About business ethics
Business ethics seems to be an oxymoron; it consist of two elements that do not seem to fit together. Many scandals and malpractices have been uncovered. However, even in everyday business activities one needs basic ethical elements like co-operation, honesty, and trustworthiness. The definition of business ethics is ‘the study of business situations, activities, and decisions where issues of right and wrong are addressed’. The right and wrong in the definition are meant morally, not commercially, financially, or whatsoever. The issue of right and wrong brings us to the law, which actually specifies ethics, but does not cover the whole area of ethics. Some behaviours or actions are not legally forbidden, but can be said to be wrong from a moral point of view. The other way around is true as well; some rules and regulations in the law have nothing to do with ethics (that you have to drive on the right side of the road). Since business ethics is situated in the grey area of business, questions and dilemmas are often equivocal (not one right answer). The following definitions help you distinguish between ethics and morality. ‘Morality is concerned with the norms, values, and beliefs embedded in social processes which define right and wrong for an individual or a community’. ‘Ethics is concerned with the study of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for a given situation. These rules and principles are called ethical theories’. So their relationship:
Morality, Ethics, Ethical theory, Potential solutions to ethical problems
Whereby Ethics rationalizes morality to produce ethical theory that can be applied to a situation.
Consumers, pressure groups, and the media continuously pay attention to business ethics. Firms seem to recognize the importance of being ethical more and more, and they also realize that it may be even good for their business. The following are reasons why business ethics are important:
Businesses have great power and influence over society; business ethics can help understanding why this happens and what the consequences might be, and what we can do about it.
Business has major potential to help society in economic and welfare context, how they use this potential raises ethical questions.
Malpractices can harm individuals, communities, and the environment enormously.
Stakeholders place increasingly tough ethical demands on businesses; business ethics can help appreciating and understanding this challenge so that businesses are able to effectively meet their expectations.
Many businesspeople lack ethical education; by studying business ethics, ethical decision-making can be done better because it can help identifying, diagnosing, analyzing, and solving ethical problems.
Ethical violations still occur; many employees do not find their employer fair. Business ethics can find out why that is like that and how we can deal with those problems.
Business ethics provides the tools to consider what way of managing ethical problems is beneficial for organizations.
Business ethics contributes to knowledge in the sense that it provides knowledge outside the regular frame of business studies; moving more to societal questions, so that we can understand society in a systematic way.
Many remain sceptical about business ethics, but that is more often based on the theories and their applicability than on the subject itself. As said, more and more attention is paid to the subject of business ethics, also by universities and movie makers. Also, the ‘business ethics industry’ is rising, to help businesses with their ethical issues. Furthermore, consumer spending on ethical products is rising (fair trade, energy efficient products, etc).
The level and type of ethical misconduct that is observed across a range of organizational types is similar. However, there are some noteworthy differences depending on the context.
First, the difference between small and large companies. Small companies have less time and resources to devote on ethics. Their approach to ethics is informal and trust-based, and they see their employees as the most important stakeholder. Large companies usually have standardized approaches and more resources to establish ethics management programmes.
What hinders them is the need to focus on shareholder value and profitability, and also the very fact that they are big and complex.
Second, the difference between private, public, and civil society organizations (CSOs). The major responsibility of private companies is their shareholders, that of civil society organizations their constituencies and donors. The public sector is mainly concerned with the general public and higher level government. The latter is concerned with ethical issues in the area of law, corruption, public accountability, distribution of resources, etc. That often results in a formal and bureaucratic approach to ethics. CSOs are usually focused on mission and values, which results in a more informal approach. The book focuses on larger firms. The table on page 17 summarizes the differences in business ethics that can be observed across various organizational types.
While globalization presents huge opportunities, it also brings increased risks for businesses. These have to do with the speed with which information is transferred, maintaining confidentiality, interdependence of markets, and the virtual business place. Also from society a controversial answer on globalization is heard. Especially MNCs have to justify their operations more and more, as they are being accused of exploitation, environmental destruction, and using their power to involve developing countries in a race to the bottom (they invest in countries that offer the best conditions in the area of taxes, environmental regulations, and worker’s rights).
People discuss whether globalization is even occurring at all. Internationalization is a part of globalization, but not the same as the process of globalization itself. Some say that Westernization is a better term to describe the process that is going on, since the western culture is diffused around the world. But that already happened in the colonization times as well. What then are the new developments? First, technological developments. We have increased communication opportunities and technologies that allow us to connect and interact with others at large distances. Also, transportation technologies have improved significantly. Second, political developments. Passing borders has become much easier and obstacles like the iron curtain have been removed.
One author says that deterritorialisation is the best word to describe the current process, and he proposes the following definition of globalization: ‘a process which diminishes the necessity of a common and shared territorial basis for social, economic, and political activities, processes, and relations’. For examples of globalization that fit this example, see page 20.
Globalization as deterritorialisation is important for three areas – culture, law, and accountability -, which will now be discussed.
First, culture. Ethical values that we consider as logical in our home country might not be seen the same way in foreign countries. An obvious example here is the area of gender and racial diversity.
