Introduction to Business Ethics by Joseph DesJardins

Since its inception, An Introduction to Business Ethics by Joseph DesJardins has been a cuting- edge resource for the business ethics course. DesJardins’ unique multidisciplinary approach offers critical analysis and integrates the perspective of philosophy with management, law, economics, and public policy, providing a clear, concise, yet reasonably comprehensive introductory survey of the ethical choices available to us in business.

Highlights of the Fifh Edition: • NEW! Discussion cases throughout focused on Goldman Sachs, the LIBOR banking

scandal, Patagonia, and Chick-fil-A and same-sex marriage. Additional revised and updated cases include discussions on Walmart and briber y in Mexico, Apple and Foxconn in China, executive compensation, conflicts of interest at Goldman Sachs, and employee privacy.

•   A revised discussion of ethical theory which de-emphasizes philosophical jargon,

introduces ethics as involving frameworks and paterns of reasoning rather than as abstract “theories,” and expands discussion of ethical principles, rights, and duties.

What Instructors are Saying about An Introduction to Business Ethics: “A great book, thorough and accessible.”– Jessica McManus, Notre Dame University

“Provides all the major areas in Business Ethics . . . It is clear, challenging, and comprehensive.”

– Andy Wible, Meskegon Community College

Visit www.mhhe.com/desjardins5e for a wealth of student and instructor resources! Fifth E

dition A

n Introduction to B usiness Ethics

D esJardins

F i f t h E d i t io n

An Introduction to

Joseph DesJardins

Business Ethics

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A N I N T R O D U C T I O N T O

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F i f t h E d i t i o n

J o s e p h D e s J a r d i n s C o l l e g e o f S t . B e n e d i c t / S t . J o h n ’ s U n i v e r s i t y

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AN INTRODUCTION TO BUSINESS ETHICS, FIFTH EDITION

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221

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DesJardins, Joseph R.

An introduction to business ethics/Joseph DesJardins.—Fifth edition.

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ISBN 978-0-07-803832-7 (alk. paper)

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iii

About the Author

Joe DesJardins is Vice Provost, as well as Professor in the Department of Phi-losophy, at the College of St. Benedict and St. John’s University in Minnesota. His other books include Business Ethics: Decision Making for Personal Integrity and Social Responsibility (with Laura Hartman and Chris MacDonald); Environ- mental Ethics: An Introduction to Environmental Philosophy; Environmental Ethics: Concepts, Policy, and Theory; Contemporary Issues in Business Ethics (co-editor with John McCall); and Business, Ethics, and the Environment. He is the former Execu- tive Director of the Society for Business Ethics and has published and lectured extensively in the areas of business ethics, environmental ethics, and sustain- ability. He received his B.A. from Southern Connecticut State University and his M.A. and Ph.D. from the University of Notre Dame. He previously taught at Villanova University.

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To Linda

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v

Contents

Preface x

Chapter One: Why Study Ethics? 1

Learning Objectives 1 Discussion Case: The LIBOR Scandal: Is It Ok If Everyone Does It? 2 Discussion Questions 4 1.1 Why Study Business Ethics? 4 1.2 Values and Ethics: Doing Good and Doing Well 6 1.3 The Nature and Goals of Business Ethics 10 1.4 Business Ethics and the Law 12 1.5 Ethics and Ethos 13 1.6 Morality, Virtues, and Social Ethics 15 1.7 Ethical Perspectives: Managers and Other Stakeholders 16 1.8 A Model for Ethical Decision Making 17 Refl ections on the Chapter Discussion Case 18 Chapter Review Questions 19

Chapter Two: Ethical Theory and Business 20

Learning Objectives 20 Discussion Case: AIG Bonuses and Executive Salary Caps 21 Discussion Questions 22 2.1 Introduction 23 2.2 Ethical Relativism and Reasoning in Ethics 25 2.3 Modern Ethical Theory: Utilitarian Ethics 29 2.4 Challenges to Utilitarianism 33 2.5 Utilitarianism and Business Policy 35 2.6 Principle-Based Ethics 37 2.7 Virtue Ethics 41 2.8 Summary and Review 44 Refl ections on the Chapter Discussion Case 45 Chapter Review Questions 46

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vi Contents

Chapter Three: Corporate Social Responsibility 48

Learning Objectives 48 Discussion Case: Walmart 49 Discussion Questions 52 3.1 Introduction 53 3.2 The Economic Model of Corporate Social Responsibility 53 3.3 Critical Assessment of the Economic Model:

The Utilitarian Defense 56 3.4 Critical Assessment of the Economic Model:

The Private Property Defense 61 3.5 The Philanthropic Model of Corporate Social Responsibility 64 3.6 Modifi ed Version of the Economic Model: The Moral Minimum 65 3.7 The Stakeholder Model of Corporate Social Responsibility 67 3.8 Strategic Model of Corporate Social Responsibility:

Sustainability 71 3.9 Summary and Review 74 Refl ections on the Chapter Discussion Case 75 Chapter Review Questions 76

Chapter Four: Corporate Culture, Governance, and Ethical Leadership 79

Learning Objectives 79 Discussion Case: Goldman Sachs’s “Toxic Culture” 80 Discussion Questions 81 4.1 Introduction 81 4.2 What is Corporate Culture? 82 4.3 Culture and Ethics 83 4.4 Ethical Leadership and Corporate Culture 86 4.5 Effective Leadership and Ethical Leadership 87 4.6 Building a Values-Based Corporate Culture 89 4.7 Mandating and Enforcing Ethical Culture:

The Federal Sentencing Guidelines 92 Refl ections on the Chapter Discussion Case 94 Chapter Review Questions 94

Chapter Five: The Meaning and Value of Work 97

Learning Objectives 97 Discussion Case: Social Enterprises and Social Entrepreneurs 98 Discussion Questions 100 5.1 Introduction 101 5.2 The Meanings of Work 102 5.3 The Value of Work 104 5.4 Conventional Views of Work 107 5.5 The Human Fulfi llment Model 109

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Contents vii

5.6 The Liberal Model of Work 112 5.7 Business’s Responsibility for Meaningful Work 114 Refl ections on the Chapter Discussion Case 116 Chapter Review Questions 117

Chapter Six: Moral Rights in the Workplace 119

Learning Objectives 119 Discussion Case: Electronic Privacy at Work 120 Discussion Questions 121 6.1 Introduction: Employee Rights 122 6.2 The Right to Work 123 6.3 Employment at Will 127 6.4 Due Process in the Workplace 129 6.5 Participation Rights 132 6.6 Employee Health and Safety 134 6.7 Privacy in the Workplace 139 Refl ections on the Chapter Discussion Case 143 Chapter Review Questions 143

Chapter Seven: Employee Responsibilities 145

Learning Objectives 145 Discussion Case: Confl icts of Interests in Subprime Mortgages

and at Goldman Sachs and Enron 146 Discussion Questions 151 7.1 Introduction 151 7.2 The Narrow View of Employee Responsibilities:

Employees as Agents 152 7.3 Professional Ethics and the Gatekeeper Function 157 7.4 Managerial Responsibility and Confl icts of Interest 160 7.5 Trust and Loyalty in the Workplace 163 7.6 Responsibilities to Third Parties: Honesty,

Whistle-Blowing, and Insider Trading 165 Refl ections on the Chapter Discussion Case 171 Chapter Review Questions 172

Chapter Eight: Marketing Ethics: Product Safety and Pricing 174

Learning Objectives 174 Discussion Case: Life-Cycle Responsibility for Products 175 Discussion Questions 177 8.1 Introduction: Marketing and Ethics 177 8.2 Ethical Issues in Marketing: An Overview 178 8.3 Ethical Responsibility for Products: From Caveat

Emptor to Negligence 181

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viii Contents

8.4 Strict Product Liability 185 8.5 Ethics and Pricing 187 Refl ections on the Chapter Discussion Case 191 Chapter Review Questions 192

Chapter Nine: Marketing Ethics: Advertising and Target Marketing 194

Learning Objectives 194 Discussion Case: Predatory Lending: Subprime Mortgages and Credit Cards 195 Discussion Questions 196 9.1 Introduction: Ethics of Sales, Advertising, and

Product Placement 197 9.2 Regulating Deceptive and Unfair Sales and Advertising 200 9.3 Marketing Ethics and Consumer Autonomy 203 9.4 Targeting the Vulnerable: Marketing and Sales 208 Refl ections on the Chapter Discussion Case 212 Chapter Review Questions 214

Chapter Ten: Business’s Environmental Responsibilities 216

Learning Objectives 216 Discussion Case: Sustainable Business 217 Discussion Questions 219 10.1 Corporate Social Responsibility and the Environment 219 10.2 Business’s Responsibility as Environmental Regulation 221 10.3 Business Ethics and Sustainable Economics 223 10.4 Business Ethics in the Age of Sustainable Development 227 10.5 The “Business Case” for Sustainability 230 Refl ections on the Chapter Discussion Case 232 Chapter Review Questions 233

Chapter Eleven: Diversity and Discrimination 234

Learning Objectives 234 Discussion Case: Chick-fi l-A and Same-Sex Marriage 235 Discussion Questions 236 11.1 Introduction: Diversity and Equality 237 11.2 Discrimination, Equal Opportunity, and Affi rmative Action 238 11.3 Preferential Treatment in Employment 243 11.4 Arguments Against Preferential Hiring 247 11.5 Arguments in Support of Preferential Hiring 250 11.6 Sexual Harassment in the Workplace 253 Refl ections on the Chapter Discussion Case 258 Chapter Review Questions 259

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Contents ix

Chapter Twelve: International Business and Globalization 261

Learning Objectives 261 Discussion Case: Business in a Global Setting 262 Discussion Questions 263 12.1 Introduction 264 12.2 Ethical Relativism and Cross-Cultural Values 265 12.3 Cross-Cultural Values and International Rights 267 12.4 Globalization and International Business 269 12.5 Globalization and the Poor 271 12.6 “Race to the Bottom” 273 12.7 Democracy, Cultural Integrity, and Human Rights 275 Refl ections on the Chapter Discussion Case 278 Chapter Review Questions 279

Photo Credits 281 Index 283

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x

Preface to the Fifth Edition

My overarching goal in the fi fth edition of this text remains what it was for the fi rst edition: “to provide a clear, concise, and reasonably comprehensive introductory survey of the ethical choices available to us in business.” This book arose from the challenges encountered in my own teaching of business ethics. Over the years I have taught business ethics in many settings and with many formats. I sometimes relied on an anthology of readings, other times I emphasized case studies. I taught business ethics as a lecture course and in a small seminar. Most recently, I taught business ethics exclusively to under- graduates in a liberal arts setting. It is diffi cult to imagine another discipline that is as multidisciplinary, taught in as many formats and as many contexts, by faculty with as many different backgrounds and with as many different aims, as business ethics.

Yet, although the students, format, pedagogy, and teaching goals change, the basic philosophical and conceptual structure for the fi eld remains relatively stable. There are a range of stakeholders with whom business interacts: em- ployees, customers, suppliers, governments, society. Each of these relationships creates ethical responsibilities, and every adult unavoidably will interact with business in several of these roles. A course in business ethics, therefore, should ask students to examine this range of responsibilities from the perspective of employee, customer, and citizen as well as from the perspective of business manager or executive. Students should consider such issues in terms of both the type of lives they themselves wish to lead and the type of public policy for governing business they are willing to support.

My hope was that this book could provide a basic framework for examin- ing the range of ethical issues that arise in a business context. With this basic framework provided, individual instructors would then be free to develop their courses in various ways. I have been grateful to learn that this book is being used in a wide variety of settings. Many people have chosen to use it as a supplement to the instructor ’s own lectures, an anthologized collection of readings, a series of case studies, or some combination of all three. Others have chosen to use this text to cover the ethics component of another course in such business-related disciplines as management, marketing, account- ing, human resources. The book also has been used to provide coverage of

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Preface to the Fifth Edition xi

business-related topics in more general courses in applied or professional eth- ics. I take this variety of uses as evidence that the fi rst edition was reasonably successful in achieving its goals.

NEW TO THE FIFTH EDITION

The primary goal of this new edition is to update cases with more contempo- rary examples and to continue to revise the text for the sake of clarity and ac- cessibility for students. To those ends, readers will note the following major changes for the fi fth edition:

• Every chapter begins with a new, or revised and updated, discussion case. Highlights include new cases on Goldman Sachs, the LIBOR banking scandal, Patagonia, and Chick-fil-A and same-sex marriage. Revised and updated cases include new discussions on Walmart and bribery in Mexico, Apple and Foxconn in China, executive compensation, conflicts of interest at Goldman Sachs, and employee privacy.

• A revised discussion of ethical theory that deemphasizes philosophical jargon (readers will no longer see the word “deontological” for example!). The new discussion introduces ethics as involving frameworks and pat- terns of reasoning rather than as “theories” and substitutes a discussion of ethical principles, rights, and duties for the former section on deontologi- cal ethics.

As always, a new edition provides an opportunity to not only update mate- rial, but to present it in a more accessible style. It has been gratifying to learn that readers have found the book clearly written and accessible to students un- familiar with the fi eld. In continuing to strive for these goals, I have rewritten some sections, deleted some outdated cases and dated material, and worked to improve the clarity of the more philosophical sections.

Readers of previous editions will fi nd a familiar format. Each chapter be- gins with a discussion case developed from actual events. The intent of these cases is to raise questions and get students thinking and talking about the ethi- cal issues that will be introduced in the chapter. The text of each chapter then tries to do three things:

• Identify and explain the ethical issues involved; • Direct students to an examination of these issues from the points of view

of various stakeholders; and

• Lead students through some initial steps of a philosophical analysis of these issues.

The emphasis remains on encouraging student thinking, reasoning, and de- cision making rather than on providing answers or promoting a specifi c set of conclusions. To this end, a section on ethical decision making at the end of chapter 1 provides one model for decision making that might prove useful throughout the remainder of the text.

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xii Preface to the Fifth Edition

ACKNOWLEDGMENTS

As with previous editions, my greatest debt in writing this book is to those scholars engaged in the academic research of business ethics. I tried to acknowl- edge their work whenever I relied on it in this text, but in case I have missed anyone, I hope this general acknowledgment can serve to repay my debt to the business ethics community. I also acknowledge three members of that com- munity who deserve special mention and thanks. My own work in business ethics has, for over 20 years, benefi ted from the friendships of John McCall, Ron Duska, and Laura Hartman. They will no doubt fi nd much in this book that sounds familiar. Twenty years of friendship and collaboration tends to blur the lines of authorship, but it is fair to say that I have learned much more from John, Ron, and Laura than they from me.

Previous editions have also benefi ted from the advice of a number of people who read and commented on various chapters. In particular, I would like to thank Norman Bowie, Ernie Diedrich, Al Gini, Patrick Murphy, Denis Arnold, and Christopher Pynes.

I owe sincere thanks to the following teachers and scholars who were gracious enough to review previous editions of this book for McGraw-Hill: Dr. Edwin A. Coolbaugh—Johnson & Wales University; Jill Dieterlie—Eastern Michigan University; Glenn Moots—Northwood University; Jane Hammang- Buhl—Marygrove College; Ilona Motsif—Trinity College; Bonnie Fremgen— University of Notre Dame; Sheila Bradford—Tulsa Community College; Donald Skubik—California Baptist University; Sandra Powell—Weber State University; Gerald Williams—Seton Hall University; Leslie Connell— University of Central Florida; Brad K. Wilburn—Santa Clara University; Carlo Filice—SUNY, Genesco; Brian Barnes—University of Louisville; Marvin Brown—University of San Francisco; Patrice DiQuinzio—Muhlenberg Col- lege; Julian Friedland—Leeds School of Business, University of Colorado at Boulder; Derek S. Jeffreys—The University of Wisconsin, Green Bay; Albert B. Maggio Jr.—bicoastal-law.com; Andy Wible—Muskegon Community College; Christina L. Stamper—Western Michigan University; Charles R. Fenner, Jr.— State University of New York at Canton; Sandra Obilade—Brescia University; Lisa Marie Plantamura—Centenary College; James E. Welch—Kentucky Wesleyan College; Adis M. Vila—Dickinson College; Chester Holloman— Shorter College; Jan Jordan—Paris Junior College; Jon Adam Matthews— Central Carolina Community College; Bruce Alan Kibler—University of Wisconsin-Superior

The fifth edition benefited from the thorough and thoughtful reviews by:

• Carla Johnson, St. Cloud State University • Martha Helland, University of Sioux Falls • Jessica MacManus, Notre Dame • David Levy, State University of New York—Geneseo • Barbara Barresi, Capital University

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Preface to the Fifth Edition xiii

• Kenneth Ferguson, East Carolina University • Michael Shaffer, St. Cloud State University • Wake Maki, University of North Carolina–Greensboro • Andy Wible, Muskegon Community College • Richard McGowan, Butler University

Joseph DesJardins

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1

1 C H A P T E R

Why Study Ethics?

L E A R N I N G O B J E C T I V E S

After reading this chapter, you will be able to:

• Identify reasons why the study of ethics is important;

• Explain the nature and meaning of business ethics;

• Explain the difference between ethical values and other values;

• Clarify the difference between ethics and the law;

• Describe the distinction between ethics and ethos;

• Distinguish between personal morality, virtues, and social ethics;

• Identify ethical issues within a case description.

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2 Chapter 1

DISCUSSION CASE: The LIBOR Scandal: Is It Ok If Everyone Does It?

On June 27, 2012, as part of a U.S. Department of Justice Investigation, Barclays Bank admitted to manipulating and reporting fraudulent inter- est rates used in international fi nancial markets. Barclays, a multinational fi nan- cial services and banking fi rm headquartered in London, was fi ned more than $450 million dollars (U.S.) by both U.K. and U.S. regulators. Evidence showed that Barclays had regularly manipulated the LIBOR (London InterBank Offered Rate) since at least 2005, in order both to profi t from large trades and to falsely portray the bank as fi nancially stronger than it was.

The LIBOR is the rate at which major London banks report that they are able to borrow. This rate then serves as the benchmark at which interest rates are set for countless other loans, ranging from credit cards to mortgages and interbank loans. It also acts as a measure of market confi dence in the bank; if a bank must pay a higher rate to borrow than others do, then markets must have less confi dence in the institution’s fi nancial strength.

The LIBOR is established in a surprisingly simple manner. Each morning at 11 a.m. London time, members of the British Bankers Association (BBA) report to the fi nancial reporting fi rm of Thomson Reuters the rates at which they would expect to pay for loans from other banks. Discarding the high- est and lowest quartiles, Thomson Reuters then calculates a daily average, which becomes the daily LIBOR benchmark. Within an hour, Thomson Re- uters publicizes this average worldwide, along with all of the individual rates reported to them. This benchmark is then used to settle short-term in- terest rates as well as futures and options contracts. By one estimate, the LIBOR is used to set interest rates for global fi nancial transactions worth more than $500 trillion. The individual rates also provide an indirect mea- sure of the fi nancial health of each reporting institution—the lower their rates, the stronger their fi nancial position.

