501 b. Freeman, R.E. (2007) Managing for Stakeholders: Survival,

Thinking Ethically in Business  77 Reputation, and Success. New Haven: Yale University Press. c. Kaler, J. (2003) ‘Differentiating Stakeholder Theories’. Journal of Business Ethics 46: 71—83.

2. For two among many cases where some of the most dramatically affected stakeholders were unaware that they were being negatively affected by a corporation’s practices (called “unorganized stakeholders”), see for example: a. Oklahoma, U.S. based plutonium fuels production plant KerrMcGee’s failure to handle employee and community safety issues surrounding its plutonium plant, notably detailed in the movie Silkwood, named for the employee who worked to bring company negligence to public attention. Available from: http://www.pbs.org/wghb/pages/frontline/shows/reaction/interact/silkwood.html. [Accessed 29 July 2008]. b. Read about the “Love Canal” neighbourhood development situated on a known chemical dump sold by Hooker Chemical and Plastics Corporation in upstate New York, U.S. Available from: http://www.epa.gov/history/topics/lovecanal/01.htm. [Accessed 29 July 2008]. Section 3.2.1 Distinguishing Types of Stakeholders Rubrics have been proposed to help managers classify stakeholders, in order to facilitate taking their myriad points of view into account. Some have proposed that stakeholders be classified in terms of both importance and influence, but recent stakeholder theory frowns on rubrics that have only two criteria (called binary or dichotomous rubrics). For an example that offers a threefold analysis in which stakeholders are classified according to their degree of power, legitimacy, and urgency, see: Mitchell, R. (1997) ‘Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts’. The Academy of Management Review. 22 (4), esp. 874—879. Ronald Mitchell of the University of Victoria has developed, with

78  Thinking Ethically in Business two colleagues, Bradley Angle and Donna Wood, a threefold typology that managers could employ when to adjudicate among stakeholders in terms of power, legitimacy, and urgency. Available from: http://www.jstor.org./stable/259247. [Accessed 6 June 2008.). Section 4.3.2 Claims That are True by Definition: For more information about the nature of identity statements, see Black, M. et al (Trans. and Ed.)(1980) ‘On Sense and Reference’. Translations from the Philosophical Writings of Gottlob Frege (3rd ed.). Oxford: Blackwell. Kripke, S. (1980) Naming and Necessity. Cambridge, MA: Harvard University Press.

Appendix B: Charts B.1 A Sample Decision Tree Decision trees are diagrams used to mechanically determine a course of action by taking into account known or predicted consequences and desired or expected results. Decision trees provide one means for figuring out how to reach a goal or recommend an action. While decision trees can be useful for initial strategizing, they are insufficient for actually determining what one’s decision will or should be. This is because the tree, by its nature, can only take into account a limited number of factors. Making actual decisions, of course, always involve an indefinite number of factors in unique circumstances. Thus, one should feel free to use a decision tree for a first step of analysis, but not rely on it for one’s ultimate recommendation to act. To use the tree, begin with a proposed action. That is, begin by considering a recommendation to take a certain action. Then follow the questions on the tree to see whether that proposed action is ethically viable. The tree on the next page was constructed by the author purely for illustrative purposes and is not intended as a recommendation for strategic business decisions.

Business Ethics Decision Tree S.L.Dwyer 08/08

Sample Decision Tree

Is the recommended action legal?

NO

YES

Is the law prohibiting it an immoral law?

Maximize utility for major stakeholders?

NO

NO

YES

Don’t do it

Maximize profits in the long run?

Maximize profits in the long run?

YES

Satisfy ethical aims of the corp?

NO

Don’t do it

YES

NO

Comply with prima facie duties?

Comply with prima facie duties?

NO

NO

Don’t do it

Don’t do it

NO

Don’t do it

YES

Does it violate any stakeholder rights?

If yes, then do it unless stakeholder rights are violated

YES

Might be Acceptable given other ethical considerations

If yes, don’t do it; If no, do it

Thinking Ethically in Business   81 B.2 Changing Classification of Jobs Some jobs have been classified as professions since their inception; others have been seen as mere occupations. Some occupations have undergone reclassification due to economic conditions or practitioner behaviour. The chart below offers a small sample of some of these changes. Occupations and Professions: Samples of Changing Classifications Category 1

Category 2

Category 3

Category 4

Category 5

Architects

Astronauts

Alchemist

Bookkeepers

Chemists Judges

Engineers Nurses

Computer Systems Engineer Governance Officers Home Inspectors

Astrologer

Secretaries Soldiers

Physicians

Public School Teachers

Religious Leaders Category 1 = Category 2 = Category 3 = Category 4 = Category 5 =

Surgeons Occupations generally considered Professions Newly Created Professions in the past century Newly Created Professions in the past twenty five years Past Professions which are now defunct Occupations Past Professions which are now classed as Occupations