Also firing employees may seen as a logical results of economic downturn in Europe, but is considered very unethical in Chinese companies. Cultural differences have existed forever, but globalization makes them visible and turns them in to potential ethical problems.
Second, the legal area. When a company only does business in its home country, it can rely on the legal framework there to decide on what is right and wrong. However, as soon as the company crosses borders, there is no one legal framework telling them what is right and wrong anymore. The demand for business ethics will increase since the national government cannot control the actions of the organization anymore.
Third, the area of accountability. Obviously, corporations are the most important players in the global field. They are suppliers, they own mass media, they pay wages, and they pay taxes. Also, they account for a big percentage of GDP, while they have no formal responsibility or accountability for the people like the government has. So the more globalization occurs, the more demand for corporate accountability rises. The stakeholders of corporations and their ethical impact are summarized in the table on page 25.
As you have learned many times, globalization involves a paradox: on the one hand the world is converging, but on the other hand business face new, unknown regions and countries that have different ethical practices and values, which presents a diverging view on globalization. The formal academic subject of business ethics has its roots in Northern America, and is a relatively young subject in the rest of the world. In Europe attention for it was increasing from the 1980s.
The questions which are posed in the area of business ethics differ across the world. Figure 1.7 on page 26 summarizes the regional differences between Europe, North America, and Asia from a business ethics perspective.
We agree that there should be ethical conduct in businesses, but who should make sure that this really happens; who is responsible? In the US, the culture is individualistic, so the individual should make the choices that are ethically right.
Asia, on the other hand, relies more on the hierarchy, so top management are the ones responsible for ethical behaviour. In Africa and India, they take a similar perspective as in Asia. In Europe, it is found that the state is responsible because they make the rules and regulations. In most American states, there is not that much regulation on business ethics, so the key player is the corporation. In Europe, the regulations on business ethics are many. That results in governments, corporate associations, and trade unions being the main actors in business ethics. In Asia, there are also more regulations but it are the corporations rather than the trade unions that collaborate with the government. Another situation is that businesses are for a large part state-owned, as is the case in China. So we can say that in Asia the corporations and the governments are the main players. Developing countries like Southern America and Africa have yet another key player: the non-governmental organizations. Since the governments there are often corrupt or do not have enough money, they cannot establish the necessary legal frameworks.
Because of the legal framework in Europe, there is not so much freedom and flexibility for managers in deciding on ethical issues. In Asia there is more flexibility, and emphasis is placed on collective responsibility and relationships. The US rely heavily on rules and regulations; but these come from the businesses themselves rather than from the government. But punishments can be severe. The African approach to business ethics can be explained by the philosophy of Ubuntu, which is ‘a value system in which the commitment to co-existence, consensus, and consultation is prized as the highest value in human interaction’. A similar approach is the Chinese Guanxi idea.
The different regions find different things most important in business ethics. The European textbooks focus on capitalism and economic rationality, the US books focus on privacy, salary issues, whistle blowing, and privacy, the Asian on corporate governance and the accountability of management, and the countries in de developing world focus on ethical obligations to provide jobs that pay enough to live from, and to price goods fairly.
They also expect MNEs to make a contribution to healthcare, local development, and education. US companies often have their shareholders as only stakeholders, whereas companies in other regions have to deal with boards, other companies, and banks as well.
Why are there so many differences? In Europe, the Catholic and Lutheran Protestant religions resulted in a collective organization of the economy. The Calvinist-Protestant religion in the US resulted in a capitalist economy. So religion is the main source of these differences, which is also visible in other regions of the world. Asia is influenced by Hinduism, Buddhism, and Confucianism which resulted in a relational, flexible, and pragmatic approach. Muslims rely on justice, integrity, and trusteeship. There are also other sources. For example, Europe had to build its institutions again after World War II. In the US, scandals have been given a lot of attention which further drives the corporate need for ethical behaviour. The approach or situation can also be a result of a colonial history.
Until now we discussed differences, but there are also similarities. For instance within Europe, the national governments lose importance and the different business systems are becoming more similar. Deregulation takes place, due to which the European system becomes more similar to the US system.
In the Eastern European countries there are weak states and no tight regulations which results in the need for businesses to deal with ethical issues themselves as well.
There are several impacts that businesses have on society:
Pollution of the environment
Waste disposal problems
Downsizing and plant closures
Erosion of local environments/cultures as a result of mass tourism
Sustainability is a term that addresses these issues and is increasingly heard nowadays, often in combination with development (sustainable development). The definition of sustainable development is ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. It has an economic, social, and an environmental element.
We can define sustainability as ‘the long-term maintenance of systems according to environmental, economic, and social considerations’. It partly explains the idea of the triple bottom line (TBL). This says that business does not have one goal (adding economic value), but that other goals include environmental and social goals. We will now discuss each of these three components in more detail.