Evidence shows that as early as 2007, before the major fi nancial collapse of Lehman Brothers and the economic meltdown that followed, regulators in both the United States and the United Kingdom were aware of allegations that Barclays was underreporting their rates. In the early days of the 2008 fi nancial collapse, the Wall Street Journal published a series of articles questioning the in- tegrity of LIBOR reporting and suggested that banks were intentionally misre- porting rates to strengthen public perception of their fi nancial health. Timothy Geithner, U.S. Secretary of Treasury under President Obama, acknowledged that in 2008 when he was chairman of the New York Federal Reserve Bank, he recommended that British regulators change the process for setting the LIBOR. In testimony to the U.S. Congress in July 2012, Geithner said “We were aware [in 2008] of the risks that the way this was designed created not just the incen- tive to underreport, but also the opportunity to underreport.”

Internal documents and e-mails showed that traders, compliance of- fi cers, and senior management at Barclays were aware of and approved the

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Why Study Ethics? 3

underreporting. An e-mail sent from a Barclays employee to his supervisor in 2007 said: “My worry is that we are being seen to be contributing patently false rates. We are therefore being dishonest by defi nition and are at risk of dam- aging our reputation in the market and with the regulators. Can we discuss urgently please?”

Evidence also showed that Barclays employees were in regular commu- nication with traders who would explicitly ask that Barclays report specific higher or lower rates in order to benefit their trades. For example, Deriva- tive traders, who would stand to gain or lose millions of dollars depend- ing on the rate, would communicate directly with their Barclays banking contacts and request that certain rates be reported. The tone of their com- munication demonstrates the familiarity that existed between these parties: “Dude. I owe you big time! . . . I’m opening a bottle of Bollinger,” wrote one trader to his Barclays contact. “Pls set 3m libor as high as possible today,” wrote another. Yet another, “Dude, what’s up with ur guys . . fix this . . .tell him to get it up!

Investigations into the LIBOR scandal showed widespread intentional fraud among many individual employees and executives at Barclays. But from the earliest days of the scandal, allegations were being made that other banks were equally involved. While admitting guilt, Barclays denied that they were the only bank involved in misreporting data. In a recorded interview, one Barclays employee told investigators that “We did stick our head above the parapet last year, got it shot off, and put it back down again. So, to the extent that, um, the Libors have been understated, are we guilty of being part of the pack? You could say we are. . . . Um, so I would, I would sort of express us maybe as not clean clean, but clean in principle.” In a conversation between a senior executive at Barclays’ and a representative of the British banking Ad- ministration, which was reported by the U.S. investigation, the Barclays em- ployee defended the bank, saying “We’re clean, but we’re dirty-clean, rather than clean-clean.”

The BBA representative responded: “No one’s clean-clean.” By the end of August 2012, the investigation had spread to include allega-

tions of fraudulent LIBOR reporting by HSBC and royal bank of Scotland, the two other largest banks in the United Kingdom, as well as more than a dozen other international banks.

The scandal even spread to the British government. Barclays CEO Bob Diamond testifi ed that at the height of the fi nancial collapse in fall 2008, he received a call from Paul Tucker, deputy governor of the Bank of England. According to Diamond, Tucker called on behalf of “senior Whitehall” fi gures and put pressure on Mr. Diamond to lower his reported LIBOR rates. The al- legation is that the higher rates would undermine confi dence in Barclays at a time that fi nancial markets needed boosting, and it increased the likelihood that the British government would need to bail out Barclays as it already had done for other failing banks. Mr. Tucker claims that he was misunderstood by Mr. Diamond.

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4 Chapter 1

DISCUSSION QUESTIONS

1. What ethical issues are involved in this case? 2. Who are the stakeholders in this case? Who would be hurt by rate fixing? 3. What responsibilities did senior executives at Barclays have to pre-

vent fraud in circumstances that, in Timothy Geithner’s words, “cre- ated not just the incentive to underreport, but also the opportunity to underreport”?

4. If the LIBOR scandal is as widespread as ongoing investigations suggest, are there ethical issues involved in this case that are different from those that would be involved if only Barclays was guilty? What are they?

5. Who is responsible for the ethical integrity of such institutional practices as the LIBOR? Is anyone at fault for this fraud other than the individuals involved in reporting false information?

1.1 WHY STUDY BUSINESS ETHICS?

Why should anyone study business ethics? The short answer is that a class in business ethics should not aim simply to help you learn about ethics, but it should also aim to help you do ethics and be ethical. That is, the goal of busi- ness ethics is more than just teaching and learning about what happens in business. The goal is also to help each of us become more ethical and to help us all create and promote ethical institutions. We can achieve these goals by developing three intellectual capacities: a better understanding of ethical is- sues, a more fi nely tuned set of analytical skills with which to evaluate ethical issues, and a refi ned sensitivity to appreciate the signifi cance of leading an ethical life.

But as recently as the mid-1990s, articles in such major publications as the Wall Street Journal , the Harvard Business Review , and U.S. News and World Re- port questioned the value of teaching classes in business ethics. Throughout the 1980s and 1990s, this skeptical attitude was as common among business practitioners as it was among students. Few disciplines faced the amount of skepticism that commonly confronted courses in business ethics. Many stu- dents believed that, like “jumbo shrimp,” business ethics was an oxymoron. Many also viewed ethics as a mixture of sentimentality and personal opinion that would interfere with the effi cient functioning of business. After all, who’s to say what’s right or wrong?

Yet a great deal has changed since then. Beginning in 2001, with the col- lapse of Enron and Arthur Andersen, hardly a month has gone by without a major corporate ethical scandal making headlines. In just the fi rst fi ve years of the twenty-fi rst century, a wave of ethical scandals swept though the corpo- rate world as fraudulent and dishonest practices were uncovered at such fi rms as WorldCom, Tyco, Adelphia, Global Crossing, Health South, Qwest, Merrill Lynch, Citigroup Salomon Smith Barney, Parmalat, Marsh and McClennen, Credit Suisse First Boston, and even the New York Stock Exchange itself. In

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Why Study Ethics? 5

more recent years, that list has grown to include such cases as AIG, Bernard Madoff, the fi nancial industry’s subprime lending practices, and Fannie Mae and Freddie Mac. Risky investment and lending practices that bordered on incompetence if not malfeasance led to the collapse of such fi rms as Lehman Brothers, Countrywide Financial, Merrill Lynch, Bear Stearns, Washington Mu- tual, and Wachovia. In 2012 alone, WalMart has admitted to a major bribery scandal in Mexico, Goldman Sachs saw a senior executive offer a very public resignation because of what he characterized as a corrupt corporate culture, and virtually every major British bank has been implicated in the LIBOR scandal described in the opening discussion case.

At the start of the second decade of the twenty-fi rst century, today’s ques- tions are less about why or should ethics be a part of business, than about which ethics should guide business decisions and how ethics can be integrated within business. 1 Students unfamiliar with ethical issues will fi nd themselves as un- prepared for careers in business as students who are unfamiliar with account- ing and fi nance. Indeed, it is fair to say that students will not be fully prepared even within fi elds such as accounting, fi nance, human resource management, marketing, and management unless they are familiar with the ethical issues that arise specifi cally within those fi elds. You simply will not be prepared for a career in accounting, fi nance, or any area of business if you are unfamiliar with the ethical issues of these fi elds.

Why has this change come about? To answer this question, consider the phrase used to describe the potential collapse of AIG and other large fi nan- cial institutions: “too big to fail.” This phrase was used to justify the need for trillions of dollars of U.S. government guarantees and bailouts that were used to avoid a more signifi cant economic collapse in 2008–2009. It is not an exaggeration to say that ethical failures have been responsible for some of the most dramatic business failures in the past decade, and that such major business failures in turn can jeopardize entire national economies, if not the entire global economy.

On a smaller scale, consider the people who would be harmed by the LIBOR rate-fi xing scheme. Millions of consumers, businesses, fi nancial institu- tions, and even governments lost hundreds of millions of dollars to this fraud. Dishonest traders fraudulently benefi ted at the expense of honest traders. Com- peting fi nancial institutions who played by the rules lost while cheaters ben- efi ted. The entire fi nancial system was revealed to be operating on the basis of fraud and cheating. Multiply these harms by the dozens of other companies implicated in similar scandals and one gets an idea of why ethics is no longer dismissed as irrelevant. The consequences of unethical behavior and unethical business institutions are too serious to be ignored.

Today, business managers have many reasons to be concerned with the eth- ical standards of their organizations. Perhaps the most straightforward reason is that the law requires it. In 2002, the U.S. Congress passed the Sarbanes-Oxley Act to address the wave of corporate and accounting scandals. Section 406 of that law, “Code of Ethics for Senior Financial Offi cers,” requires that corpo- rations have a code of ethics “applicable to its principal fi nancial offi cer and

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6 Chapter 1

comptroller or principal accounting offi cer, or persons performing similar func- tions.” The code must include standards that promote:

1. honest and ethical conduct, including the ethical handling of actual or apparent confl icts of interest between personal and professional relationships;

2. full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be fi led by the issuer; and

3. compliance with applicable governmental rules and regulations.

Beyond these specifi c legal requirements, contemporary business manag- ers have many other reasons to be concerned with ethical issues. Unethical behavior not only creates legal risks for a business, it creates fi nancial and mar- keting risks as well. Managing these risks requires managers and executives to remain vigilant about their company’s ethics. It is now more clear than ever that a company can lose in the marketplace, it can go out of business, and its employees can go to jail if no one is paying attention to the ethical standards of the fi rm. Ethical behavior and an ethical reputation can provide a competitive advantage, in the marketplace and with customers, suppliers, and employees. Consumer boycotts based on allegations of unethical conduct have targeted such well-known fi rms as Nike, McDonald’s, Home Depot, Gap, Shell Oil, Levi-Strauss, Donna Karen, K-Mart, and Walmart. Managing ethically can also pay signifi cant dividends in organizational structure and effi ciency. Trust, loy- alty, commitment, creativity, and initiative are just some of the organizational benefi ts that are more likely to fl ourish within ethically stable and credible organizations.

For business students, the need to study ethics should now be as clear as the need to study the other subfi elds of business education. Without this back- ground, students will be unprepared for a career in contemporary business. But even for students not anticipating a career in business management or busi- ness administration, familiarity with business ethics is just as crucial. It was not, after all, only clients of Barclay’s Bank itself that suffered because of unethi- cal behavior. Our lives as employees, as consumers, as citizens are affected by decisions made within business institutions, and therefore everyone has good reasons for being concerned with the ethics of those decision makers.

The case for ethics is by now clear and persuasive. Business must take eth- ics into account and integrate ethics into its organizational structure. Students need to study business ethics. But what does this mean? What is “ethics” and what is “business ethics”? To begin our investigation let us turn to a more gen- eral question: Is ethics good for business?

1.2 VALUES AND ETHICS: DOING GOOD AND DOING WELL

It is clear, from cases ranging from Enron through AIG, Lehman Brothers, and Countrywide Financial, that unethical behavior can lead directly to business failure. But is the opposite true? Does good ethics mean business success?

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Why Study Ethics? 7

As described in their best-selling book, Built to Last: Successful Habits of Visionary Companies, authors James Collins and Jerry Porras researched doz- ens of very successful companies looking for common practices that might explain their success. These companies not only outperformed their competi- tors in fi nancial terms, they also have outperformed their competition over the long term. On average, the companies they studied were founded in 1897. Among their key fi ndings was the fact that the truly exceptional and endur- ing companies all placed great emphasis on a set of core values. These core values are described as the “essential and enduring tenets” that help defi ne the company and are “not to be compromised for fi nancial gain or short-term expediency.” 2

Collins and Porras cite numerous examples of core values being articulated and promoted by the founders and CEOs of such companies as IBM, Johnson & Johnson, Hewlett Packard, Procter and Gamble, Walmart, Merck, Motorola, Sony, Walt Disney, General Electric, and Philip Morris. Some companies made a commitment to customers as their core value; others focused on employees, their products, innovation, or even risk-taking. The common theme was that core values and a clear corporate purpose, what together are described as the organization’s core ideology, were essential elements of enduring and fi nan- cially successful companies.

These examples suggest that there are many different type of values. In general, we can think of values as those beliefs or standards that incline us to act or to choose in one way rather than another. Thus, the value that I place on an education leads me to study rather than play video games. I choose to spend my money on groceries rather than on a vacation because I value food more than relaxation. A company’s core values, then, are those beliefs and principles that provide the ultimate guide in its decision making. Understood in this way, we can recognize that there can be many different types of values. There are fi nancial, religious, historical, nutritional, political, scientifi c, and aesthetic val- ues. Individuals can have their own personal values and, importantly, institu- tions also have values. Talk of a corporation’s “culture” is a way of saying that a corporation has a set of identifi able values. All the companies described by Collins and Porras, have been described as having strong corporate cultures and clear sets of values.

At fi rst glance, Built to Last seems to reach an extremely attractive conclu- sion. The most successful companies all share in common a commitment to core values. This would seem to provide very persuasive reasons for any business to make a strong commitment to ethics. Good ethics seem to be connected to good business. Unfortunately, things are not as they appear. Collins and Porras are explicit in pointing out that while having a set of core values was essential in long-term success, they discovered no right set of core values. Their conclusion was that it was important only that companies have values, not that they have any particular values. In fact, executives at one of their “visionary” companies, Philip Morris, were described as defi ant and self-righteous in their prosmoking ideology. The authors quote a Fortune magazine description of Philip Morris CEO Michael Miles as “ruthless, focused . . . cold-blooded.” Miles is also quoted

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as saying “I see nothing morally wrong with the [tobacco] business. . . . I see nothing wrong with selling people products they don’t need.” 3

Collins and Porras make a strong case for the conclusion that having a set of strong core values is important for the long-term fi nancial success of a business. But, if these values can include ruthless and cold-blooded promo- tion of smoking, much more needs to be said about ethical values. One way to distinguish these various types of values is in terms of the ends that they serve. Financial values serve monetary ends, religious values serve spiritual ends, aesthetic values serve the end of beauty, and so forth. So, how are ethi- cal values to be distinguished from these other types of values? What ends are served by ethics?

Values, in general, were earlier described as those beliefs or standards that incline us to act or choose in one way rather than another. Different types of values were distinguished by the various ends served by those acts and choices. Ethical values serve the ends of human well-being. Acts and choices that aim to promote human well-being are acts and choices based on ethical values. Con- troversy may arise when we try to specify more precisely what is involved in human well-being, but we can start with some general observations. Happiness certainly is a part of it, as is respect, integrity, and meaning. Freedom and auton- omy surely seem a part of human well-being, as do companionship and health.

Second, the well-being promoted by ethical values is not a personal and selfi sh well-being. After all, the Madoff scandal resulted from many individuals seeking to promote their own well-being. Ethics requires that the promotion of human well-being be done impartially. From the perspective of ethics, no one person’s well-being counts as more worthy than any other’s. Ethical acts and choices should be acceptable and reasonable from all relevant points of view. Thus, we can offer an initial characterization of ethics and ethical values. Ethical values are those beliefs and principles that seek to promote human well-being in an impartial way.

Chapter 2 will examine the nature of philosophical ethics in more detail. But we should acknowledge that there are disagreements about what ethics commits us to and what ends are served by ethical values. There are also cases in which ethical values confl ict, and such ethical dilemmas are a signifi cant part of business ethics. The prosmoking values of Philip Morris, for example, alleg- edly promoted the values of personal freedom and autonomy. Critics charge that these same values result in serious illness and death to many people. How do we decide if Philip Morris is an ethical company?

Simply, there are few if any unambiguous and absolute rules that can guide ethical decision making. To evaluate the Philip Morris case we would begin by exploring the meaning and value of the freedom to choose relative to the value of health. We might also examine the motivation of Philip Morris executives to discover if they truly valued the personal freedom of their customers or if their motivation was less impartial and more self-serving. Ethical controversy is only the starting point of philosophical ethics. Accordingly, one major goal of this text will be to emphasize reasoning and analytical skills as much as informa- tional content.

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Why Study Ethics? 9

Let us now return to the question with which this section began. Is ethics good for business? Consider Malden Mills, a well-known business case that made headlines some years ago.

During the early evening hours of December 11, 1995, a fi re broke out in a textile mill in Lawrence, Massachusetts. By morning, the fi re had destroyed most of Malden Mills, the manufacturer of Polartec fabric. The fi re seemed a disaster to the company, its employees, its customers, and the surrounding communities. Malden Mills was a family-owned business, founded in 1906 and run by the founder ’s grandson Aaron Feuerstein. Polartec is a high-quality fabric well known for the outdoor apparel featured by such popular compa- nies as L.L. Bean, Land’s End, REI, J. Crew, and Eddie Bauer. As the major supplier of Polartec, the company had sales of $400 million in the year leading up to the fi re. The disaster promised many headaches for Malden Mills, for its employees, for the numerous businesses that depend on its products, and for an entire community.

The towns surrounding the Malden Mills plant have long been home to textile manufacturing. The textile industry was born in the nineteenth cen- tury and thrived for one hundred years along the rivers in these New England towns. The textile industry effectively died during the middle decades of the twentieth century when outdated factories and increasing labor costs led many companies to abandon the area and relocate, fi rst to the nonunionized South, and later to foreign countries such as Mexico and Taiwan. As happened in many northern manufacturing towns, the loss of major industries, along with their jobs and tax base, began a long period of economic decline from which many have never recovered. Malden Mills was the last major textile manufac- turer in town and with 2,400 employees it supplied the economic lifeblood for the surrounding communities. Considering both its payroll and taxes, Malden Mills contributed approximately $100 million a year to the local economy. The fi re was a disaster for many people and many businesses beyond those directly involved with Malden Mills.

As CEO and President, Aaron Feuerstein faced some major decisions, deci- sions that would be guided by his core values. He could have used the fi re as an opportunity to follow his competitors and relocate to a more economically attractive area. He certainly could have found a location with lower taxes and cheaper labor and thus have maximized his earning potential. He could have simply taken the insurance money and decided not to reopen at all. Instead, as the fi re was still smoldering, Feuerstein pledged to rebuild his plant at the same location and keep the jobs in the local community. But even more surprising, he promised to continue paying his employees and extend their medical coverage until they could be brought back to work. For this, Feuerstein became famous. Featured on television and in such magazines as Fortune, Newsweek, and Time, Mr. Feuerstein was honored by President Clinton and invited to attend the State of the Union address as the president’s guest. He was praised by many as a model of ethical business behavior.

Initially, all went well. Malden Mills was able to rebuild its factory and re- open sections within a year. Employees came back to work and the community

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10 Chapter 1

seemed to recover. Unfortunately, Malden Mills couldn’t recover fully. Insur- ance covered only three-fourths of the $400 millions cost of rebuilding and by 2001 Malden Mills fi led for bankruptcy protection. During the summer of 2004, Malden Mills emerged from bankruptcy, but its board of directors was now controlled by its creditors, led by GE Commercial Finance Division. The new board replaced Aaron Feuerstein as CEO and Board Chairman, although he retained the right to buy back the controlling interest if he could raise suf- fi cient fi nancing. In October 2004, the board rejected Feuerstein’s offer to buy back the company. In response to the company’s contract offer that included cuts in health care benefi ts, the union representing the remaining 1,000 work- ers at Malden Mills voted to authorize a strike in December 2004, the fi rst in company history.

Are strong ethical values good for business? The only reasonable answer is that sometimes they are and sometimes they are not, at least over the short term. Many of the companies examined by Collins and Porras seem to attain the ideal, high ethical standards and long-term fi nancial success. Others, like Philip Morris, attained long-term success with values that would not indisputably be considered ethical. Some unethical companies, Enron perhaps most famously, failed as a business because of their ethical failures. Others, like Malden Mills, seem to suffer fi nancially because of their high ethical standards. The record is mixed. The choice is yours.