Appendix C: Index of Selected Terms Keyed to Section Absolute Duty 1.3 Accountability 3.4.1 Ad hominem fallacy 4.5 Analogical arguments 4.4.3 Appeal to Force fallacy 4.5 Arguments 4, 4.2, 4.4 Background analysis 4.2, 4.4.3 Biased Sample fallacy 4.5 Business and Government Interconnection 1.1, 4.1 Business stakeholders 3.2.1 Causal arguments 4.4.3 Conflicts of Interests 1.6 Consequentialism 5.2, 5.4 Corporate Social Responsibility 3.3 Corruption, corrupt practices 1.2, 3.3.1, 5.6.1 Cost/Benefit Analysis 4.2 CSR 3.3 Deductive arguments 4.4.1 Defeasible Duty 1.4 Definitions 4.3.2 Descriptive claims 4.3.1 Duty Ethics (Kant’s) 5.5 Equivocation 4.5 Ethical claims 4.3.4.1 Ethical Egoism 5.2 Ethics in Business 1.1 Eudaimonian Utilitarianism 5.3.2 External stakeholders 3.2

Thinking Ethically in Business   83 Fallacies 4.5 Fallacy of Accent 4.5 False Analogy 4.5 False Dichotomy 4.5 Full disclosure 3.3.1 Happiness 5.3.2, 5.6 Hedonism 5.3 Hedonistic calculus 5.3.1 Identity statements 4.3.2, Appendix A.2 Imperfect Obligation 1.5 Indefeasible Duty 1.4 Independent Experts 3.4.1 Inductive arguments 4.4.2 Instrumental goods 5.3.2 Internal stakeholders 3.2 Intrinsic goods 5.3.2 Investors 2.2 Judgment 5.1, 5.7 Legal statements 4.3.4.1 Managerial Capitalism 2, 2.1 Managers 2.1. 2.3 passim Moderation 5.6.1 Neutrality 3.3 Nonconsequentialism 5.5 Normative statements 4.3.4 Owners 2.1, 2.2 Perfect Obligation 1.5 Premise 4.2 Prima facie Duty 1.3 Professional 1.2 Publicly traded corporations 2, 2.1 Restricted Egoism 5.2.1 Shareholders 2.1, 2.2 Social Hedonism 5.3 Societal stakeholders 3.2.1 Sound arguments 4.4.1

84  Thinking Ethically in Business Stakeholder theory 2.5, 3 Stakeholders 3, 3.2, 3.2.1 Statistical arguments 4.4.3 Stockholder Theory 2, 2.3, 2.5 Stockholders 2.1, 2.2, 2.3 Template 5.7 Transparency 1.1, 3.3.1 Unorganized stakeholders 3.2, Appendix A.2 Utilitarianism 5.3 Valid arguments, Validity 4.4.1 Virtue Ethics (Aristotle’s) 5.6

Humanities Insights These are some of the Insights available at: http://www.humanities-ebooks.co.uk/ General Titles An Inroduction to Feminist Theory An Introduction to Critical Theory An Introduction to Rhetorical Terms

Genre FictionSightlines Octavia E Butler: Xenogenesis / Lilith’s Brood Reginal Hill: On Beulah’s Height Ian McDonald: Chaga / Evolution’s Store Walter Mosley: Devil in a Blue Dress Tamora Pierce: The Immortals

History Insights Oliver Cromwell The British Empire: Pomp, Power and Postcolonialism The Holocaust: Events, Motives, Legacy Lenin’s Revolution Methodism and Society The Risorgimento

Literature Insights Conrad: The Secret Agent Eliot, T S: ‘The Love Song of J Alfred Prufrock’ and The Waste Land English Renaissance Drama: Theatre and Theatres in Shakespeare’s Time Faulkner: The Sound and the Fury Gaskell, Mary Barton Hardy: Tess of the Durbervilles Ibsen: The Doll’s House Hopkins: Selected Poems Ted Hughes: New Selected Poems Lawrence: Sons and Lovers Lawrence: Women in Love Paul Scott: The Raj Quartet Shakespeare: Hamlet Shakespeare: Henry IV Shakespeare: Richard II Shakespeare: Richard III Shakespeare: The Tempest

Shakespeare: Troilus and Cressida Shelley: Frankenstein Wordsworth: Lyrical Ballads Fields of Agony: English Poetry and the First World War

Philosophy Insights American Pragmatism Contemporary Epistemology Critical Thinking Ethics Existentialism Formal Logic Meta-Ethics Contemporary Philosophy of Religion Philosophy of Sport Plato Wittgenstein

Some Titles in Preparation The New Deal  Lord Palmerston World War II: the North Africa Campaign, 1940–43 Aesthetics  Foucault  Heidegger Islamic Philosophy  Lacan Marxism  Mental Causation Philosophy of History Philosophy of Language Philosophy of Mind Plato’s Republic  Žižek Renaissance Philosophy Sartre: Existentialism and Humanism Austen: Pride and Prejudice Blake: Songs of Innocence & Experience Chatwin: In Patagonia Eliot, George: Silas Marner Eliot: Four Quartets Fielding: Tom Jones Heaney: Selected Poems Lawrence: Selected Poems Lawrence: The Rainbow Shakespeare: Macbeth Shakespeare: Romeo and Juliet