First, the environmental component. This is where the concept of sustainability emerged from. The ethical issue here concerns managing physical resources effectively so that as few as possible are wasted. Bio systems have eternal life if they are treated well, so businesses must treat them in such a way that their health is not in danger. Also important are non-renewable resources and damaging environmental pollutants that are emitted while producing. The economy itself is also a concern here; business should try to maintain or increase the current living standard.
Next, the economic component. Economic growth is constrained by the possibilities that the earth gives us (e.g., population and economic activity cannot grow forever because there is no space for that).
The first implication for business ethics is that it is responsible for economic performance on the long-term. Furthermore, it includes the attitude that a company has towards the economic framework. This concerns for instance bribes and cartels, which would not be ethical.
Third, the social component, which is relatively new. It emerged as a response on unethical activities in less developed regions. The main issue here is the social justice issue. The welfare in the world is still very unequally distributed, but that is not the only gap. Social justice also addresses the differences between men and women, between the urban rich and the rural poor, etc. The UN developed the eight Millennium Development Goals:
Stop extreme hunger and poverty
Make primary education available everywhere
Promote gender equality
Reduce child mortality
Improve mothers’ health
Combat diseases
Ensure environmental sustainability
Establish a global partnership for development
Governments are responsible for achieving those goals, but they influence businesses
To discuss the wider responsibility of corporations, we first have to define what they exactly are. The vast majority of business forms are corporations, but not all (sole traders). Also there are non-businesses that are corporations (charities). For the law, corporations are independent from their owners, workers, investors, and consumers, and they have their own right. That is why they have perpetual succession (it will not die when his investors etc die). Furthermore, because it is independent, the corporation itself owns its assets. This leads us to the following implications:
Corporations are seen as artificial persons for the law
Since corporations are independent of their owners, shareholders have limited liability
Managers and directors are responsible for protecting shareholders’ investments
This part was the legal responsibility, next come the social responsibilities. Nobel-Prize-winner Milton Friedman says corporations do not have social responsibilities because:
Only human beings can have moral responsibility (so the humans who run the corporation are responsible for the actions of the corporation)
Managers should only act in the interests of shareholders because that was the reason for setting up the company, the reason was not being socially responsible
The state should pursue social responsibility, not corporate managers
Literature does not agree on whether corporations have social responsibility. Most say that they have some, but that the main responsibility lies in individuals, because one cannot show that corporations have agency independent of their members. Two arguments to show that:
There is a corporate internal decision structure which directs decisions to reach certain goals. Various elements interact to come to decisions, so they cannot be assigned to individuals.
There is an organizational culture which specifies values and beliefs and says what is right or wrong. This culture influences the actions of individuals.
So we can actually say that the corporation has more social responsibility than the individuals.
Corporate social responsibility (CSR)
Many say that corporate social responsibility exists, often because it is in their own self interest to have social responsibilities (enlightened self-interest). That is because:
Customers might boycott socially irresponsible corporations
Employees like working for and are more committed to socially responsible corporations
Having CSR can ensure greater independence from the government because regulations may be a step ahead of legislation
CSR can be seen as a long-term investment to ensure a better community which in turn ensures a stable competitive environment for the corporation
However, should this be called CSR if it is actually only to maximize profit? So it depends on the primary motivations of the people taking the decisions. Other, moral arguments for CSR:
Corporations should solve the social problems they cause (pollution etc)
Because corporations have their power and resources, they should use these responsibly in society
All actions of corporations have social impacts (employment, provision goods/service), and corporations are responsible for those
Shareholders are not the only stakeholders, so other stakeholders (like consumers and suppliers) should also be taken into account.
Now we have shown that CSR really exists and is necessary, we have to define what it includes. It includes ‘the economic, legal, ethical, and philanthropic expectations place on organizations by society at a given point in time’. Carroll made a model for CSR in the form of a pyramid which further explains this definition.
The lowest layer are the economic responsibilities, which are required by society. So corporations must provide return on investments, wages and a safe working environment, and a desired quality of services/goods.
Next, the legal responsibilities, required by society as well.
Then, the ethical responsibilities, which are expected by society. Society wants corporations to act in a just, right, and fair way, even though it might be beyond the legal framework.
On top are the philanthropic responsibilities, these are desired by society. The world philanthropy means love of the fellow human. So this means that lives should be improved; that of employees, but also local communities and even society in general. This can be done by giving money to charities, supporting local schools, or sponsoring social events. This category is least important.
A disadvantage of this model is that it does not tell us what to do when there are conflicts between these responsibilities. For example closing a plant can be an economic responsibility, but clashes with the ethical responsibility to provide secure jobs. Also, it is biased to the US, as we will see now.
The concept of CSR comes from the US, which is because US companies tend to be not so open about their social responsibilities. Therefore, an explicit model of CSR arose, whereas other countries have more implicit models since CSR is already embedded in the institutional and legal framework of society. In Europe regulations ensure that, and in countries like Asia or Africa, religious institutions ensure it. Some differences:
The economic responsibility in the US focuses really only on profit. In Europe and Asia, economic responsibility is seen as a broader concept; corporations are economically responsible for local communities and employees as well.