1.3 THE NATURE AND GOALS OF BUSINESS ETHICS

How, then, might we defi ne business ethics? In a descriptive sense, “business ethics” refers to those values, standards, and principles that operate within business. But “business ethics” also refers to an academic discipline that not only studies those standards, values, and principles, but also seeks to articulate and defend the ones that ought to or should operate in business. In this way, business ethics includes normative as well as descriptive elements. This text is a contribution to that academic fi eld of business ethics. Its aim is to describe, examine, and evaluate ethical issues that arise within business settings.

Unlike some business disciplines, there is no single set of answers in ethics, no single body of information, nor is there even a single framework for think- ing about ethics. Business ethics is a truly multidisciplinary fi eld, incorporating information from a variety of disciplines, including philosophy, management, economics, law, marketing, and public policy.

Given this diversity, there is no single way—let alone single right way—to teach and learn business ethics. But this does not mean that there are not com- mon goals, concepts, principles, and frameworks of business ethics. There is a growing body of scholarly literature in business ethics, and, in an academic setting at least, an important element of a course in business ethics is to become familiar with that scholarly literature. Just as there are Generally Accepted Accounting Principles (GAAP) for accountants, there are a set of principles, standards, concepts, and values common to business ethics. Chapter 2 will

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Why Study Ethics? 11

introduce some of the most common ethical theories and principles. But beyond this academic side, business ethics has a practical side in the sense that it aims at judgment, behavior, and actions. We all hope that books and classes in business ethics translate into more ethical behavior among business practitioners.

Unfortunately, things are not always that simple. First, there is the daunting gap between ethical judgment and ethical behavior. From at least the time of Plato and Aristotle, Western philosophy has acknowledged a real discontinu- ity between judging some act as right and following through and doing it. It is diffi cult enough knowing the difference between good and bad, right and wrong. But knowing is different from doing, and not everyone has the fortitude, strength of character, or motivation to act in ways that we know are best. While many observers expect an ethics class to teach ethical behavior, most ethicists have the more modest goal for their courses. It is not at all clear, for example, that an ethics course would have made any difference to the individuals who perpetrated the fraud at Barclays Bank.

A more modest and judicious goal for business ethics is to focus on the cognitive and intellectual (as opposed to behavioral) side of ethics. Business ethics as an academic discipline is more a matter of ethical reasoning and thinking than ethical behavior. But even here there is a major dilemma con- fronting ethics courses. On one hand, few would teach ethics in a way that aims to indoctrinate students. Few teachers would think that it is the role of an ethics course to tell students the right answers or proclaim what they ought to think and how they ought to live. The role of an ethics course should not be to convey information to a passive audience, but to treat students as ac- tive learners and engage them in an active process of thinking and question- ing. Taking Socrates as the model, philosophical ethics rejects the view that blind obedience to authority or the simple acceptance of customary norms is an adequate ethical perspective. Teaching ethics must, in this view, involve students thinking for themselves. The unexamined life, Socrates claimed, is not worth living.

The problem, of course, is that when people think for themselves they don’t always agree with each other, and they certainly don’t always act in a way that others would judge as ethical. The other side of this dilemma is the specter of relativism and emotivism. If the ethics classroom does not teach students the right answers, many students will conclude that there are no right answers. If there are few teachers who use the classroom to preach ethical dogma, there are probably fewer still who believe that there are no right answers and that any- thing goes from an ethical point of view.

Thus a major challenge for business ethics is to fi nd a middle ground be- tween preaching the truth to passive listeners on one hand, and encouraging the relativistic conclusion that all opinions are equal to one another. A common goal for most courses in business ethics navigates this diffi culty by emphasiz- ing the process of ethical reasoning. Business ethics is concerned more with rea- soning than with answers. Responsible reasoning must begin with an accurate and fair account of the facts; one must listen to all sides with an open mind, one must become familiar with all the relevant issues at stake, and one must

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12 Chapter 1

pursue the logical analysis of each issue fully and with intellectual rigor. Busi- ness ethics essentially involves this process of ethical analysis. Without it, one risks turning ethics into dogmatism; with it, one has gone as far as possible to defl ate relativism. With this process, we are best prepared to avoid the dilemma of dogmatism and relativism.

This dilemma not only confronts business ethics in an academic setting, it is also true for ethics within business settings as well. Even if they could be successful in doing so, few business managers would want to approach ethical issues by making pronouncements of ethical dogma. Like good teachers, good business managers and leaders seek to empower their employees to make their own decisions. But responsible businesses also do not suggest that anything goes or that all values are equal. Value relativism in the workplace will likely lead only to power struggles and confl ict.

1.4 BUSINESS ETHICS AND THE LAW

Some believe that the way out of this dilemma is to concentrate on legal com- pliance. For many businesspeople, ethics is identifi ed with the law. Business behaves ethically when it obeys the law. An ethical business, therefore, should have an ethics offi cer or an ethics department that monitors compliance with the legal and professional standards of conduct.

Unfortunately, compliance with the law alone will prove insuffi cient for ethically responsible business. It is common to think of the law as a set of rules that one can obey or violate in an unambiguous way. Traffi c laws, for example, require stopping at a red light and prohibit speeds over a certain limit. But this is a very incomplete understanding of the law. Even when there are specifi c regulations requiring or prohibiting certain action, ambiguity is always possible in the application of those regulations.

For example, consider the following case. At a management training pro- gram I recently attended, two corporate attorneys outlined some of the legal responsibilities for managers under the Americans with Disabilities Act. This law requires business to make “reasonable accommodations” for workers with disabilities. This law goes on to specify some, but not all, of the condi- tions that would count as a disability. During the question period, one man- ager explained that she had an employee who suffered from asthma and she wondered if asthma was a disability. The two attorneys conferred for a mo- ment and answered simply: “It depends.” The law’s defi nition of a disabil- ity involves, in part, how serious the impairment is, how much it limits the worker ’s life activities, and whether or not it is easily corrected by medication. Given this ambiguity, the manager must make a judgment about how to treat this worker. Imagine this manager is committed to doing the ethically correct thing, but believes that one’s ethical responsibility is to obey the law. What should this manager do? In such a case, the decision is unavoidable, the law doesn’t help, and the manager therefore is forced to make a judgment about what ought to be done.

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Why Study Ethics? 13

More generally, much of the civil law governing business is based on the legal precedents of case law rather than on specifi c statutes or regulations. Case law is fundamentally ambiguous in a way that statutory law is not. In a very real sense, many acts are not illegal until a court rules that they are. For ex- ample, both the attorneys and the auditors in the Enron case were expected to “push the envelope” of legality by Enron’s aggressive management practices. Given that many of Enron’s fi nancial practices were quite literally unprece- dented, their attorneys and accountants offered advice that they believed could be defended in court. Until and unless these acts were challenged in court there was a real sense in which they were perfectly legal. While admittedly pushing the envelope on accounting and tax regulations, what they did was not obvi- ously illegal. The Barclays case demonstrates that even when the law is clear, there can be great incentives and opportunities to ignore the law, especially if it appears that competitors are doing it as well.

These facts demonstrate that one cannot always rely on the law to decide what is right or wrong. The manager whose employee suffers from asthma will need to make a decision and the law won’t decide this for her. Sometimes, the law itself requires ethical analysis for many of its decisions. Legal decisions in the Enron case will not be based solely on legal precedent (since, by defi ni- tion, pushing the envelope is to go into the gray area beyond what is obviously prohibited by precedent) but upon a judge and jury’s determination that the acts were unfair and unethical. Because most business decisions never get to the point where a judge and jury are asked to make a determination, business managers will be faced with the unavoidable responsibility of looking beyond the law for guidance in making ethical decisions.

Expressed in these terms, perhaps the major reason to study ethics is because whether we examine ethical questions explicitly or not, they are an- swered by each and every one of us every day in the course of living our lives. Presumably, the executives at Enron did not wake up one morning and choose to defraud their stockholders and employees. The actions we take and the lives we lead give practical answers to these fundamental ethical questions. Our only real choice is whether we answer them deliberately or unconsciously. Thus, the philosophical answer to why you should study eth- ics was given by Socrates over 2,000 years ago. “The unexamined life is not worth living.”

1.5 ETHICS AND ETHOS

Ethics is a vast fi eld of study that really addresses only one question: How should we live our lives? The question of human well-being ultimately focuses on how we should live. But while this may seem a simple question, it is perhaps the most fundamental question any human can ask. We can begin to answer it by refl ecting on the nature of philosophical ethics. Within the Western tradition, philosophical ethics is often traced to the ancient Greek philosopher Socrates. There is perhaps no better characterization of ethics than Socrates’ statement that it “deals with no

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small thing, but with how we ought to live.” Like all cultures, the Greeks had a set of beliefs, attitudes, and values that guided their lives. The word ethics is de- rived from the Greek word ethos, meaning “customary” or “conventional.” Most Greeks would have answered Socrates by claiming that we ought to live an ethi- cal life. Like most people in other cultures, an ethical life for the Greeks would have been a life lived according to the beliefs, attitudes, and values that were customary in their own culture. Often, these customary values are connected to a culture’s religious worldview. To be ethical, in the sense of ethos, is to conform to what is typically done, to obey the conventions and rules of one’s society and reli- gion. In this sense, ethics would be identical to ethos. It is fair to say that employees and executives at Barclays were claiming that they were only conforming to the ethos of the British banking community.

Taking its lead from Socrates, philosophical ethics is not content to ac- cept this as an answer to the question of how we should live. We said earlier that each one of us answers ethical questions every day by how we choose to live our lives. For many people, this choice is made implicitly by conform- ing to the ethos and customs of their culture. Philosophical ethics denies that simple conformity and obedience are the best guides to how we should live, as the Barclays fraud case seems to demonstrate. From the very begin- ning, philosophy rejects authority as the source of ethics and has, instead, defended the use of reason as the foundation of ethics. Philosophical eth- ics seeks a reasoned analysis of custom and a reasoned defense of how we ought to live.

Philosophical ethics distinguishes what people do value from what people should value. What people do in fact value is the domain of such social sciences as sociology, psychology, and anthropology. As a branch of philosophy, however, ethics asks us to step back and rationally evaluate the customary beliefs and values that people do hold. Philosophical ethics requires us to abstract our- selves from what is normally or typically done, and refl ect upon whether or not what is done should be done and whether what is valued should be valued. The difference between what is valued and what ought to be valued is the difference between ethos and ethics.

Perhaps this observation helps to explain some of the skepticism surround- ing business ethics. Any philosophical focus on business ethics seems to suggest some dissatisfaction with, or misgivings about, what is normally or customarily done in business. Why step back from what is normally done unless you have reason to doubt that what is being done should be done? But while philosophi- cal ethics is critical in the sense of demanding reasons for each decision, it need not be critical in the sense of rejecting or disagreeing with the customary norms and standards.

As a branch of philosophical ethics, business ethics asks us to step back from our daily decisions, step back from the ethos of business, to refl ect upon how business decisions affect our lives. In what ways do the practices and decisions made within business promote or undermine human well-being? Raising these questions does not imply that what is normally being done is unethical. After examining ethical issues in business, we may end up defending the same values

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Why Study Ethics? 15

and making the same decisions that we would have originally. But what philo- sophical ethics does require is a conscious refl ection and analysis of those beliefs and values upon which we act. Again, to rely on Socratic wisdom, philosophical ethics assumes that “the unexamined life is not worth living.” As we proceed through an examination of business ethics, we are really doing little more than re- fl ecting upon daily events and echoing Socrates’ question: How ought we to live?

1.6 MORALITY, VIRTUES, AND SOCIAL ETHICS

How ought we to live? Each of us might ask this fundamental question of eth- ics individually, or we ask it about ourselves collectively. In this fi rst individual sense, this is a question about how I should live my life, how I should act, what I should do, what kind of person I should be. In the collective sense, this is a question about how a society ought to be structured, about how we ought to live together in community.

This fi rst sense of ethics, the concern with how each of us should live our lives, is sometimes referred to as morality . One part of morality involves examin- ing principles and rules that might help us decide what we should do. Another important part of morality involves an examination of those character traits, or virtues , that would constitute a life worth living. This distinction is sometimes made in terms of deciding how we should act , and deciding the type of person we should be . The second, more collective, area of ethics is sometimes referred to as social ethics and it raises questions of public policy, law, civic virtue, and political philosophy.

Business ethics addresses both kinds of questions. Questions of individual morality will be a major theme throughout this text. One of the most fundamental goals of business ethics is to provide opportunities for students to step back from the immediate concerns of day-to-day life and ask: “What kind of person should I be?” “What should I do?” “What kind of life will I live?” “What would I have done if I worked at Barclays and was responsible for reporting the daily LIBOR rate?

No doubt most of us at most times of our lives are too concerned with more immediate issues such as completing an assigned task, paying our bills, and hav- ing fun, to consciously step back and ask about the meaning and value of what we do. But this is what philosophical ethics demands. Morality takes the larger perspective. Imagine late in your life looking back to refl ect on the kind of life you have led and asking: “Has this life been worth living? Am I proud of my life? Am I proud or ashamed of the person I have been? Has this been a full and meaning- ful life?” These are among the fundamental questions of morality.

Business ethics also addresses issues of social ethics and public policy. Understanding this viewpoint can start with the recognition that business in- stitutions are human creations and this fact means that humans cannot avoid responsibility for them. As the discussion case indicates, business institutions have a tremendous infl uence on many lives. We depend on business for our jobs, our food, our health care, our homes, our livelihoods. The public policy perspective invites us to step back from the actual practice of business to ask:

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“How should business be structured?” If we had it all to do over again, how would we arrange business institutions in our society? In this sense, public policy questions ask us to take the point of view of the citizen who is deciding how society—and business institutions are a part of society—ought to be orga- nized and conducted. Many observers would point out that the LIBOR scandal is much more an ethical failure of institutions than of individuals.

When we ask these questions we can see that important ethical questions remain even when the particular decision facing an individual appears clear- cut. As an executive at a mortgage banking fi rm you may choose to pursue a strategy of high-risk, subprime mortgages, but citizens get to decide whether or not to regulate such banking practices, and whether or not to bail out banks that fail as a result. Should such important social goods as mortgages be left in the hands of private corporations and individual traders?

1.7 ETHICAL PERSPECTIVES: MANAGERS AND OTHER STAKEHOLDERS

This focus on questions of morality and public policy also calls attention to the fact that one can take a variety of perspectives when examining issues in busi- ness ethics. A major part of business ethics deals with questions of management. “Business” ethics often is interpreted to mean the ethics of those charged with acting on behalf of a business. What should a business manager do in various situations? In this sense, business ethics can be interpreted as managerial ethics.

But, a decision faced from the point of view of business management raises different issues than those faced from the point of view of employees or owners. Decisions made within the mortgage banking industry were of monumental im- portance to consumers, employees, and the housing industry, as well as to the citizens of every state and, as it turned out, to the entire global economy. This is not to suggest that right or wrong depends on who is asking the question. But it does suggest that the types of questions asked and issues faced will vary from perspective to perspective. Because a reasoned evaluation of any ethical issue demands that all relevant concerns be addressed, this text will regularly ask you to shift perspectives and ask the moral questions from the point of view of management, employees, owners, consumers, suppliers, and citizens. Whether our future interaction with business occurs in the role of CEO or just plain con- sumer, we must examine business decisions from a variety of perspectives.

These observations suggest that all decisions faced by business managers, from fi nance and marketing to ethics and human resources, exist in a social and legal context. This context not only helped create the situation but also deter- mines what alternatives are available. Whatever social arrangements exist, we need to recognize that each of us, in our roles as citizens, is responsible for them. A mature, responsible life requires us to step back and refl ect upon the kind of society we choose to live in, as well as the particular decisions we choose to make.

We can summarize this introduction by saying that business ethics asks us to step back from what is usually and customarily done in the business world to

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Why Study Ethics? 17

ask the essential normative question of ethics: “How should we live? How should I live as an individual, and how should we live in community?” Throughout this text, indeed throughout your life, you should regularly step back to ask: “What kind of person am I choosing to be?” and “What kind of society ought we to create?” To return to our opening question, the study of ethics is relevant to busi- ness because it is essential to living a responsible and meaningful life.

1.8 A MODEL FOR ETHICAL DECISION MAKING

The opening pages of this chapter spoke of the goal of business ethics as involv- ing three components: understanding ethical issues, analyzing them, and be- coming sensitive to the importance of ethics. This chapter has presented a view of ethics not as offering strict rules and moralizing sermons, but as a process of responsible decision making. Deciding how to act, how to live, who to be, are the fundamental challenges of living an ethical life. The following decision- making model can help this process. 4

Making a responsible decision requires that we begin with a fair and accu- rate understanding of the situation. We need to know the facts . Because ethical issues often involve complicated and emotionally charged situations, uncover- ing the facts and attaining an unbiased and complete understanding can be more diffi cult than it sounds.

A second step in responsible decision making is to identify the ethical is- sues at stake. It is not uncommon for people to disagree over whether or not a particular case is an ethical case at all. Oftentimes what one person sees sim- ply as an economic or legal issue will be viewed by others as a major ethical issue. Explaining what makes an issue an ethical issue is a vital step in ethical decision making.

Once the ethical issues have been identifi ed, the next steps are to identify the people who are affected by the situation and understand how they might be affected. Who are the stakeholders in a decision? How will they be harmed or benefi ted? What will the likely consequences be? What is owed to the various stakeholders?

A next step is to consider alternative courses of action. What choices are available? A useful stimulus to this step is to put yourself in another person’s position and imagine how the situation would appear, how it would feel, from his or her perspective. Use what has been called “moral imagination” to explore a wide range of alternative choices and values. Consider how your decision will be interpreted from another perspective.

As you approach a decision, step back and employ what we might call the “ New York Times test.” What would the public reaction be if your decision was presented in full detail on the front page of the New York Times ? This is a way to ask oneself how a decision will stand up to public scrutiny. Is your decision one that you would be willing to explain and defend openly, or is it a decision that you would just as soon have kept quiet. Transparency is often a good test for responsible decision making.

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18 Chapter 1

Ultimately, one must make a decision. After understanding the facts, con- sidering all stakeholders, and thinking about alternatives, choose a course of action. But even after the decision has been made, responsible decision making requires us to monitor the results and learn from them. Responsible decision making is an iterative process: think–choose–act–think.

To review, a responsible ethical decision involves:

• Understanding the facts; • Identifying the ethical issues involved; • Identifying all stakeholders; • Understanding how those stakeholders will be affected; • Employing moral imagination to understand alternatives; • Considering how others will judge your decision; • Making a decision and monitoring and learning from the results.

REFLECTIONS ON THE CHAPTER DISCUSSION CASE

Refl ecting on the discussion case that opened this chapter can be useful to re- inforce each point. What are the facts of the LIBOR scandal? This chapter pro- vided only a very brief case description. Are there any facts that you would need to know before making a judgment about this case? Are you missing any information?

Next, consider the range of ethical issues involved in the LIBOR case. Barclays cheated millions of people out of their money, they defrauded and stole from them, lied to regulators, and were dishonest. They hurt many innocent people. Traders who sought much-higher-than-normal returns could justifiably be de- scribed as greedy, selfish, cheaters. Government regulators failed in their duties to promote honesty and fairness in financial markets and to protect consumers from fraud. Fraudulent financial markets failed to achieve the common, over- all good for society. Barclays’ apology induced little sympathy among victims, whether that was warranted or not. Most observers thought that Barclays and the other banks involved deserve significant punishment.

Philosophical ethics of the type introduced in the next chapter would ex- amine each of these highlighted concepts in turn. What do we mean by, and why do we value, “fairness”? Why is it important to trust others? What is wrong with breaking promises? Why is greed thought to be wrong? Should victims have sympathy for the perpetrators? When is punishment deserved, and what justifies punishment? What duties does government have toward its citizens? Did investors seeking higher-than-normal returns get what they deserved?

We should also reflect on the wide range of people who were adversely affected by fraudulent LIBOR rates: banking clients, consumers, employees, competitors, governments, and the financial markets themselves. Are there any parties that benefited from their actions? More generally, we should under- stand that the decisions made within business affects the lives and well-being

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Why Study Ethics? 19

of millions of people every day who depend on the decisions made in business as diverse as small family-run firms to the world’s largest corporations.

The LIBOR scandal and the widespread harms caused by that fraud surely can be traced to the ethical corruption of specific individuals who reported fraudulent rates. Arrogant and greedy individuals willing to violate legal and ethical standards can be faulted for many problems in business ethics. Unfor- tunately, such people are all too common. But we should also recognize the failure of the many “gatekeepers,” those people and institutions whose role it is to provide checks on such behavior. Auditors, accountants, attorneys, financial analysts, compliance officers, board members, and government regulators have roles to play within the economic system to ensure the integrity of that system and to prevent fraud and abuse. Another lesson from the LIBOR fraud is that there was a systematic breakdown in this gatekeeping function. Preventing fu- ture cases like this will require steps to be taken at each level: individual em- ployees with higher ethical standards, internal structures within corporations to establish and enforce higher standards, and legal requirements and other regulatory reforms to act as external checks on corporate behavior.

CHAPTER REVIEW QUESTIONS

1. Describe several reasons why ethics is relevant to business. Can a “good business” be an unethical business?

2. What are values? What is the difference between ethical values and other types of values? What is the difference between “value” when used as a verb, and “value” when used as a noun?

3. What is the difference between “ethics” and “ethos”? 4. How is descriptive business ethics different from normative business ethics? 5. This chapter introduced a distinction between morality, virtues, and social

ethics. How would you describe each? 6. How would you answer someone who asked: “Why should I study ethics

if I want to be an accountant?” 7. Other than business managers and owners, which other constituencies

might have a stake in business decisions?

ENDNOTES

1A persuasive case for why this shift has occurred can be found in Value Shift by Lynn Sharp Paine (New York: McGraw-Hill, 2003).

2Built to Last: Successful Habits of Visionary Companies, James Collins and Jerry Porras (New York: HarperCollins, 1994), p. 73.

3Ibid., p. 67. The Fortune article quoted is “How Philip Morris Diversifi ed Right,” Fortune, October 23, 1989.

4This decision-making model is adapted from a more detailed version offered in Business Ethics: Decision Making for Personal Integrity and Social Justice, by Laura Hartman and Joseph DesJardins (McGraw-Hill, 2nd ed., 2010).

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20

L E A R N I N G O B J E C T I V E S

After reading this chapter, you will be able to:

• Understand the basic categories and concepts of ethical theory;

• Identify the errors of ethical relativism;

• Explain the ethical theory of utilitarianism;

• Explain how utilitarian ethics provides support for market economics and business policy;

• Clarify several major challenges to utilitarian ethics;

• Explain rights- and duty-based ethics;

• Explain the basic concepts of virtue ethics.

2 C H A P T E R

Ethical Theory and Business

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Ethical Theory and Business 21

DISCUSSION CASE: AIG Bonuses and Executive Salary Caps

In April 2012, Forbes’ magazine began its annual report on executive com-pensation with the following: “Our report on executive compensation will only fuel the outrage over corporate greed. In 2011 the chief executives of the 500 biggest companies in the U.S. . . . got a collective pay raise of 16% last year, to $5.2 billion. This compares with a 3% pay raise for the average American worker. The total averages out to $10.5 million apiece. . . . So much for the moral suasion granted to shareholders last year with the fi rst-ever say-on-pay votes for U.S. public companies.” ( Forbes, April 4, 2012)

Public criticism of executive compensation, especially among top execu- tives of U.S. based public-traded corporations, increased signifi cantly following the economic collapse that began in 2008. For many observers, the magnitude of executive pay, both in absolute terms and relative to average workers, particu- larly needed to be addressed at a time when failed management was at fault for so much public and economic harm.

Perhaps no part of the fi nancial market collapse in late 2008, and the gov- ernment bailout that followed, caused as much public outcry as did the fi nan- cial bonuses and compensation paid to senior executives of failed companies. American International Group (AIG) became the target of much of this criti- cism. Persuaded that AIG was “too big to fail,” the U.S. federal government had committed $180 billion dollars as of March 2009 to rescue AIG from bankruptcy. In early March 2009, AIG announced that it was paying $165 million in bonuses to 400 top executives in its fi nancial division, the very unit that was at the heart of the company’s collapse.

AIG cited two major factors in the defense of these bonuses: they were owed as a result of contracts that had been negotiated and signed before the col- lapse, and they were needed to provide an incentive to retain the most talented employees at a time when these people were most needed.

Critics claimed that the bonuses were an example of corporate greed run amok. They argued that contractual obligations should have been overridden and renegotiated at the point of bankruptcy. They also dismissed the effective- ness of the incentive argument since this supposed “talent” was responsible for the failed business strategy that led to AIG’s troubles in the fi rst place.

As part of the government bailout of AIG, Edward M. Liddy, an associate of Secretary of the Treasury Henry Paulson, was named CEO of AIG in September 2008. Former CEO Martin Sullivan resigned earlier that summer when AIG’s fi nancial troubles intensifi ed, but he did not retire without fi rst securing a $47 million severance package. In comparison, Liddy himself accepted a salary of $1, although his contract held out the possibility of future bonuses.

In testimony before the U.S. Congress soon after being named CEO, Liddy was asked to explain the expense of a recent AIG-sponsored retreat for AIG salespeople. The retreat cost AIG over $400,000 and was, in Liddy’s words, a “standard practice within the industry.” Six months later, when news broke about the $165 million bonus payments, Liddy suggested that the executives

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22 Chapter 2

consider doing “the right thing” and return the bonuses, describing them as “distasteful.”

Within months of taking offi ce, the Obama administration took steps to limit executive compensation at fi rms that accepted signifi cant government bailout money, including the retirement packages of the former CEOs of Citi- group, General Motors, and Bank of America. Announcing this action, Treasury Secretary Timothy Geithner observed that “this fi nancial crisis had many signif- icant causes, but executive compensation practices were a contributing factor.”

Excessive compensation for corporate executives has been a regular news story for more than a decade. Fortune magazine’s cover story on June 15, 2001, was titled “Inside the Great CEO Pay Heist.” This well-respected business maga- zine detailed how many top corporate executives now receive “gargantuan pay packages unlike any seen before.” In the words of Fortune ’s headline, “Execu- tive compensation has become highway robbery—we all know that.” 1 This story documented a phenomenon that had been growing signifi cantly in the 1990s.

In 1960 the after-tax average pay for corporate chief executive offi cers (CEOs) was 12 times the average pay earned by factory workers. By 1974 that factor had risen to 35 times the average. In 1995, the factor had risen to 100 as es- timated by BusinessWeek , 35 times the average pay received by factory workers. A 1998 Fortune magazine article estimated the factor had risen to 182. In 2012, the Economic Policy Institute, a nonpartisan economic think tank, reported that this ratio had hit 231 to 1. This ratio would mean that a CEO earns in one day what an average American worker earns all year.

At the time that the AIG bonuses were made public, the Obama adminis- tration announced a new policy that would cap pay at $500,000 for CEOs of companies receiving federal bailout money. In announcing the policy, President Obama said, “We all need to take responsibility. And this includes executives at major fi nancial fi rms who turned to the American people, hat in hand, when they were in trouble, even as they paid themselves their customary lavish bo- nuses . . . that’s the height of irresponsibility. That’s shameful. And that’s ex- actly the kind of disregard for the costs and consequences of their actions that brought about this crisis: a culture of narrow self-interest and short-term gain at the expense of everything else.”

By the end of 2009, more than 10 of the largest fi nancial institutions that had received federal bailout money, including such fi rms as Goldman Sachs, Citi- group, and Bank of America, had repaid their federal loans and thus avoided the federally mandated salary caps.

DISCUSSION QUESTIONS

1. The United States has established a minimum wage law. Should there be a maximum wage law?

2. What standards should be used to establish a fair wage? Are the stan- dards for executives different from those for hourly workers? What factors determine what someone deserves for pay?

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Ethical Theory and Business 23

3. Should salary be tied to results, such that an executive whose company loses money should earn less than an executive whose company makes a profit?

4. Are large salaries more justified as incentives to produce beneficial con- sequences, or as rewards for past accomplishments? Are there available alternatives to money that might serve as incentives and rewards?

5. Can anyone ever make too much money for their own good?

2.1 INTRODUCTION

The issue of executive compensation demonstrates how business activities raise fundamental questions of fairness, justice, desert, virtue, and rights. If it is true that the language of ethics is inextricably a part of business, then it will be help- ful to begin our examination of business ethics with a short introduction to some of the basics of philosophical ethics. Just as you need to have a familiar- ity with the language and concepts of economics and management to make responsible business decisions so, too, you need a basic familiarity with ethics. This chapter will show how some of the key concepts of ethics are both relevant and necessary for any study of business.

Chapter 1 introduced ethics as a process of reasoning about what is perhaps the most signifi cant question any human being can ask: How should I live my life? But, of course, this question is not new; every major philosophical, cul- tural, political, and religious tradition in human history has grappled with it. In light of this, it would be a mistake to ignore these traditions as we examine ethical issues in business. Nevertheless, many students think that discussions of philosophical ethics are too abstract to be of much help in business. Discussion of ethical “theories” often seems to be too theoretical to be of much relevance to business. Throughout this chapter, I hope to suggest a more accessible under- standing of ethics, one that will shed some light on the practical and pragmatic application to actual problems faced by businesspeople.

An ethical theory, or ethical framework, is nothing more than an attempt to pro- vide a systematic answer to the fundamental ethical question: How should human beings live their lives? Ethics attempt to answer the question of how we should live, but they also give reasons to support their answer. Ethics seeks to provide a rational justifi cation for why we should act and decide in a particular prescribed way. Anyone can offer advice for what you should do and how you should act, but a philosophical and reasoned ethics must answer the “Why?” question as well.

As a fi rst step, let us refl ect upon the reasoning that was offered to support and criticize the bonuses paid to AIG executives. These reasons fall into three general categories. Some reasons appeal to the consequences of paying the bo- nuses: they either will, or will not, provide incentives for producing good work and benefi cial future consequences. Other reasons appeal to certain principles: one should not break a contractual promise, even if it has unpopular results; one should never benefi t from serious harms that have been caused by one’s own actions. Other reasons cite matters of personal character: accepting bonuses

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24 Chapter 2

is greedy, or distasteful. Or, paying the bonuses that were due in the face of pub- lic criticism was courageous and had to be done as a matter of integrity.

As it turns out, the three major traditions of ethics that we shall rely on in this text are refl ected in these three categories. This should be no surprise, since ethical traditions in philosophy refl ect common ways to think and reason about how we should live and what we should do. Ethics of consequences, ethics of principles, and ethics of personal character are the traditions that will be intro- duced in this chapter.

This chapter will introduce three ethical traditions that have proven infl u- ential in the development of business ethics and that have a very practical rel- evance in evaluating ethical issues in contemporary business. Utilitarianism is an ethical tradition that directs us to make decisions based on the overall con- sequences of our acts. Deciding that executive compensation is justifi ed because it provides incentives for future work is a consequentialist approach. Great rewards provide a strong incentive for executives to work hard on behalf of shareholders. Stock options especially are thought to operate in this way by connecting certain future consequences with performance. 2

A second tradition, one based on the importance of ethical principles and rights, directs us to decide on the basis of moral principles such as keeping your promises or giving people what they deserve. Some defenders of high CEO pay cite the agreement made between the executive and the company, acting through the board of directors. In effect, the company made a promise and therefore the ex- ecutive has a right to the pay and the company has an obligation to make good on it. Another defense suggests that such pay is something that is deserved for work accomplished or for the risks taken by the CEO. Thus, high salary is something that has been earned. Reasoning that justifi es executive compensation as a contractual duty is a principle-based argument. Principles, promises, obligations, deserved recom- pense, rights, and duties are concepts that are at the heart of principle-based ethics.

Finally, virtue ethics directs us to consider the moral character of individuals and how various character traits can contribute to, or obstruct, a happy and meaningful human life. Reasoning that faults executive compensation as greedy , distasteful , and as motivated by narrow self-interest adopts a virtue-based per- spective on ethics. The implication is that a greedy person who does distasteful and selfi sh things will not lead a fulfi lling human life.

We will examine these arguments in more depth later in this chapter. For now, the crucial thing to recognize is the inescapability of the language of ethics. Debates surrounding CEO pay are fundamentally debates about ethics: What do people deserve? What produces benefi cial overall consequences? What is one’s duty? What is fair or unfair, just or unjust? What is wrong with being greedy?

Before turning to these theories, let us consider a philosophical perspective that raises a signifi cant challenge to the very legitimacy of reasoning about eth- ics. Ethical relativism is a view that believes that all ethical judgments are rela- tive to the person or culture that makes them. It is also not uncommon to fi nd this perspective widely held both in and outside of the business community. Thinking through an analysis of ethical relativism in a careful manner will help demonstrate how one can, in fact, reason in and about ethical issues.

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Ethical Theory and Business 25

2.2 ETHICAL RELATIVISM AND REASONING IN ETHICS

The day on which I originally wrote this chapter began with a morning class in business ethics. After class, a student remained to ask some questions about a paper assignment that I had returned during the previous class meeting. This student wanted to know how I had graded her paper, particularly why she had received an unexpectedly low grade. When I pointed out that much of the paper offered little more than her opinions, she asked a question that is famil- iar to many ethics teachers. “How can you say that my opinions are wrong? Isn’t everyone entitled to their own opinions?” I answered that while people may be entitled to hold any opinion they wish, not all opinions are equal. Some are right, some are wrong, some are reasonable and some are unreasonable, some are thoughtful and others are less thoughtful. “But this is ethics,” she re- sponded. “Who’s to say what’s right or wrong?”

I suggested that anyone who had reasons could say what was right or wrong and asked if she herself didn’t have some reasons to support her opinions. Why did she believe what she had written? She responded that she didn’t know, but that it was “just the way I feel.”

I suspect that this skeptical reaction is familiar to many students. Ethics is not like math, science, or accounting. One cannot look up the right answer or calculate the answer with mathematical precision. One cannot prove the truth of an ethical judgment in the way that one can offer a proof in geometry. One cannot run an experiment that supports, or refutes, an ethical opinion. Unlike these other disciplines, ethics appears to rest on mere opinion. People differ about ethical judgments, and there seems no rational way to decide between competing conclusions. Ethical issues seem based in personal feelings and emo- tions. It is very likely that the example of executives earning hundreds of mil- lions of dollars a year causes strong emotional reactions for many people. But is that all there is to this case? Is it just a matter of envy or jealousy? Is the criticism simply a claim that they are greedy? Or, are there reasons for thinking that there is something wrong here? Is there any way to prove your conclusion?

There is an important perspective within the philosophical study of eth- ics, called ethical relativism, which holds that ethical values and judgments are ultimately dependent upon, or relative to, one’s culture, society, or personal feelings. In this sense, ethics truly is simply a matter of opinion, be it the opinion of one’s self, culture, society, or religion. Ethical relativism presents a serious challenge to any consideration of ethics. Relativism denies that we can make rational or objective ethical judgments. There is no right or wrong, moral or im- moral, except in terms of a particular culture or society.

The student who remained after class was implicitly assuming a version of ethical relativism. In her view, ethical judgments were a matter of opinion and if two people differed in their opinions, there was no legitimate way to decide between them. Each person is entitled to their own opinion, and no one opinion is more legitimate or more correct than another.

Relativism represents a serious challenge to ethics, including business eth- ics, because if it is correct there is no reason to continue our study of ethics.

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26 Chapter 2

If all opinions are equally valid, then it makes little sense for us to attempt to evaluate ethical judgments in business. If relativism is correct, then at best business ethics can help explicate the cultural or social values that underlie our ethical judgments, but it can do little to evaluate them as right or wrong. Philosophical ethics, from the relativist perspective, becomes little more than a process of values clarifi cation in which we can clarify and elucidate our values but not justify them.

Relativism is especially important as we think about ethical issues involving international business. Consider the issues raised by child labor. Some Western businesses have been criticized for using suppliers who rely on child laborers working under harsh conditions for long hours and very low wages to produce expensive consumer goods like sneakers and designer clothing. A common response to such criticism points out that such working conditions are accepted in the host country and, therefore, Western critics have no justifi cation for impos- ing their own cultural norms on others. This, in a nutshell, is ethical relativism.

Let us use another example from business ethics, a case of sexual harass- ment, and consider how my relativist student might scrutinize it. One form of sexual harassment occurs when submission to sexual favors is made a condi- tion of employment. (This is called quid pro quo harassment.) Imagine a male manager telling a female job applicant that she would be hired only if she submitted to his sexual advances. Now imagine that our relativist concludes that the criticism of harassment is simply a matter of opinion, that all opin- ions are equally valid, and that while the women may feel that harassment is wrong, the manager may feel that it is right. (He might answer criticism as did my student, “it’s just the way I feel.”) From the relativist perspective, each opinion or feeling is equally valid. Is there any way to defend the claim that such harassment is unethical?

One might argue, among other things, that sexual harassment would sub- ject a woman to unfair workplace discrimination. The inequality of power in this situation places the woman in the unacceptable position of having to choose between her livelihood and her own sexual integrity. Such a choice is fundamentally coercive and threatening. One might point out that the male manager would unlikely accept as a general rule the principle that employ- ers are justifi ed in using threats to coerce employees into submitting to such degrading acts. In developing such arguments, we seem to have moved the discussion from mere opinion to a more reasoned conclusion.

Of course, the relativist could argue that such values as equality, fairness, integrity, self-respect, and freedom from coercion and threats are all them- selves a matter of personal or social opinion. From the relativist perspective, all that we have shown is that harassment is wrong as long as you assume that people deserve a workplace that is free from discrimination and threats. But who is to say that people do deserve such things? While we may have advanced the debate somewhat, we still haven’t proven to the relativist that harassment is wrong.

Let us consider how the debate has been advanced. If, like my student, we start with mere opinions and feelings, then this discussion has moved beyond

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Ethical Theory and Business 27

mere opinion by appealing to certain values and principles that justify and le- gitimize that opinion. This is no longer mere opinion, but opinion based on principle. In developing this argument we would point to certain facts, such as the disproportionate power relationship that exists between job applicant and employer. We would point out the crucial importance that jobs play in our lives and the harms that can occur from the loss of a job. We could explain the psychological good of self-respect, offer a conceptual analysis of integrity and its value to the self, and discuss the importance of personal autonomy. We could take a social perspective and consider the present status of women in the work- place, and the social harms that can result from discrimination. And very im- portantly, we would employ the careful and rigorous rules of logic throughout our reasoning. Conclusions reached after this process surely are more reason- able and justifi ed than mere opinion.