Legal responsibility in Europe is seen as the basis for social responsibility, since the state provides rules and regulations in order to ensure social responsibility. In the US, the government support private liberty and relies more on companies themselves.
People in Europe tend to mistrust corporations to a bigger extent than US citizens. So corporations in Europe constantly have to ‘prove’ that they behave ethically and there is much more discussion about ethical behaviour of corporations. In Africa, the focus is on avoiding corruption and ensuring good governance.
In the US it is quite normal that big companies donate much money. In Europe taxes are much higher and therefore people expect governments to fund activities like supporting education and funding art.
The sequence of the pyramid of CSR is not the same everywhere. US consumers find economic responsibilities most important, French and German people find complying with laws and social norms most important, and African consumers find economic responsibilities most important, followed by philanthropy, legal, and ethical responsibilities.
An idea related to CSR is corporate social responsiveness. It is ‘the capacity of a corporation to respond to social pressures’. There are four strategies to respond to social pressures:’
Reaction. Then, the corporation avoids responsibility by for instance saying that the government is responsible
Defence. The corporation admits that it is responsible, but try to do as least as possible.
Accommodation. The corporation accepts that it is responsible and does what relevant groups demand of them.
Pro-action. The corporation goes beyond the norms and anticipates on what might be coming in the future and thus does more than is expected.
The concept of corporate social performance (CSP) says we can measure the outcome of CSR. There are three areas in CSP:
Social policies. These are made explicit by companies, for instance in a vision or mission statement.
Social programmes. These are the specific activities, measures, or instruments that are established to execute social policies.
Social impacts. We can measure these by assessing concrete changes achieved by the corporation. This is difficult because many changes are not measurable or if they are measurable, influenced by other factors as well. Some data, like education support or environmental damage prevention can be measured.
So far we have assessed the responsibilities of the company, but not yet to who it is responsible. The book defines a stakeholder of a corporation as ‘an individual or a group which either: is harmed by, or benefits from, the corporation; or whose right can be violated, or have to be respected, by the corporation’. This definition includes the principle of corporate rights and the principle of corporate effects.
The traditional management model says that the firm is responsible for shareholders, customers, employees, and suppliers.
The stakeholder model says firms are responsible for shareholders, suppliers, civil society, employees, customers, competitors, and the government.
The network model says firms are responsible for the same stakeholders as the stakeholder model, but then also for the stakeholders’ stakeholders.
Shareholders are the only ones who have a real reciprocal relationship with corporations, since they directly provide money to conduct businesses. So why do other groups also have a legitimate claim on the corporation?
Because some groups have a legitimate stake which is protected by law, for instance suppliers have contracts with corporations which are legally binding.
Because there are externalities caused by doing business, for instance when a plant in a small community is closed many more people than just the employees will be affected. However, these are not protected by law.
Because saying that the owners (so the shareholders) are the only ones who have rights is a too narrow view. Most shareholders do not own shares because they want to own the company, but just because they want to earn some money.
So what does this mean for the role of management? They have to balance their responsibilities for their multiple stakeholders. It is even suggested that all stakeholders should have a say in the managerial decisions (stakeholder democracy).
In the US the shareholder was long seen as the dominant stakeholder, therefore there was a necessity to shift to a responsibility for other stakeholders as well.
In Europe and other parts of the world that was not so much the case, since the government automatically plays a bigger role as stakeholder, and is held responsible for the other stakeholders as well. So we can say that the stakeholder concept is pretty new in literature, but that it has been practiced for quite a long time already in other countries than the US.
There are different forms of stakeholder theory:
Normative stakeholder theory. This theory tries to explain why corporation should take into account stakeholder interests.
Descriptive stakeholder theory. Tries to describe whether and how corporation actually do take into account stakeholder interests.
Instrumental stakeholder theory. Tries to assess whether it is beneficial for the corporation to take into account stakeholder interests.
Corporate accountability assessed ‘whether a corporation is answerable in some way for the consequences of its actions’. Friedman (the one who said that by pursuing their own self interests, corporations where socially responsible) says that corporations are only answerable to their shareholders. But firms have become more and more political actors, because of governmental failure and the increasing influence and power of corporations. We will now discuss these reasons in more detail.
First, governmental failure. Beck wrote a book (Risk Society) that describes several risks that we are exposed to nowadays (global warming, industrial agriculture etc). We expect governments to deal with those risks but it turned out that they were often not able to, or were even responsible for a problem. Why is that? Sometimes because they are just part of the problem. Often, resolving issues would really change the lifestyle of modern society or decrease our welfare, which politicians do not dare to do. Sometimes governments are simply not able to control risks (Chernobyl). Beck says that the governments are not the only ones responsible anymore, there are also ‘subpolitics’ (for instance Greenpeace).
Second, there has been an enormous rise in corporate influence and power due to several developments:
Liberalization and deregulation of markets
Privatization of public services
Unemployment struggles (government cannot directly control this)
Globalization (which could force governments to engage in a race to the bottom)
Industrial society becoming too complex and far-reaching to allow for appropriate laws, as a result of which companies have to regulate themselves.