In the face of such reasoning, the relativist could continue to insist on proof, and this demand could go on indefi nitely. (Although, as I would point out to my student, a paper that argues against harassment by reasoning along the lines suggested above would be more reasonable, and therefore receive a higher grade, than one that simply asserts the opinion that harassment is wrong because “that’s just the way I feel.”) But note that at this point that the relativist would have to reject not only the original conclusion (sexual harass- ment is wrong) but also a wide variety of other beliefs and values (everyone should be treated with equal respect, people should be free from coercion and threats, self-respect is good, loss of dignity is harmful, and so forth). The costs of relativism—what you would need to give up to maintain it—just got much higher. If the relativist is determined enough, and if her standards of proof are high enough, then perhaps we could never satisfy the demand for proof.

We’ll set more modest goals for this text. Throughout this book, I will as- sume that we can reason about ethical matters and that it is possible to rationally defend some views against others. I will assume that a conclusion defended by appeal to such values as equality, fairness, freedom from coercion, integrity, freedom from harm, and honesty (among others) is a conclusion that is more reasonable than one that is simply asserted as a matter of personal feelings or opinion. A conclusion that is reached through careful logical analysis and rea- soning is rationally better than one that is simply asserted. An argument that goes on to elucidate such values as equality, fairness, and freedom from coer- cion is more rational still.

We may discover that the most interesting and challenging ethical contro- versies involve a clash between two or more such values. I will also assume that it is exactly at such points that more, rather than less, rigorous and care- ful reasoning is required. For example, some might argue that as long as the woman was not physically prevented from walking away, her freedom was not violated by the threat of job loss. Others might argue that freedom is violated when such central human needs as a job are threatened as the means for get- ting someone to conform to the desires of a more powerful person. Disputes about the meaning and scope of such fundamental values provide a greater justifi cation for the need of ethics.

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28 Chapter 2

Perhaps, then, we can learn from ethical relativism, and take it as a chal- lenge to our own complacency and laziness. Whenever we are ready to give up and simply assume that our own opinions are adequate, let us call to mind the relativist question as a challenge: “Who is to say what’s right?” It will be a chal- lenge worth answering.

Providing answers to the relativist has long occupied philosophical ethics. The ethical theories that we examine in the following sections can be thought of as philosophical attempts to provide more fundamental answers to the rela- tivist. But before we turn to these theories, and before we leave this consid- eration of ethical relativism, let me call your attention to several confusions that often lead students into the relativist trap. In my own teaching experience many students who do not avoid these traps end up reaching relativist con- clusions by default.

The fi rst trap has been mentioned already. We should be careful not to hold ethics to too high a standard of proof. If we start with the assumption that an ethical judgment must be proven as absolutely certain and beyond doubt, then ethics assuredly will fail to meet this standard. Mathematics and the more the- oretical side of physics, engineering, and chemistry may meet this standard, but very few other intellectual fi elds would pass such a test. Reasoning in all of the humanities, the social sciences (including economics), the biological sci- ences, medicine, meteorology, and the applied sides of physics, chemistry, and engineering would fail to meet this standard in most of their conclusions. The business-related disciplines of management, marketing, fi nance, and account- ing never establish their conclusions as certain beyond doubt. So, before reject- ing ethics as little more than mere opinion, we should be careful that we are not using a standard that would commit us to similar conclusions about most other areas of human knowledge.

The second trap involves confusing the fact that there is wide disagreement about values, with the conclusion that no agreement is possible. The fi rst view, often called cultural relativism, offers a factual description of different cultures and societies. People do not agree about ethical matters. As discussed in chap- ter 1 , the ethos of various cultures differ widely. People hold a wide variety of ethical opinions. Some cultures may believe, in fact, that children are little more than slave labor. However, in itself, the fact of disagreement provides no reason for concluding that all of these diverse opinions are equally valid. To understand this point, consider the wide disagreement about scientifi c matters. We could fi nd people, indeed perhaps entire cultures, that believe the Earth is fl at, that the Earth is only a few thousand years old, that evolution has never occurred, that aliens visit regularly, or that people can foresee the future by charting the course of the planets and stars. Of course, believing that the world is fl at does not make it fl at and believing that aliens exist does not mean that they do. So, too, with ethics. The fact that people hold different opinions does not, in itself, mean that each of these opinions is equally valid.

We should also be careful not to assume too quickly that there is a wide dis- agreement about fundamental ethical values. Certainly there is a wide variety of cultural beliefs, customs, values, and practices. But there is also wide agreement

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about many values as well. Child abuse, torture, genocide, and slavery are just some practices that are universally condemned on ethical grounds. No doubt, we can fi nd cases where individuals and even societies engage in such atroci- ties, but we would fi nd very few who would seriously defend these practices as justifi ed or merely a matter of personal opinion. While it may appear that some cultures legitimize child labor, it is more likely the case that such circumstances are seen as an unfortunate but necessary alternative to starvation. Accepting a deplorable situation as the least harmful of the alternatives is not the same as accepting it as ethically valid.

A third trap involves confusing values such as respect, tolerance, and im- partiality with relativism. Respect for other people is a fundamental ethical value. Part of what it means to respect someone is to listen to his or her opin- ions and to show tolerance for opinions that differ from our own. But tolerating diverse opinions and values is not the same as ethical relativism. Let us turn the relativist challenge back on to the value of tolerance. Is tolerance (and respect and impartiality) merely a matter of opinion? If it is, then intolerant people have no reason to change their views. Condemning intolerance is simply your opinion. If, on the other hand, tolerance is not merely a matter of opinion, if in other words, it is put forward as a legitimate social value, then we have at least one value—tolerance—that has escaped the relativist critique.

Let us now turn to two of the most prominent and infl uential approaches to ethics in contemporary society: utilitarianism and principle-based ethics.

2.3 MODERN ETHICAL THEORY: UTILITARIAN ETHICS

Utilitarianism is the fi rst ethical framework that we need to consider. Utilitari- anism has had a signifi cant impact on the modern world and has been espe- cially infl uential in shaping politics, economics, and public policy. It therefore has had, and continues to have, an enormous infl uence on business. It will be helpful to start our consideration by locating utilitarianism within its historical context. Roots of utilitarian thinking can be found in works by Thomas Hobbes (1588–1679), David Hume (1711–1776), and Adam Smith (1723–1790), but the classic formulations are found in the works of Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1873). Each of these social philosophers was writing against a background of the great democratic revolutions of the seventeenth and eighteenth centuries.

Utilitarianism tells us that we can determine the ethical signifi cance of any action by looking to the consequences of that act. Utilitarianism is typically identifi ed with the policy of “maximizing the overall good” or, in a slightly dif- ferent version, of producing “the greatest good for the greatest number.” Acts that accomplish this aim are good; those that do not are bad.

This emphasis on the overall good, and upon producing the greatest good for the greatest number, directly opposed authoritarian policies that aimed to benefi t the political elite. Thus, utilitarianism provided strong support for demo- cratic institutions and policies. Government and all social institutions exist for the

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well-being of all, not to further the interests of the monarch, the nobility, or some small minority. Likewise, the economy exists to provide this highest standard of living for the greatest number of people, not to create wealth for a privileged few.

Thus, utilitarianism is a consequentialist ethics. Good and bad acts are de- termined by their consequences. (How else might we judge acts? Well, some- times we determine that we should or should not do something as a matter of principle, regardless of consequences. We’ll look at this approach in more detail in the next section.) In this way, utilitarians tend to be pragmatic thinkers. No act is ever right or wrong in all cases in every situation. It will all depend on the consequences. For example, lying is neither right nor wrong in itself. There might be situations in which lying will produce greater overall good than tell- ing the truth. In such a situation, it would be ethically right to tell a lie.

Consider as an example the case from the start of this chapter. Should the U.S. government pass a law that limits the amount of money corporate CEOs can be paid (or, at least, that can be credited as tax-deductible)? A utilitarian ap- proach to this question will consider the likely consequences of either alternative. Limiting the amount of executive salary that can be deducted from taxes should provide a disincentive to corporations to pay such large salaries. In a world of fi nite resources, this should work to increase the average pay for other workers or lower costs to consumers. On the other hand, lower salaries might make it more diffi cult to attract highly qualifi ed executives to U.S. fi rms and could result in less competitive U.S. companies. This would result in harm to everyone, including lower-paid workers and consumers. Either way, the ethical judgment made about the decision is a function of what happens after the fact.

But whenever we make a decision on basis of the consequences of what we do, we are implicitly assuming some theory of good and bad. How else would we be able to distinguish the consequences we should seek from those we should avoid? If we judge our actions in terms of consequences, then we must have some independent standard for deciding between good and bad consequences. In general terms, utilitarian thinkers hold that we should maxi- mize the overall good, but among utilitarians there are different interpretations of what this “good” involves.

In general, the utilitarian position is that happiness is the ultimate good. The only thing that is and can be valued for its own sake is happiness. (Does it sound absurd to you to claim that unhappiness is good and happiness is bad?) The goal of ethics, both individually and as a matter of public policy, should be to maximize the overall happiness. But, what exactly is happiness?

Jeremy Bentham argued that only pleasure, or at least the absence of pain, was intrinsically valuable. Happiness, according to Bentham, must be under- stood in terms of pleasure and the absence of pain; unhappiness is understood as pain, or the deprivation of pleasure. On Bentham’s view, pleasure and pain are the two fundamental motivational factors of human nature. In his words,

Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. . . . They govern us in all we do, in all we say, in all we think. 3

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Consider, then, Bentham’s utilitarian reasoning. Only pleasure and the absence of pain are valued for its own sake. Only pleasure and the absence of pain, there- fore, are intrinsically, objectively, and indisputably good. If pleasure and the absence of pain are good, more pleasure (or less pain) is better and maximum pleasure (or minimum pain) is best. Therefore, maximizing pleasure (the utilitar- ian principle) is the fundamental, objective, and indisputable ethical principle.

While the imperative to maximize pleasure sounds egoistic, utilitarian- ism differs from egoism in important ways. Egoism focuses on the happi- ness of individuals. Utilitarian acts are judged by their consequences for the general and overall good. Consistent with their commitment to democratic equality, however, the general good includes the well-being of each individ- ual affected by the action.

While agreeing with the general framework of Bentham’s utilitarianism, John Stuart Mill defended a different understanding of happiness. Mill believed that there is a qualitative dimension to happiness that is missed by Bentham’s focus on pleasure. Human happiness is not mere hedonism. According to Mill, humans are capable of enjoying a variety of experiences that produce happi- ness. Besides the pleasures of sensation that Bentham mentions, humans also experience social and intellectual pleasures that are qualitatively different from, and superior to, mere feelings. In a famous passage, Mill claims that “it is better to be a human being dissatisfi ed than a pig satisfi ed; better to be a Socrates dis- satisfi ed than a fool satisfi ed.” 4

But the claim that there is a form of happiness that is qualitatively better than sensations of pleasure is controversial. How do we know, or how can we prove, that it is better to be Socrates dissatisfi ed than a fool satisfi ed? Mill’s an- swer has signifi cant ethical and social implications. To decide which pleasures and what type of happiness is better, according to Mill, we should consult with someone with the experience of both. Such experienced and competent judges are the best test for determining the highest happiness.

Of two pleasures, if there be one to which all or almost all who have experience of both give a decided preference, . . . that is the more desirable pleasure. 5

And if disagreement continues beyond this, Mill next suggests that

From the verdict of the only competent judges, I apprehend there can be no appeal. On a question which is the best worth having of two pleasures . . . the judgment of those who are qualifi ed by knowledge of both, of if they differ, that of the majority among them, must be admitted as fi nal. 6

Thus, Mill acknowledges that not all opinions are equal. Some people are more competent and more qualifi ed than others in judging what is good. Mill’s utilitarianism does not support an uncritical majority rule in which every opin- ion of what is good is treated as equally valid. However, we shouldn’t abandon democracy because of this. The way to develop competent judges is through experience and education. People need to be educated and experienced in a variety of pleasures before they are competent to judge. Once they are experi- enced, then majority-rule democracy is the best way to make decisions.

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Thus, in John Stuart Mill’s writings we fi nd one of the classic defenses of lib- eral democracy and liberal education. The most fundamental ethical principle commits us to arranging society in such a way that we maximize the happiness for the greatest number of people. The best means for attaining this goal is an educated citizenry making decisions through a majority-rule democracy. The best method for securing an educated citizenry is to allow individuals the free- dom of choice to pursue their own ends. Even when those choices are unwise, individuals are gaining the experience needed to distinguish between good and bad, higher and lower, pleasures.

These views have signifi cant implications for business and economics. In classical free market economics, consumer demand is sovereign. Economic transactions occur when individuals seek their own happiness, understood as getting what they demand. If individuals make mistakes and buy products that fail to bring them satisfaction, they learn from their mistakes, no longer buy the product, and according to supply and demand, market forces eventually elimi- nate unsatisfactory products.

Perhaps utilitarianism’s greatest contribution to social and political thought has come through its infl uence in economics. With roots in the works of Adam Smith as well as those of Bentham and Mill, the ethics of twentieth-century neo- classical economics—essentially what we think of as free market capitalism—is decidedly utilitarian. It is in this way that utilitarianism has had an overwhelm- ing impact on business and business ethics.

Under free market economies, economic activity aims to satisfy consumer demand. The law of supply and demand tells us that economies should, and healthy economies do, produce (supply) those goods and services that consum- ers want (demand). Since scarcity and competition prevent everyone from get- ting all that they want, the goal of free market economics is to optimally satisfy wants. Free markets accomplish this goal by allowing individuals to decide for themselves what they most want and then bargain for these goods in a free and competitive marketplace. This process of allowing individuals to set their own preferences and bid for them in the marketplace will, over time and under the right conditions, guarantee the optimal satisfaction of wants.

This brief description suggests how free market economics fi ts the utilitar- ian framework. The end or goal of economic activity, what economists often refer to as utility or welfare, is the maximum satisfaction of consumer demand. We do the most good for the greatest number when we get as many people as possible as much of what they want as possible. The “good” is defi ned in terms of satisfying one’s wants. But, since scarcity and competition prevent us from getting all that we want, individuals are left to rank-order their wants or, in other terms, to establish their own preferences. Thus, free market economics can be thought of as a version of preference utilitarianism, where the utilitarian goal is the maximum satisfaction of preferences.

Given this goal, free market economics advises us that the most effi cient means to attain that goal is to structure our economy according to the principles of free market capitalism. We should allow individuals the freedom to bargain for themselves in an open, free, and competitive marketplace. Self-interested

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individuals (and mainstream economics assumes that this is at least a strong tendency among human motivations) will always be seeking ways to improve their own position. Agreements (contracts) will occur only in those situations where both parties believe that a transaction will improve their own position. In such a situation, the competition among rational and self-interested individu- als will continuously work to promote the greatest overall good. Whenever a situation occurs in which one or more individuals can attain an improvement in their own happiness without a net loss in others’ happiness, market forces will guarantee that this occurs. Thus, the market is seen as the most effi cient means to the utilitarian end of maximizing happiness.

2.4 CHALLENGES TO UTILITARIANISM

We will examine some debates surrounding the free market version of utilitari- anism in chapter 3 . For now, let us consider some general challenges to the ethics of utilitarianism. We can classify these challenges into two groups— problems raised from within a utilitarian perspective that involve fi nding a defensible version of utilitarianism and problems raised from outside that challenge the plausibility of the entire utilitarian project.

We will mention two challenges that are debated from within utilitarian perspectives. First, all utilitarians must fi nd a defensible way to measure happiness. Phrases like “maximize the overall good” and the “greatest good for the greatest number” require some form of measurement and compari- son (how else would you know that this situation rather than another has maximized the good?). Bentham went to great lengths to develop a “hedo- nistic calculus” to help quantify pleasures. Mill left it to the judgment of a majority of well-informed, competent judges. Economists substitute such measures as the gross national product for determining overall happiness. Bentham, Mill, and neoclassical economics all sought a scientifi c, measur- able ethics. But there simply is no consensus among utilitarians on how to measure and determine the overall good.

This problem is only compounded by the fact that utilitarians are commit- ted to considering all the consequences to all affected parties. Many business ethics issues highlight how diffi cult this could be. Consider the consequences of using nonrenewable energy sources and burning fossil fuels for energy. It is hard to see how a utilitarian could ever hope to calculate the consequences of a choice between investing in nonrenewable sources and continuing the present reliance on coal and oil. Yet this is exactly what is required by the utilitarian principle. (Attempts to shift focus, as economists often do, on to the “expected” utility of an act is to abandon utilitarianism. At that point we have adopted an ethics not of consequences but of intentions and that is no longer utilitarianism. We’ll see this view developed in the following section.)

The second problem with the utilitarian perspective deals with differing ver- sions of the good and the implications for human freedom. Historically, utilitar- ians are social and political liberals. That is, they all placed a very high value

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on individual freedom of choice. But there is a tension between objective ac- counts of the good and individual freedom. Simply put, free individuals do not always choose to do what is good for them. The more utilitarians emphasize freedom, the more likely they hold more relativistic accounts of the good. On this view, good is simply a matter of opinion, or individual desires, preferences, and wants. However, this seems to abandon the entire project of ethics since, after all, people often desire what is trivial, immoral, and bad. On the other hand, the more utilitarians are willing to specify a content to the good life, the more the need to abandon the commitment to individual freedom. If we know what is truly good, then individuals ought to act in certain ways (to maximize the good) even if they don’t want to. Finding a balance between individual freedom and the overall good is a challenge that confronts most versions of utilitarianism.

The fi nal challenge is not raised from within the utilitarian perspective but rather goes directly to the core of utilitarianism. The essence of utilitarianism is its consequentialism. Good and bad acts are judged by their consequences. In short, the end justifi es the means. But this seems to deny one of the earliest and most fundamental ethical principles that many of us have learned: The ends don’t justify the means.

This challenge can be explained in terms of rules or principles. When we say that the ends don’t justify the means what we are often saying is that there are certain rules or principles we should follow no matter what the con- sequences. Put another way, we have certain duties or obligations that we ought to obey even when doing so does not produce a net increase in overall happiness. Examples of such duties are those required by such principles as justice, loyalty, and respect, as well as the duties that fl ow from our roles as parent, spouse, friend, and citizen. We will examine that ethical tradition in more detail in the next section.

Several examples can be used to explain this criticism. Since utilitarianism focuses on the overall consequences, utilitarianism seems willing to sacrifi ce the good of individuals for the greater overall good. So, for example, it might turn out that the overall happiness would be increased if we forced a small minority of the population into slave labor. Utilitarians could object to slavery, not as a matter of principle, but only if and to the degree that slavery detracts from the overall good. If it turns out that slavery increases the net overall happiness, utilitarianism would have to support slavery. In the judgment of many people, such a decision would violate the principles of justice, equality, and respect. As we will see developed in the following section, principle-based ethics would appeal to the concept of ethical rights in criticizing utilitarianism. From that perspective, individuals possess certain basic rights that should not be violated even if doing so would increase the overall social happiness. Thus, critics of laws restricting executive compensation argue that businesses should be free to decide for themselves what to pay their executives. The income paid to execu- tives belongs to the corporation, not to the government, and therefore such a law would violate their property rights. Rights function to protect certain cen- tral interests from being sacrifi ced for the greater overall happiness. Utilitarians can defend rights only to the degree that rights contribute to the overall good.

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Another example that can be raised against utilitarianism looks to specifi c relationships and commitments that we all make. For example, as a parent we love our children and have certain duties to them. Imagine a situation in which you have to choose between saving the life of your child and saving the life of a talented dedicated brain surgeon. Utilitarians are committed to determining the ethical decision by calculating the overall consequences of each choice and doing whatever will maximize the overall good. The example can be arranged in such a way that saving the brain surgeon clearly contributes to the overall good. But what ethical judgment should we make about the parent who even begins to make such calculations?

Utilitarians would seem to be committed to parental love and duty only to the degree that such love and duty contributes to the overall good. Parents should love their children because this contributes to the overall good of society. (And if it doesn’t?) But surely this misrepresents (and insults) the nature of parental love. I do not love my children because of the consequences that this might have for society. Principle-based ethicists would argue that there are certain commitments that we make, certain duties that we have, which should not be violated even if doing so would increase the net overall happiness. Violating such commitments and duties would require individuals to sacrifi ce their own integrity for the com- mon good. Thus, critics of excessive executive compensation might claim that gross inequality in pay is unfair and unjust in principle. We will consider similar themes of professional commitments and duties when a later chapter examines the role of professional responsibilities within business institutions.

2.5 UTILITARIANISM AND BUSINESS POLICY

Before moving on to principle-based ethics, it will be helpful to connect utili- tarian ethics to some general concerns of business ethics. At its most basic, utilitarianism is a social philosophy, offering criteria by which the basic structure of social institutions, such as business and the economy, ought to be determined. Social institutions should be structured in whatever way will maximize the overall good.

As we have seen, critics of utilitarianism deny that this is an adequate or complete social ethics. But even among utilitarians there is disagreement about the best means for attaining the utilitarian goal. It will be useful to intro- duce two versions of utilitarian thinking at this point. In general, utilitarians are committed to whatever means attain the ends of maximum happiness. On this view, policy questions are really pragmatic questions that depend on the specifi c circumstances of time and place. Nevertheless, some general policy patterns can be identifi ed.

One version of utilitarianism public policy holds that there are experts who can predict the outcome of various policies and carry out policies that will attain our ends. These experts, usually trained in social sciences such as economics, are familiar with the specifi cs of how society works and can therefore determine which policy will maximize the overall good.

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This approach to public policy underlies one theory of the entire admin- istrative and bureaucratic side of government. On this view, the legislative body (from Congress to local city councils) establishes the public goals, and the administrative side (presidents, governors, mayors) executes (administers) policies to fulfi ll these goals. The people working within the administration, the classic government bureaucrats, should know how the social and political system works and use this knowledge to carry out the mandate of the legisla- ture. The government is fi lled with such people, typically trained in such fi elds as economics, law, social science, public policy, and political science. This ap- proach, for example, would justify widespread government regulation of busi- ness on the grounds that such regulation will ensure that business activities do contribute to the overall good.

Consider how the Federal Reserve Board sets interest rates. There is an established goal, a public policy “good,” that the Federal Reserve takes to be the greatest good for the country. (This goal is something like the highest sus- tainable rate of economic growth compatible with minimal infl ation.) The Fed examines the relevant economic data and makes a judgment about the pres- ent and future state of the economy. If economic activity seems to be slowing down, the Fed might decide to lower interest rates as a means for stimulating economic growth. If the economy seems to be growing too fast and the infl ation rate is increasing, they might choose to raise interest rates. Lowering or raising interest rates in itself is neither good nor bad; the rightness of the act depends on the consequences. The role of the public servant is to use his or her expertise to judge the likely consequences and make the decision that is most likely to produce the best result.

A second infl uential version of utilitarian policy invokes the tradition of Adam Smith and claims that competitive markets are the best means for at- taining utilitarian goals. This version would promote policies that deregulate private industry, protect property rights, allow for free exchanges, and encour- age competition. In such situations the self-interest of rational individuals will result, as if led by “an invisible hand” in Adam Smith’s terms, to the maximum satisfaction of individual happiness.

The dispute between these two versions of utilitarian policy, what we might call the “expert” and the “market” versions, characterizes many disputes in busi- ness ethics. One clear example concerns regulation of unsafe workplaces. One side argues that questions of safety and risk should be determined by experts who then establish standards that business is required to meet. Government regulators (in this case, the Occupational Health and Safety Administration, or OSHA) are then charged with enforcing safety standards in the workplace. The other side argues that the best judges of acceptable risk and safety are workers themselves. A free and competitive labor market will ensure that people will get the level of safety that they want. Individuals calculate for themselves what risks they wish to take and what trade-offs they are willing to make in order to attain safety. Workers willing to take risks likely will be paid more than work- ers who demand safe work environments. Thus, a market-based solution will prove best at optimally satisfying these various and competing interests.

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There is no question that utilitarian reasoning dominates among policy makers and policy administrators. Policy experts at all levels are focused on results and on getting things done. This makes the utilitarian emphasis on consequences particularly attractive to fi elds such as economics, business, and government. It seems obvious that policy questions should be judged by re- sults and consequences. The utilitarian emphasis on measuring, comparing, and quantifying also reinforces the view that policy makers should be neutral administrators. The standard view is that policy goals should be left to the dem- ocratic decisions of the people. The people decide what they want and what makes them happy; the job of social policy is simply to help them attain those goals in as effi cient a manner as possible. Effi ciency is simply another word for maximizing happiness.

Finally, like utilitarians, policy experts are concerned with the well-being of the whole community. Their focus is on the collective or aggregate good. By their very nature, policy makers take a broad social perspective. This, too, is consistent with the utilitarian emphasis on the overall good.

Despite these close connections between utilitarianism and public policy, serious ethical challenges remain. We turn now to a major alternative to utilitar- ian ethics: principle-based ethics.

2.6 PRINCIPLE-BASED ETHICS

Principle-based, or rights-based, ethics emphasizes the fact that sometimes the correct path is determined not by its consequences but by certain principles or duties. More familiar synonyms for duty include obligations, commitments, and responsibilities. This principle-based approach faults utilitarianism for think- ing that our acts should always be judged by their consequences to the overall good. This ethical tradition denies the utilitarian belief that the ends do justify the means. It holds that there are some things that we should, or should not, do regardless of the consequences.

To understand why the ends don’t justify the means we need to emphasize that utilitarian ends are focused on the collective or aggregate good. Utilitarian- ism is concerned with the well-being of the whole. (This is one of the things that makes utilitarianism attractive to public policy makers.) But many of us have a deep commitment to the dignity of individuals. We believe that individuals should not be used as a mere means to the greater overall good. A prominent way of explaining this is to say that individuals have rights that should not be sacrifi ced simply to produce a net increase in the collective good.

Consider the debate mentioned previously concerning child labor in the developing world. Some policy makers in impoverished countries believe that the best means for raising the standard of living within their country is to increase exports. This brings in hard currency with which the country can pay for food, medicine, and education (and repay debts!). Increasing exports will raise the standard of living for all citizens and thereby meet the utilitar- ian goal of improving the collective good. However, to increase exports a

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country must be capable of selling their goods at costs below those of com- peting countries. Since labor is a major production cost, keeping labor costs low helps the country as a whole. Unfortunately, one means for maintaining low labor costs is to employ young children. (Cases of child labor in the man- ufacture of sneakers and clothing are only the most well-publicized instances of an all too common phenomenon.)

Is it ethical to use young children in such circumstances? Defenders of this practice argue, typically on good utilitarian grounds, that the children are better off with the jobs than without them, that they contribute to their own family’s income, and that they contribute to the overall welfare of their society. Critics claim, on principle-based grounds, that it is unethical to treat young children this way even if there are benefi cial results. In this view, child labor is ethically equivalent to child abuse and slavery. It is something wrong on principle.

Within one tradition, our ethical duty is explained in terms of a principle that the German philosopher Immanual Kant called the categorical impera- tive. (An imperative is a command or duty; categorical means that it is without exception.) Our primary duty is, according to Kant, to act only in those ways in which the maxim of our acts could be made a universal law. This is a very abstract way of saying something that is fairly intuitive. The “maxim” of our acts can be thought of as the intention behind our acts. The maxim answers the question: “What am I doing?”

Kant tells us that we should act only according to those maxims that could be universally accepted and acted on. (Consider how Kant might respond to the egoist view that all human behavior is intended for one’s own self-interest.) For example, Kant believed that truth telling could, but lying could not, be made a universal law. If everyone lied whenever it suited them, rational communica- tion would be impossible. Thus, lying is unethical. This condition of universal- ity, not unlike the Golden Rule, prohibits us from giving our own personal point of view privileged status over the points of view of others. It is a strong require- ment of impartiality and equality for ethics.

Kant also provided two other versions of this categorical imperative that are less abstract. He claimed that ethics requires us to treat all people as ends and never only as means. In yet another formulation, we are required to treat people as subjects, not as objects. These formulations restate the commitment to treat people as capable of thinking and choosing for themselves. Humans are subjects (they perform the act rather than being acted upon, to use the familiar subject/object categories from grammar). They have their own ends and purposes and therefore should not be treated simply as a means to the ends of others. In chapter 3 , we will examine a view on corporate social re- sponsibility that concludes, on Kantian grounds, that business managers have direct ethical responsibilities to all parties (stakeholders) who are affected by business activities.

Thus, on this Kantian theory our fundamental ethical duty is to treat peo- ple with respect, to treat them as equally capable of living an autonomous life. But since each person has this same fundamental duty toward others, each of us can be said to have the right to be treated with respect, the right to be

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Ethical Theory and Business 39

treated as an end and never as a means only. I have the right to pursue my own autonomously chosen ends as long as I do not in turn treat other people as means to my ends.

This points to a common way of understanding rights and duties. Philoso- phers will sometimes claim that rights and duties are correlative. This is to say that my rights establish your duties and my duties correspond to the rights of others. The principle-based tradition focuses on duties, which can be thought of as establishing the ethical limits of my behavior. From my perspective, duties are what I owe to others. Other people have certain claims upon my behavior; they have, in other words, certain rights against me.

Thus, to return to the earlier example, the Kantian would object to child labor because such practices violate our duty to treat children with respect. We violate the rights of children when we treat them as mere means to the ends of production and economic growth. We are treating them merely as means because, as children, they are incapable of rationally and freely choos- ing their own ends.

From this beginning, the principle-based, or rights-based, approach to eth- ics gets more complex. A complete theory must specify what rights we have and how they are justifi ed, the range and scope of rights, and some process for prioritizing rights and resolving confl icts between different rights. As prepara- tion for evaluating many of the debates to follow, we will pursue these ques- tions briefl y.

One way to understand rights is to think of them as protecting interests. We often make a distinction between a person’s wants and interests. Wants (or desires) are psychological states of an individual. They are what, as a matter of fact, people will pursue. Wants are subjectively known, in the sense that indi- viduals enjoy a privileged status for knowing what they want. (Imagine dis- agreeing with a person’s claim that they want something.) Interests work for a person’s benefi t and are objectively connected to what is good for that person. People don’t always want what it is in their interest to have.

For example, if given the choice many children would want to eat sugar- coated breakfast cereal each morning. Their parents deny them this on the grounds that it is not in their interests to eat such food. In this case, wants and interests confl ict. Likewise, many college students want to skip class, but it is not in their interest to do so. On the other hand, wants and interests can coincide. You want a good education and good health, both of which are in your interests to have.

As we have seen, some versions of utilitarianism take happiness, under- stood as the satisfaction of wants, as the fi nal goal of ethics. This version would either deny the distinction between wants and interests (interests being sim- ply strong wants) or argue that the best way to decide what is in someone’s interest is to let them decide for themselves (i.e., let them pursue their own wants). Either way, utilitarians believe that all wants/interests equally deserve to be satisfi ed to the degree that they equally produce happiness. If your de- sire for protection against an unsafe workplace is equal to my desire for high wages, each equally deserves satisfaction. Given this equality, the utilitarian

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commitment to satisfy as many wants as possible seems a reasonable strategy. But deontologists argue that wants and interests are not equal. They argue that at least some interests are so important to the well-being of an individual that they should not be sacrifi ced simply for a net increase in the overall happiness. Rights serve to protect these interests from being sacrifi ced.

Consider the case of downloading and sharing music and movie fi les over the Internet. A plausible case could be made that we would promote greater overall happiness by adopting a public policy that allowed unlimited and un- restricted downloads. Only a relatively small minority of people, mostly per- forming artists and producers, would be unhappy. On utilitarian grounds, it would seem that we would best serve the public interest by allowing unregu- lated downloads. However, the artists and producers would claim that they have property rights that should prohibit such a policy. The interests that the public might have in listening to free music or watching free videos is not on a par with the interests that individuals have in controlling their own property. Rights are sometimes described as “trumps” that override the collective will. They function in this way because they protect certain interests that are more important and central to human well-being than the mere happiness of others. The connection between rights and interests is important because it provides a way for determining which rights we have. By identifying central impor- tant interests, and distinguishing them from mere wants, we can determine the range of human rights.

So what rights do we have? The challenge is to develop an account that creates neither too many nor too few rights. Here is another example from my local community. City planners have a blueprint for road construction through- out the area. One of the planned roads would cut through and destroy a rare oak woodland within the city. When the plan was announced, local residents objected to the road on a variety of environmental grounds. The director of the regional planning group answered protesters by claiming that local citizens “have a right to uncongested roads.” Surely this theory of rights is too exten- sive. The connection between rights and duties that we mentioned previously is a good test for this. If rights imply duties, and if people have a right to un- congested roads, then it would seem that someone (local government?) has the duty to provide enough roads to prevent people from ever having to sit in a traffi c jam. It is diffi cult to see how this could be done without wreaking havoc on the well-being of many people by raising taxes, destroying neighborhoods, taking away property, and so on.

This suggests that we do not get “rights” simply by wanting something very badly. (Critics charge that this is a problem with rights-based ethics. It encourages people toward self-centered individualism, trying to privilege their own selfi sh wants by calling them rights. Anything that someone wants eventu- ally gets called a right and thereby people come to expect society to provide this for them.) But we also don’t want to have too narrow a view of rights. Too weak an account, or too few rights, collapses the entire theory toward utilitarianism.

We can at least sketch a general account of rights by returning to the origi- nal idea of respect and the elements of autonomy and dignity on which it is

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Ethical Theory and Business 41

based. What human characteristic justifi es the assumption that humans possess a special dignity? Why would it be wrong to treat humans as mere means or objects, rather than as ends or subjects?

The most common answer offered through the Western ethical tradition is that the human capacity to make rational choices is the distinctive human char- acteristic. Humans do not act only out of instinct and conditioning, they make free choices about how they live their lives, about their own ends. In this sense, humans are said to have autonomy. Humans are subjects in the sense that they originate action, they choose, they act for their own ends. To treat someone as a means or as an object is to deny to them this distinctive and essential human characteristic; it would be to deny to them their very humanity.

From this we can see how two related rights have emerged as fundamen- tal within philosophical ethics. If autonomy, or self-rule, is a fundamental characteristic of human nature, then the freedom to make our own choices deserves special protection as a basic right. But since all humans possess this fundamental characteristic, equal treatment (or equal consideration) is also a fundamental right.

In summary, we can say that rights offer protection of certain central human interests, prohibiting the sacrifi ce of these interests merely to provide a net increase in the overall happiness. But interests, as opposed to desires, are connected to human well-being in an objective manner. Human nature, charac- terized as the capacity for free and autonomous choice, provides the grounds for distinguishing central interests from mere wants.

2.7 VIRTUE ETHICS

For the most part, utilitarian and principled approaches to ethics focus on rules and principles that we might follow in deciding what we, both as individuals and as citizens, should do. Chapter 1 pointed out, however, that ethics also in- volves questions about the type of person one should become. Virtue ethics is a tradition within philosophical ethics that seeks a full and detailed description of those character traits, or virtues, that would constitute a good and full human life. Before concluding this chapter, it will be worthwhile to consider some of the virtues, and corresponding vices, that might be relevant to business ethics.

To understand how virtue ethics differs from utilitarian and principled approaches, consider the problem of egoism. As mentioned above, egoism is a view that holds that people act only out of self-interest. Many economists, for example, assume that all individuals always act out of self-interest; indeed, many assume that rationality itself should be defi ned in terms of acting out of self-interest. The biggest challenges posed by egoism and, according to some, the biggest challenge to ethics, is the apparent gap between self-interest and altruism, or between motivation that is “self-regarding” and motivation that is “other-regarding.” Ethics requires us, at least at times, to act for the well-being of others. Yet some people would claim that this is not possible; humans act only from self-interested motives.

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But as philosophers and psychologist have always known, human moti- vation is more complex than this. Some people are motivated by only selfi sh reasons, but many others are not. Some people are motivated by a deep care for others, by compassion, sympathy, and respect. Importantly, as every par- ent would recognize, such motivational factors can be taught and learned. Human beings are no more naturally selfi sh and greedy than they are natu- rally kind and compassionate. Human beings have the capability of being both selfi sh and kind.

Once we recognize this fact (and philosophers from at least the time of Plato and Aristotle have recognized this), we can begin to separate those motivations that are likely to lead us to a good and meaningful life from those motivations that are likely to lead us to a life of unhappiness. The fi rst set of motivation or character traits are called virtues , the latter are vices . An ethics of virtue seeks to develop the character traits and habits that will lead us to live a meaningful and happy human life. For virtue ethics, the acquisition of those traits becomes a fundamental question for ethics. Can we teach people to be honest, trustworthy, loyal, courteous, moderate, respectful, and compassionate?

Parents confront this question every day. I know my children will lead happier and more meaningful lives if they are honest, respectful, cheerful, and moderate and not greedy, envious, gloomy, arrogant, and selfi sh. Yet, simply telling my children to be honest and to avoid greed is insuffi cient. I cannot re- main passive and assume that these traits will develop naturally. Instilling these character traits and habits is a long-term process that develops over time.

Business institutions also have come to recognize that character formation is both diffi cult and unavoidable. Employees come to business with certain character traits and habits, and these can get shaped and reinforced in the work- place. Hire a person with the wrong character traits, and there will be trouble ahead. Designing a workplace, creating a corporate culture, to reinforce virtues and discourage vice is one of the greatest challenges for an ethical business.

An ethics of virtue shifts the focus from questions about what a person should do , to a focus on what type of person one is . This shift requires not only a different view of ethics but, at least as important, a different view of ourselves. Implicit in this distinction is the recognition that our identity as a person is constituted in part by our wants, beliefs, motivations, values, and attitudes. A person’s character—those dispositions, relationships, attitudes, values, and beliefs that popularly might be called a “personality”—is not some feature that remains independent of that person’s identity. Character is not like a suit of clothes that you step into and out of at will. Rather, the self is identical to a person’s most fundamental and enduring dispositions, atti- tudes, values, and beliefs.