It is said that consumers have a democratic vote in corporations since they decide what to buy (‘purchase votes’). However, one cannot really see his choice reflected in the actions of corporations. Furthermore, consumers are constrained by the choices they have. So how can we make corporations more accountable? For instance by letting them report and audit on their ethical, environmental, and social performance or by developing stakeholder partnerships and stakeholder dialogue. So in other words; by ensuring transparency on their corporate social activities. Transparency is ´the degree to which corporate decisions, policies, activities, and impacts are acknowledged and made visible to relevant stakeholders´.
This is a pretty new concept, and therefore it is still difficult to define. We offer three perspectives: a limited view (corporate philanthropy), an equivalent view (CSR), and an extended view (emphasizes extended political role of corporations) (the table on page 75 provides an overview).
First, the limited view. It focuses on the direct physical environment in which the company acts, so the local community is the most important stakeholder. It implies that the company should do something back for community because community also helps them. However, there is nothing very new here and the world ‘citizenship’ is not really used.
Second, the equivalent view. Actually, this is just an updated label for CSR, which is quite confusing. Anyway, it focuses on all areas of CSR and assumes a broad range of stakeholders and citizens (society in general).
Third, the extended view of CC. It defines citizenship as a set of individual rights. There are several rights:
Social rights, which imply freedom to participate in society (education, healthcare etc.). Also called positive rights because they are entitlements towards third parties.
Civil rights, which imply freedom from interference and abuses by others (rights to own property, freedom of speech, right to engage in free market). Also called negative rights because they protect against stronger parties.
Political rights (right to vote, hold office, etc).
The government is mainly responsible for these rights, so actually it is strange to call it corporate citizenship. But still, corporations are individuals for the law and they have significant power and can take over some of the responsibilities of the government. The extended view defines CC as ‘the corporate function for governing citizenship rights for individuals’ . Concerning social rights, the corporation provides or ignores the role of providing social services. Concerning civil rights, the corporation enables or disables them. Concerning political rights, the corporation channels or blocks them. The concept of extended CC is descriptive rather than normative.
At this point, the book finds out that CC does not really add something to our understanding of CSR since it is mostly used in the first two forms, so nothing new to CSR is added and CC is actually just a buzzword. However, if CC would be used in the extended view, it would provide a number of advantages:
It helps us understanding better the political role of corporation and it emphasizes the corporate accountability
It helps us to deal with globalization because it lets us see the relation between businesses and common rights across cultures
Sustainability is a new goal, and is strongly related to rights of citizenship
It provides us with a critical view on the social responsibilities of businesses
But still, it is a new concept which is not yet widely accepted.
There are two extreme thoughts on ethical theories. First, ethical absolutism. It says that universally applicable and eternal moral principles exist. It sees business ethics objectively, which means that right and wrong can be determined by applying rationale. Second, ethical relativism. This has a subjective view on business ethics, so every individual can have a different view on what is right or wrong. Most theories that come from the Western modernists are absolutist. Sometimes there are some alternative perspectives, which means that a relativism element is included. The book relies on pluralism, which is in between absolutism and relativism. It says that there are some basic principles but that backgrounds and moral convictions can influence the way these are dealt with. This view is based on two elements of morality. First, morality is a social phenomenon. It is observable that there are differences in moral views (descriptive relativism), so the absolutism view cannot be completely true. Businesses have to solve questions that deal with these differing moral views. Second, morality is mostly about harm and benefit. To do right is to avoid harm and to provide benefits. Since we can observe actual harms and benefits, the relativism perspective can neither be completely true.
Differences between normative ethical theories in North-America and Europe
We already discussed the differences in views on business ethics in chapter A. We will now summarize the differences (again) in three points:
Institutional morality versus individual morality: the normative ethical theories from the US are applicable to individual behaviour, and the European theories are based on the design of institutions.
Accepting capitalism versus questioning capitalism: the US theories see the capitalist system as giving, and addresses questions within this system. The European theories tend to focus on the ethical justification of capitalism.
Applying moral norms versus justifying moral norms: in both regions secularization takes place (moving away from a religious from or organizing). This allows for many approached. In Europe, the focus is therefore on justification and ethical legitimation of norms on how to address ethical dilemmas. The US theories focus on the application of morality, because there is still a quite rigid set of Christian-based values.
Asian approach are much more based on religion or tradition, whereas European and North American approaches rely on philosophical arguments.
The enlightenment in the 18th century was the starting point of modernity, where philosophical thinking started to be more influential. These theories tend to be absolutist. They are normative because they assume something about the world, and then they assume something specific about humans’ nature. So if we share the assumptions on which a theory is based, we can apply it. The advantage of such theories is that they provide an unequivocal solution to ethical problems. We can divide them in two groups. On the one hand we have the consequentialist theories. These assume that whatever action you take; if the outcome is morally right, then the action is morally right.
We call them teleological as well (based on the Greek word teleo which means goal). On the other hand there are non-consequentialist theories. These say that if the intended outcome is morally right, then the action is morally right. We also call them deontological (deonto means duty). A summary of some major normative theories in business ethics can be found in the table on page 98. We will now discuss these two groups of normative theories.
First, consequentialist theories. We will discuss two; egoism and utilitarianism. ‘According to the theory of egoism, an action is morally right if the decision-maker freely decides in order to pursue either their (short-term) desires or their (long-term) interests’. The explanation for this is that someone cannot oversee the consequences of his actions, so the only thing he can do is pursue his own goals. This is in accordance with Adam Smith’s theory of the invisible hand. Egoism does not mean selfishness. Someone who is selfish is not sensitive to others, someone who is egoist can be moved by others. A criticism on this theory can be best explained by an example. A student who does not study and gets drunk every night follows his desire, and a student who never goes out and always studies hard also follows his desire. Both are right according to the egoism theory. So egoism based on pursuing interest is the best use of this theory. Also to mention is enlightened egoism, which is for example a company investing in education so that the level of the workforce is improved.
This theory works well when one person’s interest do not clash with other persons’ interests, but that is often not the case. Also the market could work if everyone pursues his own self-interest, but that process does not ensure environmental sustainability etc.
Next, Utilitarianism. According to the theory of utilitarianism, ‘an action is morally right if it results in the greatest amount of good for the greatest amount of people affected by the action’. Some call it the ‘greatest happiness principle’. Utilitarianism comes from the word utility, which is seen as the main goal in life. There are several interpretations of utility. First, the hedonistic view, where utility looks at pleasure and pain. Then, the eudemonistic view, where it is measured in happiness and unhappiness. Third, the ideal view, which is rather broad. It also takes into account intrinsically valuable human goods like love and trust. The word utility is also used to measure the economic value of goods, which explains why its analysis is similar to the quantitative methodology of economics (cost-benefit analysis). This theory is useful in situations like animal testing for medical research; it is painful for the mice, but helps a lot of humans, so the overall gain is positive. On page 103 an example of a utilitarian analysis is shown. There are some disadvantages:
Subjectivity: pleasure/pain, happiness/unhappiness is not the same to everyone
Quantification: how to measure pleasure/pain, happiness/unhappiness
Distribution: minorities can be easily overlooked when assessing the greatest good for the greatest number
As the utilitarian’s knew that subjectivity was involved, they further refined their theory into act utilitarianism and rule utilitarianism. The former assesses single actions and checks how much pleasure and pain it causes, the latter assesses classes of actions and checks whether the principles of an action result in more pleasure than pain in the long run for society.
Second, non-consequentialist theories. We will discuss two: ethics of duties and ethics of rights and justice. They are similar, the difference lies in the fact that the latter assumes that someone has a right and then advocates a duty to protect that right on someone else. Ethics of duties begin with the duty to behave in a certain way. In many regions, religion plays a role here; God assigns right and duties. So they focus on human behaviour and do not assign much value to the outcome. We will now discuss both in more detail.
First, ethics of duties. Kant is the one who mainly influenced this theory. He thought that all people should apply morality to all ethical problems, regardless of the particular situation or the outcome of an action. A God or another superior authority is not necessary to dictate principles of morality, people are able enough to rationally decide on them themselves. He developed a theoretical framework which he called the categorical imperative. The three parts are:
Act only according to that maxim by which you can at the same time will that it should become a universal law.
Act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only.
Act only so that the will through its maxims could regards itself at the same time as universally lawgiving.
An action is right if it complies with all three tests. Since they are pretty vague and difficultly formulated, they will be explained in more detail. With the first one he means that a moral proposition that is true must be one that is not tied to certain conditions, including the identity of the person making the moral consideration. The universality part means that it must not be tied to specific physical details, and could be applied to any rational being. So murder is immoral because if everybody would do so there would not be human life on earth. It comes close to the ‘golden rule’ present in many religions: treat others as you want them to treat you’. With the second, Kant wants to say that one should not use humanity of yourself or others merely as a means to some other end. For instance we can use people as means under the condition that we pay them, but not for example as a slave. So it is about human dignity. The last one is the final check, and is meant to question yourself whether every human being finds it acceptable, which overcomes the subjectivity problem in the utilitarian theory.
Now some disadvantages:
Undervaluing outcomes
Complexity (since the principles are quite abstract)
Optimism (because Kant assumes that human behave rationally)
Next, the ethics of rights and justice. This theory is based on the concept of natural rights established by Locke. These rights include rights to life, freedom, and property, and more were added later.
This theory defines natural rights as ‘basic, important, unalienable entitlements that should be respected and protected in every single action’.
Duties are related to rights, since others have the duty to respect rights. That is also the case in Kant’s theory but here there is no complex theoretical deduction, it is just assumed that there is a consensus about the nature of human dignity.
This theory is widely used, for instant in the UN Declaration of Human Rights and the European Union rules. A limitation is that the assumptions about the rights are rooted in the Western region.