As an example, consider the case of excessive executive compensation that opened this chapter. It is important to remember that not every CEO demands an exorbitant salary. The language of virtues and vices would seem very rele- vant as we think about the motivations involved. Why do some people demand hundreds of millions of dollars a year while others are happy with much less? Virtues such as modesty, moderation, self-control, unselfi shness, and humility

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Ethical Theory and Business 43

come to mind when we think about a CEO who could, but does not, take an excessive salary. Self-indulgence, greed, callousness, competitiveness, and self- ishness come to mind about the others. To a person with moderate and con- strained desires, an exorbitant salary is simply not an option. It would be out of character.

Virtue ethics can offer us a more fully textured understanding of life within business. Rather than simply describing people as good or bad, right or wrong, an ethics of virtue encourages a fuller description. For example, we might de- scribe Aaron Feuerstein as heroic and courageous. He is a man of integrity, who sympathizes with employees and cares about their well-being. Other executives might be described as greedy or ruthless, proud or competitive. Faced with a diffi cult dilemma, we might ask what would a person with integrity do? What would an honest person say? Do I have the courage of my convictions?

But virtue ethics seeks more than a detailed description of business life. Like all ethical theories, virtue ethics is also prescriptive in offering advice on how we should live. Virtue ethics calls on us to refl ect on two deeper questions. Given a more detailed and textured description of moral behavior, which set of virtues are more likely to embody a full, satisfying, meaningful, enriched, and worthy human life? Business provides many opportunities for behavior that is generous or greedy, ruthless or compassionate, fair or manipulative. Given these opportunities, each one of us must ask which character traits are likely to help us live a good life and which are likely to frustrate this. What type of person are we to be?

Besides connecting the virtues to a conception of a fuller human life, virtue ethics also reminds us to examine how character traits are formed and con- ditioned. By the time we are adults, much of our character is formed by such factors as our parents, schools, church, friends, and society. But powerful so- cial institutions such as business and especially our own places of employment and our particular social roles within them (e.g., manager, professional, trainee) have a profound infl uence on shaping our character. An accounting fi rm that hires a group of trainees fully expecting that fewer than half will be retained and only a very small group will make partner encourages motivations and behavior very different from a fi rm that hires fewer people but gives them all a greater chance at long-term success. A company that sets unrealistic sales goals will fi nd it creates a different sales force than one that understands sales more as customer service. Virtue ethics reminds us to look to the actual practices we fi nd in the business world and ask what type of people are being created by these practices. Many individual moral dilemmas that arise within business ethics can best be understood as arising from a tension between the type of person we seek to be and the type of person business expects us to be.

Consider an example described to me by someone who is conducting em- pirical studies of the values found within marketing fi rms and advertising agencies. This person reported that on several occasions advertising agents told her that they would never allow their own children to watch the very television shows and advertisements that their own fi rm was producing. By their own admission, the ads for such shows aim to manipulate children into buying, or

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getting their parents to buy, products that had little or no real value. In some cases the ads promoted beer drinking and the advertisers themselves admit- ted, as their “dirty little secret,” that they were targeted for the teenage market. Further, their own research showed them how successful their ads were in in- creasing sales.

Independent of the ethical questions we might ask about advertising aimed at children, a virtue ethics approach would look at the type of person who is so able to disassociate oneself and one’s own values from one’s work, and the social institutions and practices that encourage it. What kind of person is will- ing to subject children to marketing practices that they are unwilling to accept for their own children? Such a person seems to lack even the most elementary form of personal integrity. What kind of institution encourages people to treat children in ways that they willingly admit are indecent? What kind of person does one become working in such an institution?

2.8 SUMMARY AND REVIEW

No doubt this survey of philosophical ethics might appear very abstract and far removed from the business world. Despite such appearances, these are fundamental categories for thinking about ethical issues. But we should resist the temptation to treat these theories as some external rules that should be ap- plied to situations in a way that produces specifi c decisions. It is better to think of these theories as attempts to extract and articulate the basic principles al- ready present in common ways of thinking. Once such principles are clearly described, the philosopher’s role is to draw out their implications and offer justifi cations of them. Then the principles can be brought back to bear on practi- cal decision making. Understood in this way, ethical theories are not as abstract and nebulous as they might at fi rst appear. They have emerged from common ways of thinking as much as they are intended to guide our ways of thinking.

Consider utilitarianism. The fundamental insight of utilitarian thinking is that we should consider the consequences, all the consequences, of our actions before deciding what to do. A reasonable principle is that we should consider not only the consequences that our acts might have for ourselves, but also the consequences of our acts for all parties affected by them. The ethical theory of utilitarianism tries to work out the implications of this insight. In doing so, this theory has presented a powerful approach to answer the fundamental ethical question: How should we live our lives?

It would not be an overstatement to suggest that most economic decisions are implicitly justifi ed on utilitarian grounds. Understanding utilitarianism, both its strengths and weaknesses, is necessary for developing a reasoned perspec- tive on many economic matters. From the original rationale for market-based economies found in the works of Adam Smith, to the original legal rationale for creating limited-liability corporations, to much public policy and law-govern- ing fi nance, employment, consumerism, and world trade, utilitarian consider- ations have played a prominent, if not deciding, role.

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Ethical Theory and Business 45

Likewise, principled approaches to ethics capture another insight that is recognized in such common observations as “the ends don’t justify the means.” If utilitarian ethics make judgments in terms of consequences, principled ap- proaches demand that something should, or should not, be done regardless of the consequences. Some acts are right or wrong as a matter of principle, and it is our duty to act accordingly even if benefi cial consequences would suggest oth- erwise. Respecting individual rights and fulfi lling our ethical obligations can set limits on decisions aimed at producing good consequences.

The language of rights and obligations will play a major role in all the dis- cussions that follow. One need only refl ect on such phrases as “human resource management” and “labor as a factor of production” to see that Kantian ethics will have much to contribute to discussions about how employees ought to be treated. Treating employees as mere means to the end of productivity, while perhaps useful in terms of benefi cial consequences, is something that principle- based ethics rejects. Likewise, the professional duties associated with the gate- keeping roles as accountants, auditors, lawyers, fi nancial analysts, and boards of directors also function as ethical limitations on business activities.

Finally, virtue ethics encourages us to step back from specifi c decisions and actions to ask the very profound and personal questions: Who am I? What type of person am I to be? Throughout the course of our lives, each one of us devel- ops a personal character that is refl ected in what we believe, what we value, what we desire, and how we act. This character is manifested in our habits, dispositions, and personality. The ethics of virtue seeks to articulate which of those habits and character traits are likely to be part of a meaningful and happy human life. Whether refl ected in the ordinary language of such virtues as honesty, integrity, modesty, and trustworthiness, or such vices as greed, ma- terialism, belligerence, and rudeness, virtue ethics plays an important role in ordinary business life.

The basic approaches to ethics outlined in this chapter will provide essen- tial tools for understanding business ethics, and for making responsible ethical decisions in business.

REFLECTIONS ON THE CHAPTER DISCUSSION CASE

Consider two very different responses to the enormous pay packages de- scribed in the opening discussion case. One response might be to shrug one’s shoulders and claim that this is just the way it is. One could simply acknowl- edge that some people have power over vast amounts of corporate wealth and they use that power to reap huge fi nancial benefi ts for themselves and their friends. In fact, few observers either within or outside of corporate business have taken this approach. Without exception, the public response to these pay packages has been normative or evaluative. That is, everyone takes a stand either to criticize or to defend these decisions. It would be diffi cult to have an opinion about executive compensation that did not involve ethical concepts and categories.

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Reflecting on these stands, one can discover patterns in the way that most people think about such normative issues. Many people judge the ethics of ex- ecutive compensation in terms of consequences, either beneficial, according to defenders, or harmful, according to critics. Deciding between these views would involve, at least in part, investigating the real-world consequences that result from such pay packages. Ethical analysis will sometimes require such empirical investigation: Is high executive compensation, in fact, highly correlated with per- formance? Do stock options, in fact, encourage short-term thinking or earnings manipulation? Determining the facts will often play an important role in ethical analysis, and this would be a helpful first step to take in the process of analysis.

This case also raises ethical issues of principles and standards that do not involve empirical consequences. Ownership rights and fiduciary duties are two such factors that establish ethical constraints on consequentialist thinking. For example, many argue that board members have a fiduciary duty to stockhold- ers that should trump their desire to benefit corporate executives. A helpful step in the process of identifying principles and duties is to ask who might be benefited and who might be harmed by alternative decisions. Once such stake- holders have been identified, one should then ask if there are any individuals or institutions that have a duty to provide the benefit or prevent the harm.

Finally, this case also raises questions about personal virtues and vices. At first glance, this is a descriptive activity: Describe someone who so desires money that he would manipulate an earnings report; describe someone for whom a salary of several hundred thousands of dollars each year is not enough. But within these descriptions are normative and evaluative components. A per- son described as greedy has a real character flaw; a person of integrity is to be praised and honored. One challenge to such descriptions, of course, is to answer the “so what?” question. So what if I am greedy? Why should I care if I lack integrity? These questions go to the heart of ethical motivation. Business ethics seeks not only to justify good and right behavior, it also seeks to motivate people to act accordingly. This is among the foremost ethical challenges facing contemporary business managers.

CHAPTER REVIEW QUESTIONS

1. Describe ethical relativism and at least three philosophical challenges to this position.

2. Distinguish between utilitarian, principle-based, and virtue-based approaches to ethics. What are the strengths and weaknesses of each?

3. How are utilitarian ethics relevant to business? Explain at least three major challenges to utilitarian ethics.

4. How does principle-based ethics establish a connection between individ- ual rights and the nature of human beings?

5. Develop a list of virtues and vices. As a helpful way to begin, think about the pledge offered by Boy Scouts and Girls Scouts that begins: “A scout is trust- worthy, loyal, helpful. . . .” Are these various virtues unifi ed in any way?

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ENDNOTES

1 Fortune, June 25, 2001. This special report included the following articles: “The Great CEO Pay Heist” by Geoffrey Colvin (p. 64), “This Stuff Is Wrong” by Carol Loomis (p. 73), “The Amazing Stock Option Sleight of Hand” by Justin Fox (p. 86), and “CEO Pay: The Boss’ gains outstrips investors’ gains again. Did we Learn any- thing?” by Scott DeCarlo, Forbes , April 4, 2012.

2 For a persuasive analysis of the ethics of executive compensation, see Jeffrey Moriarty, “How to (Try to) Justify CEO Pay,” Bill Shaw, “Justice, Incentives, and Executive Compensation,” and Jared Harris, “How Much Is Too Much: A Theoretical Analy- sis of Executive Compensation from the Standpoint of Distributive Justice” in The Ethics of Executive Compensation, Robert Kold, editor (Boulder, CO: Japha Volume in Business Ethics, Blackwell Publishing, 2005).

3 Jeremy Bentham, An Introduction to the Principles of Morals and Legislation (Oxford: Clar- endon Press, 1907), p. 1.

4 John Stuart Mill, Utilitarianism, ed. George Sher (Indianapolis: Hackett Publishing Co., 1979), p. 10.

5 Ibid., p. 8. 6 Ibid., p. 11.

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48

3 C H A P T E R

Corporate Social Responsibility

L E A R N I N G O B J E C T I V E S

After reading this chapter, you will be able to:

• Explain and review the utilitarian and rights-based justifications for the eco- nomic model of corporate social responsibility;

• Explain how the economic model is extended and developed through a moral minimum;

• Describe the stakeholder model of corporate social responsibility;

• Explain the ethical foundations of the stakeholder model;

• Describe the philanthropic model of corporate social responsibility;

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Corporate Social Responsibility 49

• Describe the strategic model of corporate social responsibility;

• Explain how sustainability has become a strategic social responsibility for business.

DISCUSSION CASE: Walmart

On April 21, 2012, The New York Times reported that a six-year inter-nal investigation by Walmart had uncovered evidence of widespread bribery and corruption within their Mexican operations. The investigation discovered that Walmart employees had paid more than $24 million in bribes to promote the expansion of its business in Mexico. Furthermore, the Times reported that Walmart executives in Mexico were not only aware of the bribes, but also had intentionally hidden them from the Walmart corporate offi ces in the United States.

More damaging than even the reports of bribery in Mexico, the New York Times report also alleged that when the internal investigation was shared with corporate headquarters, Walmart executives terminated the investigation. The Times also reported than only upon learning of the newspaper’s own investiga- tion and plans to write a story did Walmart executives notify legal authorities. As a result, the U.S. Justice Department began an investigation of possible vio- lations of the U.S. Corrupt Foreign Practices Act in 2011.

Few corporations generate as much controversy and have as many vocal critics and defenders as Walmart. Few corporations would generate as much debate as Walmart on the question of corporate social responsibility. Part of this no doubt is due to its sheer size and infl uence. Walmart is the world’s largest retail business; it claims to have over 200 million customer visits per week at more than 8,100 retail stores in fi fteen countries. Its total sales for fi scal year 2011 were $418 billion. Worldwide, Walmart employs more than 2.1 million people. It is the largest private employer in both the United States and Mexico, and the single largest employer in twenty-fi ve U.S. states.

In many ways, Walmart is a socially responsible corporation, describing it- self as a business that “was built upon a foundation of honesty, respect, fairness and integrity.” What is described as the “Walmart culture,” is based on three “basic beliefs,” attributed to founder Sam Walton: respect for individuals, ser- vice to customers, and striving for excellence. Defenders point out that Walmart is regularly recognized as among the “most admired” companies in the Fortune magazine annual survey.

By all accounts Walmart is among the most fi nancially successful compa- nies in the world. Defenders would point out that this economic success is itself evidence of how well Walmart is fulfi lling its social responsibility. Walmart has created immense value for shareholders, consumers, suppliers, and employees. Stockholders, both individual and institutional investors, have received signifi – cant fi nancial benefi ts from Walmart. Consumers also receive fi nancial benefi ts in the form of low prices, employees benefi t from having jobs, many businesses

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benefi t from supplying Walmart with good and services, and communities ben- efi t from tax-paying corporate citizens.

Beyond these economic benefi ts, Walmart regularly contributes to com- munity and social causes. The Walmart Foundation, a philanthropic arm of Walmart, is the largest corporate cash contributor in the United States. For fi scal year 2009, Walmart donated more than $378 million in cash and in-kind gifts to charitable organizations. It contributed more than $45 million to charities outside the United States, and its in-store contribution programs added another $100 million to local charities. Walmart has focused it charitable giving in areas such as disaster relief, food and hunger programs, and education.

More recently, Walmart has begun an initiative to promote sustainability both in its own operations and in the products it sells. In 2005, Walmart an- nounced major sustainability goals for its own operations, including becoming more energy-effi cient, reducing its carbon footprint, reducing wastes and pack- aging, and fi nding more sustainable sources for its products.

Despite these positive aspects, not everyone agrees that Walmart lives up to high ethical standards. The allegations of widespread bribery in Mexico are only the most recent charges that have been raised against Walmart’s ethical standards. In contrast to Fortune magazine’s claim, critics portray Walmart as among the least admired corporations in the world. Ethical criticisms have been raised against Walmart on behalf of every major constituency—customers, employees, suppliers, competitors, and communities—with whom Walmart interacts.

For example, some critics charge that Walmart’s low-priced goods, and even their placement within stores, are a ploy to entice customers to purchase more and higher-priced goods. Such critics would charge Walmart with decep- tive and manipulative pricing and marketing.

But perhaps the greatest ethical criticisms of Walmart have involved its treatment of workers. Walmart is well-known for its aggressive practices aimed at controlling labor costs. Walmart argues that this is part of their strategy to offer the lowest possible prices to consumers. By controlling labor costs through wages, minimum work hours, high productivity, and keeping unions away, Walmart is able to offer consumers the lowest everyday prices. One of the most infamous cases of employee treatment involved health care benefi ts.

In October 2005, the New York Times published a story detailing a Walmart internal memo that outlined various proposals for reducing health care costs paid for Walmart employees. The memo recommended two major areas for action: increasing reliance on part-time workers who do not qualify for health- care benefi ts and seeking ways to encourage healthier and discourage unhealthy job applicant and employees. The memo also acknowledged long-standing crit- icisms of Walmart’s treatment of its employees and offered suggestions for a public relations strategy that would defl ect criticism of these proposed changes.

The memo was written by Susan Chambers, Walmart’s executive vice president for employee benefi ts, and pointed out that Walmart employees “are getting sicker than the national population, particularly in obesity-related dis- eases,” including diabetes and coronary artery disease. In one passage, Cham- bers recommended that Walmart would arrange for “all jobs to include some

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Corporate Social Responsibility 51

physical activity (e.g., all cashiers do some cart-gathering)” as a means to deter unhealthy employees and job applicants. “It will be far easier to attract and retain a healthier work force than it will be to change behavior in an existing one,” the memo said. “These moves would also dissuade unhealthy people from coming to work at Walmart.”

Recognizing that young worker are paid less and require fewer health ben- efi ts than older workers and are equally productive, the memo recommended strategies, including reducing 401(k) retirement contributions and offering edu- cation benefi ts, for attracting younger employees and discouraging older em- ployees. The memo stated “the cost of an associate with seven years of tenure is almost 55 percent more than the cost of an associate with one year of tenure, yet there is no difference in his or her productivity. Moreover, because we pay an associate more in salary and benefi ts as his or her tenure increases, we are pricing that associate out of the labor market, increasing the likelihood that he or she will stay with Walmart.”

The memo pointed out that 46 percent of the children of Walmart’s 1.33 million U.S. employees were uninsured or on Medicaid. “Walmart’s critics can easily exploit some aspects of our benefi ts offering to make their case; in other words, our critics are correct in some of their observations. Specifi cally, our coverage is expensive for low-income families, and Walmart has a signifi – cant percentage of associates and their children on public assistance.”

Walmart has also been criticized for paying its workers poverty-level wages. The average annual salary for a Walmart sales associate in 2001 was $13,861, and the average hourly wage was $8.23. For the same year, the U.S. federal pov- erty level for a family of three was $14,630. Walmart offers health care benefi ts to full-time workers but, relative to other employers, Walmart employees pay a disproportionately high percentage of the costs. According to critics, these low wages and benefi ts result in many Walmart employees qualifying for gov- ernment assistance programs such as food stamps and health care, effectively creating a government subsidy for Walmart’s low wages.

Walmart has also been sued by employees in nine U.S. states for illegally requiring employees to work overtime without pay and to work off-the-clock. The U.S. National Labor Relations Board fi led suit against Walmart stores in Pennsylvania and Texas charging illegal anti-union activities. Maine’s Depart- ment of Labor fi ned Walmart for violating child labor laws. Walmart has also been sued in Missouri, California, Arkansas, and Arizona for violating the Americans with Disabilities Act.

Walmart employs more women than any other private employer in the United States. Women comprise over 70% of Walmart’s sales associates, but men hold 90% of the store manager positions. Less than one-third of all mana- gerial positions are held by women, signifi cantly lower than the 56% among Walmart’s competitors Target and K-Mart. Only one of the top twenty positions at Walmart is held by a woman. In June 2004, a federal judge in California ruled that a class-action lawsuit could proceed on behalf of all female employees of Walmart, noting that “plaintiffs present largely uncontested descriptive statistics which show that women working at Walmart stores are paid less than

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men in every region, that pay disparities exist in most job categories, that the salary gap widens over time, that women take longer to enter management positions, and that the higher one looks in the organization the lower the per- centage of women.”