Justice is ‘the simultaneously fair treatment of individuals in a given situation with the result that everybody gets what they deserve’. Fairness in this context can be seen in two manners:
Fair procedures (procedural justice, whether everybody got rewards for their performance)
Fair outcomes (distributive justice, whether the consequences are distributed fairly; in accordance with need)
It is not always possible to comply with both in the same situation. There are two views on distribution of wealth. First, egalitarianism. It says that justice and equality are the same, like Karl Marx says. A problem here is that there are differences between people. For instance if someone is just more skilled than someone else, should they still get the same? Also if I want to do some investments and earn money with it, should I be stopped doing that because other’s do not? The other view is non-egalitarianism. It says that the free market determines justice; supply and demand results in a fair distribution. Of course it leads to inequality, and some say that because of that it is not a good view. Rawls proposes the theory of justice, which lies in between the former two views. He says that there is justice when:
Everybody has the same right to the most complete total system of basic liberties compatible with a similar system of liberty for all.
Economic and social inequalities should be arranged so that
They provide the greatest benefit of the least advantaged; and
They are tied to offices and positions which are open to all under the same conditions
So first we should consider human rights and then we should check whether everyone who is involved is better off, not equally better off, but just better off. By using this theory, we can explain that it is fair that MNCs exploit low wages etc in poor countries when they provide for some education or healthcare; because everybody is better off then.
There are some general disadvantages of the Western modernist theories, they are too:
Abstract (not practical/applicable to business problems)
Reductionist (only focus on one aspect of morality; choose between consequences/duties/rights?!)
Objective and elitist (truth determined by specialists is objective truth?!)
Impersonal (personal bonds and relationships not taken into account as possibly shaping our ideas about right and wrong)
Rational and codified (focussing on rationality underestimates the importance of feelings and emotions)
Imperialist (Western theories might not be suitable for the whole world)
Some other views on the ethical theories were developed as a response to these disadvantages.
Instead of considering the actions taken, we can also look at the character and the integrity of the person who makes the decision. This view is based on virtue ethics, which says that ‘morally correct actions are those undertaken by actors with virtuous characters. Therefore, the formation of a virtuous character is the first step towards morally correct behaviour’. Virtues are character traits as a result of which someone can lead a good life. We can distinguish between intellectual virtues (wisdom) and moral virtues (like honesty, friendship, loyalty etc). Good life in this sense means being happy but in a broad sense. For instance not only making money but also enjoying making money in a virtuous manner. But what is good practice? And how can we use the idea of virtuous traits to behave in a certain manner?
An example of this approach is feminist ethics, which says that men and women differ in their attitudes towards organizing social life and thus also in the way they handle ethics. It says that a person has a network of interpersonal relations, and that maintaining it and being responsible for the members is the major concern (which is why it is also called ethics of care). Emotion, intuition, and feeling are important and that makes it a personal, subjective approach. A definition: ‘feminist ethics is an approach that prioritizes empathy, harmonious and healthy social relationships, care for one another, and avoidance of harm above abstract principles’. So the main principles are relationships, responsibility, and experience.
The latter means that we are formed by past experiences. This approach is similar to the Buddhist approach and the Confucian approach.
Normative means that there are prescribed descriptions of right and wrong (so it does not allow for subjective interpretations). That already provides a problem because not everybody shares the same thoughts about a given situation, especially in a multicultural context. This approach, however, tries to generate norms that are acceptable and appropriate to the ones involved. The most widely known way to do that is discourse ethics: ‘discourse ethics aims to solve ethical conflicts by providing a process of norm generation through rational reflection on the real life experience of all relevant participants’. So it focuses on a peaceful settlement of conflicts by talking. This talking should be non-coercive and non-persuasive.
This theory is also called postmodern business ethics and questions the direct relation between rationality and morality. It says that there is a moral impulse based on experiences, instincts, and sentiments. As a result, moral judgment is a gut feeling. A definition: ‘Postmodern ethics locates morality beyond the sphere of rationality in an emotional ‘moral impulse’ towards others. It encourages individual actors to question everyday practices and rules, and to listen to and follow their emotions, inner convictions, and ‘gut feelings’ about what they think is right and wrong’. As a consequence, there are no rules, principles, or practical steps. However, from literature we can say that the emphasis lies on the following:
Holistic approach (no distinction between private and professional sphere)
Examples instead of principles
Think local, act local (focus on one situation after another)
Preliminary character (seen as pessimistic since it is an ongoing learning process)
It shares characteristics with the virtue ethics since that is also based on the individual.
In this chapter, descriptive ethical theories will be discussed. They ‘seek to describe how ethical decisions are actually made in business, and what influences the process and outcomes of those decisions’. So they look at what people actually do and why they do it, rather than telling business people what they should do.
Defining ethical decisions
A number of factors determine whether a decision is ethical or not:
Is it likely to have a significant effect on others?
Is it likely to be characterized by choice (so, are there also other possibilities)?
Is it perceived as ethically relevant by one or more parties?