U.S. federal agents raided sixty Walmart stores in twenty states in October 2003. The raids resulted in arrests of over 250 illegal aliens who were work- ing as janitors at Walmart stores. All of the workers were employed by third- party sub-contractors that Walmart had hired for overnight janitorial services. A law-suit was fi led on behalf of several of these workers claiming that Walmart knowingly employed illegal workers as part of a scheme to pay below mini- mum wages, deny overtime pay, and otherwise exploit their illegal status.

Many local communities also criticize Walmart as a major factor in the de- mise of small towns and local businesses. Small retail businesses fi nd it dif- fi cult to compete with Walmart’s pricing and marketing strategies and local communities suffer when Walmart builds giant stores in suburban and rural locations. This not only encourages sprawl and places additional burdens on roads and transportation, it can undermine the local tax base. Further, the loss of local business has a trickle-down effect when local suppliers, and profession- als such as accountants, lawyers, and banks, suffer the loss of local business to Walmart’s national and international suppliers. The problem is compounded when Walmart receives tax subsidies and tax breaks offered by local govern- ments hoping to attract a Walmart store.

Walmart’s aggressive strategy to lower costs also is criticized for the harms it can cause suppliers both nationally and internationally. Walmart has been known to force suppliers to bid against each other in a type of “reverse auction” in which suppliers compete to see who can offer their products at the lowest costs. Because Walmart controls such a large market segment, many suppli- ers cannot survive if Walmart declines to carry their product. This practice has caused some suppliers to go out of business and has most others fi nding ways to send production offshore. One result is that Walmart, which promoted a “Buy American” marketing campaign in the 1980s, is responsible for the loss of un- counted American jobs as American businesses have been forced to outsource their production as the only means available to meet Walmart’s price targets. Finally, the labor practices of Walmart suppliers in China, Central America, and Saipan have all been accused to sweatshop conditions in factories manufactur- ing clothing produced for Walmart. 1

DISCUSSION QUESTIONS

1. Based on the cases described above, how would you describe the manage- rial philosophy of Walmart? What principles are involved? What are the over-riding aims, values, and goals of Walmart?

2. How would you decide, in any of the cases mentioned above, whether or not Walmart had been acting in a socially responsible way? What consid- erations would help you to decide?

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3. Does it matter to you, as a potential customer or a potential employee, whether Walmart has acted unethically? Why or why not?

4. For a corporation as complex as Walmart, with some activities that can be described as unethical and some as ethical, is it ever possible to make a blanket ethical judgment about its operations?

5. How might Walmart executives defend their actions after they learned of the bribery in Mexico? Would your judgment change if bribery was a com- mon business practice in Mexico?

6. Walmart’s wages are above the legally required minimum wage, and health benefits are not legally mandated. Are there reasons for a business to take actions that are not required by law but that might reduce profits?

7. Does Walmart have any responsibilities to its suppliers other than those specified in their contracts?

3.1 INTRODUCTION

This Walmart case describes the range of socially signifi cant decisions that are made on a daily basis by business management. But business ethics is not con- cerned merely with describing the facts of managerial practice, it is essentially normative. What is the proper role of business management in making such decisions? What is the proper role of business in society? What does a corpora- tion such as Walmart owe society? Do business managers have an overriding ethical responsibility to serve the interests of shareholders before acting for so- ciety’s interests? Do business managers serve society’s interests by serving the interests of shareholders? Do business managers have ethical responsibilities to employees, suppliers, and customers beyond the responsibilities mandated by law? Do the interests of shareholders override the interests of such other stakeholders as employees, customers, suppliers, and the wider community? This chapter will examine such questions by considering the major theories of corporate social responsibility.

3.2 THE ECONOMIC MODEL OF CORPORATE SOCIAL RESPONSIBILITY

What we shall call the economic model of corporate social responsibility has its roots in free market, or neoclassical, economic theory. This perspective is per- haps the most infl uential theory of corporate responsibility of the past century. In this view, the role of business management is to maximize profi ts within the law. This management role fl ows from the function assigned to business institutions within free market economies. In turn, as its ethical foundation, this economic theory can appeal to two distinct traditions in ethics: utilitarianism and individual rights to freedom and property.

Perhaps the best-known defender of the economic model of corporate so- cial responsibility is the Nobel Prize–winning economist Milton Friedman. In

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his book, Capitalism and Freedom, Friedman offers this clear statement of the economic model:

The view has been gaining widespread acceptance that corporate offi cials . . . have a social responsibility that goes beyond serving the interests of their stockholders. . . . This view shows a fundamental misconception of the charac- ter and nature of a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profi ts so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. . . . Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate offi cials of a social responsibility other than to make as much money for their stockholders as possible. 2

This can appear as a narrowly selfi sh understanding of business to some critics. On closer analysis, however, we can see the ethical roots of this view within Friedman’s quote. (It would also be useful to review the skepticism about business ethics examined in chapter 1 in light of this quotation.) The so- cial responsibility of managers is “to make as much money for their stockhold- ers as possible.” This responsibility follows from the “character and nature of a free economy.” Thus, a particular economic theory, what for simplicity’s sake we shall call the free market theory, provides the rationale for this managerial role. But why should we accept this economic theory? Friedman offers hints for how he might respond to this decidedly ethical question. By disregarding the role assigned management by the free market theory we would likely “under- mine the very foundations of our free society.” Managers are ethically obliged to maximize profi ts in order to avoid this serious ethical wrong.

This short passage only hints at the variety of social, political, ethical, and economic issues that are embedded in the market approach to business ethics. Indeed, it would be fair to describe “the market” as one of the most infl uential public policy philosophies in modern history. For issues ranging from environ- mental protection to the allocation of health care, and certainly for virtually every controversy in business ethics, we can commonly fi nd a recommendation to “let the market decide.” In this text alone, we shall examine market-based recommendations for such diverse issues as employee health and safety, de- ceptive advertising, product safety, employee rights and responsibilities, and environmental protection. It will be worthwhile to examine this view in depth.

Let us examine the Walmart case from the perspective of this economic model of corporate social responsibility. Walmart’s tremendous fi nancial ac- complishment is good evidence that management’s strategy of offering “every- day low prices” has been successful in the marketplace. Walmart has been able to attain such low prices by following a variety of managerial strategies. They have pursued several aggressive policies to keep labor costs down. They have used their purchasing power to bargain forcefully with suppliers to keep prices down and, as a result, have encouraged suppliers to outsource their production to China and other countries with lower labor and supply costs. They have outsourced their janitorial services to independent fi rms and nego- tiated with these suppliers for the lowest possible price. Walmart has entered

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new markets where their effi ciencies have been able to defeat competitors, and has bargained with local municipalities to attain favorable tax and fi nancial incentives. Despite lawsuits and regulatory infractions, we can assume that as a matter of corporate policy, Walmart has always been committed to obeying the law. In short, Walmart’s managers have sought to maximize stockholder profi t within the law.

How would “the market” evaluate this corporate strategy? Walmart seems to be exactly the type of socially responsible corporation envisioned by Friedman’s model. Walmart’s return on investment over the past 35 years has been extraordinary. Assuming that the retail industry has been free and open, and assuming that Walmart has not engaged in fraud, deception, or illegal activities, Walmart’s corporate strategy has, in the market view, attained sev- eral signifi cant ethical objectives. Perhaps most important, Walmart’s low prices have meant that more consumers have been able to purchase more of what they want. Society benefi ts when effi cient companies sell more prod- ucts at lower prices. By pursuing the lowest possible labor and supply costs, Walmart is able to hire more workers and buy more products for the same costs. This strategy provides an incentive to move the production of every- thing from janitorial services to soap and electronics to their most effi cient supplier. Greater effi ciency means that more benefi cial consequences result from each spending decision. In turn, this effi ciency attracts more investors, whose resources can then be used to increase business. Overall, society ben- efi ts from Walmart’s pursuit of profi t.

This justifi cation of the free market clearly is based on the utilitarian ethical principle that one should act so as to maximize the overall good. But besides utilitarianism, there is another ethical defense of the free market. Rather than appeal to the good consequences of the market, this approach appeals instead to the right of private property.

Again, Milton Friedman offers us a succinct statement of this principle:

In a free-enterprise, private property system a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom. . . . The key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation . . . and his primary responsibility is to them. 3

From this perspective, a business is understood as private property, and like any private property, the owners get to decide what to do with it. If Aaron Feuerstein, as the owner of Malden Mills, chose to use his property to benefi t the workers and community, fi ne. That is his free choice. But if the managers of Walmart chose to use their stockholders’ property to serve the interests of employees and the local community, they are acting irresponsibly. Pursuing any social objective other than the maximization of profi t is spending someone else’s money for your own purposes. According to defenders of the economic model, this is ethically equivalent to theft.

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Accordingly, the economic model of corporate social responsibility directs business management to pursue maximum profi ts. This is the primary ethi- cal responsibility of business management and is defended on both utilitarian and individual rights grounds. These same ethical considerations also direct government to adopt a laissez-faire approach to business. Business ought to be free from government regulation and control, allowing the market to function most effi ciently.

3.3 CRITICAL ASSESSMENT OF THE ECONOMIC MODEL: THE UTILITARIAN DEFENSE

The economic model of corporate social responsibility has been seriously chal- lenged on a variety of grounds. 4 For our purposes, we can focus on the ethical challenges and examine, in turn, those challenges directed at the utilitarian de- fense and then those directed at the private property defense.

The utilitarian defense of the economic model returns us to the discus- sion of utilitarianism found in chapter 2 . Utilitarian ethics can be thought of in terms of means and ends, of acts and consequences. Managers are assigned a certain role within a free market economy because by fi lling this role they contribute to the production of benefi cial consequences. Seen in this way, we can raise two general types of challenges: those that focus on the adequacy of free markets as means to the ends of maximally satisfying consumer demand, and those that focus on the appropriateness of these ends as legitimate ethical goals. More simply, is the free market an adequate means to our ends, and are the ends ethically appropriate?

Economists are familiar with a variety of situations in which the pursuit of profi t will not result in a net increase in consumer satisfaction. In fact, such situations are called market failures precisely because in these cases markets fail to do what they were designed to do. We can mention three general cases of market failures that are familiar examples from economics.

Externalities such as pollution and resource depletion are perhaps the best-known examples of market failures. Externalities provide examples of ef- fi ciently functioning markets failing to achieve optimal results. Common ex- amples of externalities would be such things as air pollution, groundwater contamination and depletion, soil erosion, and nuclear waste disposal. The costs of such problems are borne by parties (e.g., people downwind, neigh- bors, future generations) who are not a part of the exchange between seller and buyer. Such parties are said to be external to the economic exchange. Since the “costs” of these problems are borne by external parties, the exchange price does not represent an equilibrium between true costs and benefi ts. Such exter- nal costs (or benefi ts) mean that market exchanges will not achieve the optimal distribution of costs and benefi ts that is represented by that equilibrium. In short, markets fail to achieve their intended result. If we wish to attain that optimal distribution, the market will need to be regulated and controlled so as to internalize these externalities.

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A second example of market failure occurs in the case of public goods. There are many social goods—clean air, groundwater, ocean fi sheries, scenic views, friendly and supportive neighborhoods and communities, and safe streets for example—for which no pricing mechanisms exist. Without an economic price, no means are provided for markets to ensure that these goods get allocated to those who most value them. Thus, there is no guarantee that markets result in the optimal satisfaction of the public interest in regards to public goods. If we wish to preserve and protect such goods, something other than economic mar- kets will be needed as our policy mechanism.

A third type of market failure occurs in situations in which individual pursuit of rational self-interest—the sort of behavior required by competitive markets—results in a worse outcome than what would have occurred had the parties’ behavior been coordinated, either through cooperation or regulation. So-called prisoners’ dilemma cases are examples of situations in which coopera- tion has a more optimal outcome than competition. 5 But perhaps more common are situations in which individual rationality results in public harms.

Important ethical and policy questions can be missed if we leave policy decisions solely to the outcome of individual decisions. This problem arises for many issues in business ethics, particularly for health risks involved in such things as exposure to workplace chemicals, consuming food treated with pes- ticides or food additives, drinking water that contains nitrates and chemical residues, or pollution that results from the individual choices of numerous con- sumers. As a particular example, consider the decision involved in choosing to drive a low-mileage sport utility vehicle.

Driving such vehicles increases the amount of airborne pollutants dis- charged per mile driven. A 13-mpg SUV will discharge 134 tons of CO

2 over

its 124,000-mile lifetime. A 36-mpg compact car will discharge 48 tons over the same distance. If I act as the rationally self-interested individual presupposed by free market economics, I would calculate the benefi ts of driving an SUV and weigh them against the increased costs and health risks that I face from pollution. Since the increased risks to me (or to any individual facing such a choice) of my driving an SUV rather than a compact are infi nitesimally small, my self-interested choice to drive an SUV is reasonable according to market conceptions of individual rationality.

Consider these same facts not from an individual point of view but from the point of view of the population of, say, Los Angeles. Since, as our individual cal- culation indicated, it can be rational for any individual to choose an SUV, the in- dividualistic approach implicit in market solutions would accept the Los Angeles pollution rate as a rational policy. The overall social result of such individual cal- culations might be signifi cant increases in pollution and such pollution-related diseases as asthma and allergies. There are a number of alternative policies (e.g., restricting SUV sales, increasing taxes on gasoline, treating SUVs as cars instead of light trucks in calculating corporate automobile fuel effi ciency standards) that could address pollution and pollution-related disease. However, these al- ternatives would be considered only if we examine this question from a social rather than an individualistic perspective. Because these are important ethical

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questions, and because they remain unasked from within market transactions, we must conclude that markets are incomplete (at best) as a means to attaining the overall social good. In other words, what is good and rational for a collection of individuals is not necessarily what is good and rational for a society. Once again, if society wishes to address these concerns it will need to rely on public and not private (i.e., the market) decision-making mechanisms.

The upshot of these challenges is that economic markets are so complex that it is extremely unlikely that a single and simple directive such as maximize profi ts will produce the greater overall good in all cases and in every situa- tion. As we have seen in chapter 2 , utilitarianism is a very pragmatic theory. Ethical judgments about particular acts are always contingent upon what hap- pens after the act. Utilitarians are committed to specifi c principles only when, and only to the degree that, they produce the desired results. Because we can never know the future in a complex and ever-changing world, utilitarians al- ways remain ready to revise their principles in light of changing consequences. An unconditioned ethical directive, such as the one that the economic model of corporate social responsibility demands of business management, is inappro- priate for a utilitarian theory. A more precise formulation of a utilitarian-based market principle for management would be: Maximize profi t whenever doing so produces the greatest overall good for the greatest number of people. This principle, in turn, will require management to consider the impact that a deci- sion will have in many ways other than merely fi nancial.

Of course, defenders of market solutions have ready responses to these challenges. Even free market defenders could support regulation that would require business to internalize externalities. Presumably they would support legislation to create shadow prices for unpriced social goods or for exempting such goods from the market, as when national parks and wilderness areas are set aside as public lands. The law is also the appropriate mechanism for ad- dressing social goods that are unattainable through individual choice. In short, the law is the obvious remedy for social harms resulting from market failures. Once again, as Friedman says, as long as business obeys the law it meets its social responsibility by responding to consumer demand in the marketplace.

But there are good reasons for thinking that such ad hoc attempts to repair market failures are socially inadequate. First is what I call the fi rst-generation problem. Markets can work to prevent harm only through information supplied by the existence of market failures. Only when fi sh populations in the North At- lantic collapsed did we learn that free and open competition among the world’s fi shing industry for unowned public goods failed to prevent the decimation of cod, swordfi sh, Atlantic salmon, and lobster populations. Only when workers died from exposure to such workplace pollutants as asbestos and coal dust and only when consumers died from exploding fuel tanks and contaminated food products did society learn about the dangers of these situations. That is, we learn about market failures and thereby prevent harms in the future only by sacrifi cing the fi rst generation as a means for gaining this information. When public policy involves irreplaceable public goods such as public health and safety, such a reactionary strategy is ill-advised.

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But even if we allow government regulation to establish social standards for business, we are still faced with the ability of business to infl uence both government regulation and consumer demand. The economic model of cor- porate social responsibility limits business’s responsibility to obeying the law and responding to consumer demand. In this model, it is government’s respon- sibility to prevent and compensate for market failures. Once market failures are adequately addressed, business need only obey the law and respond to the market. But this assumes that business cannot or does not inappropriately infl u- ence the law. “Inappropriate” infl uence, in this model, is infl uence aimed not at optimizing the overall good (the goal, after all, of markets) but at protecting the interests of business. An obvious example is the automobile industry’s suc- cessful lobbying effort to have SUVs treated as trucks rather than as passenger vehicles so that manufacturers can meet corporate automobile fuel effi ciency (CAFE) standards for passenger vehicles established by law.

But just as we must recognize the ability of business to infl uence gov- ernment policy, we must also recognize its ability to infl uence consumers. To conclude that business fulfi lls its social responsibility when it responds to the demands of consumers is to underestimate the role that business can play in shaping public opinion. (We will examine this issue in more depth in chapter 8 .) Advertising is a $200 billion a year industry in the United States alone. It is surely disingenuous to claim that business passively responds to consumer de- sires and that consumers are unaffected by the messages that business conveys. Assuming that business is not going to stop advertising its products or lobbying government, the market-based approach that is implicit within the economic model of corporate social responsibility is inadequate.

The second challenge to this utilitarian defense of the economic model claims that the ends attained even by an effi ciently functioning market are unsatisfactory on ethical grounds. Throughout this chapter we have been re- ferring to the ends or goals of the market variously as “maximize overall hap- piness,” “optimal satisfaction of consumer demand,” “greatest overall good,” “greatest good for the greatest number,” “maximally satisfying wants,” and “the satisfaction of consumer preference.” Let us return to a discussion from chapter 2 and become more precise in analyzing the ends of an effi ciently func- tioning market.

Utilitarian ethics directs us to maximize happiness. How would a market serve this goal? At fi rst glance, it seems that people are happy whenever they get what they want and markets function to satisfy consumer wants. But, more precisely, markets address only those wants that are expressed within markets. We might better call such wants consumer demand or consumer preferences. Now, of course, what people demand as consumers and what makes them happy are not always identical. Friendship, psychological health, and love are important elements of happy lives, but you can fi nd none of these sold on the open market. Drugs, pornography, and cigarettes are some things demanded by consumers that do not, in the ethical sense, make people happy. In fact, there is some evidence, both anecdotal and social scientifi c, that suggests that people who get a lot of consumer goods are often not as happy as those with fewer such

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goods. Put another way, even if people received all the goods and services that they desired as consumers, there is no guarantee that they would be happy. 6

A defender of free markets might claim that even if consumer satisfaction does not tell the entire story of human happiness, it at least tells a part. Even if some good things cannot be bought, getting more rather than less of what can be bought still contributes to human happiness.

Let us step back here to recognize the signifi cance of this issue. Market economies, and many of the political institutions that surround them, assume (often uncritically) the value of economic productivity and economic growth. The language of economic growth is simply a shorthand way of saying that more people are getting more of what they want. Specifi cally, it would be sat- isfying more of those wants that can be expressed in the marketplace. But is it true that getting more of what you seek in the market is good? Is it always ethi- cally better to satisfy rather than frustrate consumer preferences? Is economic growth always good?

But surely the answer to this question is that eco