Then, it is an ethical decision.
Such models include two things: the different stages that people go through while making decisions about ethical problems in a business context, and the different influences on that.
First, the different stages:
Recognition of a moral issue
Morally judging about that issue
Establish the intention to act upon that judgement
Act upon that intention (so engage in moral behaviour)
Important here is that knowing what the morally right thing to do would be, does not necessarily mean that the person also acts upon that moral judgment.
In a way, normative theory is attached to this because we talk about moral judgments. It is often suggested in literature that commercial managers mostly rely on consequentialist theories.
Second, the different influences on the process of ethical decision-making:
Individual factors. These are the unique characteristics of the person who makes the decision. These are nature and nurture factors.
Situational factors. These are contextual features like the work context (rewards, roles, culture) and elements of the issue itself.
They both have an influence in all stages of decision-making.
There are some limitations of models of ethical decision-making. Many stages are interdependent and cannot really be separated. And of course, as with all models, they might be too simple to represent real situations. Also, they are mostly from the US.
Research on the individual factors that influence ethical decision-making comes mostly from the US, and research on the situational factors mostly from Europe. So again; the North American focus is on choice within constraints, and the European focus on constraints themselves.
Gender and age. There is no conclusive evidence on these factors.
National and cultural characteristics. These seem to have a considerable effect, and strongly influence the views of what is seen as acceptable. Geert Hofstede has been quite influential in this category, his five dimensions:
Individualism/collectivism
Power distance
Uncertainty avoidance
Masculinity/femininity
Long-term/short-term orientation
Education and employment. Not that strong, but better supported than gender and age.
Psychological factors. There are two subcategories here.
Cognitive moral development (CMD), which has a small but significant effect. It is ‘the different levels of reasoning that an individual can apply to ethical issues and problems’.
Level one: a concern with self-interest, external rewards, and punishments is exhibited
Level two: the individual behaves in the way others expect him to
Level three: the individual develops more his own way of decision-making based on justice and rights more than external influences
Within each level there are two stages, so there are six stages in total. It is more about how something is decided then what is actually decided. Most people think with the level two idea, which implies that the situation is quite important. Some criticisms include gender bias, implicit value judgements, and invariance of stages.
Locus of control, which has a small effect on decision-making but a bigger influence in predicting the apportioning of approbation or blame. ‘An individual’s locus of control determines the extent to which he or she believes that they have control over the events in their life’. Someone with an internal locus of control believes that he has a control over his life, someone with an external locus of control thinks that others, luck, or fate control his life.
Personal values. These have a significant influence. A personal value is ‘an enduring belief that a specific mode of conduct or end-state of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state’. They persist over time (enduring), influence behaviour, and are concerned with individual and/or collective well-being.
Personal integrity. They probably have a significant influence, but there are no really models or empirical tests to provide evidence. It is ‘an adherence to moral principles or values’. It plays a role in incidents of whistle blowing.
Moral imagination. Has a considerable potential, but there is not much evidence on it. It is ‘the creativity with which an individual is able to reflect about an ethical dilemma’.
These can be issue-related, or context-related.
First, the issue related factors:
Moral intensity. Quite new, but evidence of significant effect. It means how important the problem is to the person making the decision. There are six factors to it:
Magnitude of consequences. That is the sum of harms/benefits expected for the ones that are affected by the issue.
Social consensus.
Probability of effect.
Temporal immediacy. That is how quickly consequences will occur. The quicker, the higher the moral intensity.
Proximity.
Concentration of effect. So consequences can be heavy for a few or light for many.
Moral framing. Limited evidence, but strong influence on aspects of moral awareness. It is about the language used to describe a problem. When moral terms like honesty are used, moral thinking will be triggered. But many business people do not use moral terms (‘moral muteness’). Research suggests that this is because of perceived threats to:
Harmony
Efficiency
Image of power and effectiveness
Rewards. Strong evidence related to ethical behaviour, not that much research on other stages.
Authority. Immediate superiors and top management have significant influence.
Bureaucracy. Significant influence but only from empirical research. Its negative effects are:
Suppression of moral autonomy (‘just following the rules...’)
Instrumental morality (achieving goals instead of questioning the morality of the goals)
Distancing
Denial of moral status (because humans become resources)
Work roles. Probably has an influence, but there is no empirical evidence
Organizational culture. Strong influence, but still discussion about implications.
National context.
‘Business ethics management is the direct attempt to formally or informally manage ethical issues or problems through specific policies, practices, and programmes’. Its purpose is to direct employee behaviour. It has several components:
Mission or values statements (should include social purpose; does not have high impact on employee behaviour itself)
Ethics managers, officers, and committees (more common in US)
Ethics consultants (all kinds, environmental, research, strategy, projects, etc)
Ethics education and training (more common in US) Goals:
Identify situations where ethical decisions are to be made
Understand organizational culture/values
Evaluate impact of ethical decision on organization
Reporting/advice channels (to gather information)
Codes of ethics (specific rules on what behaviour is desired/expected)
Auditing, accounting, and reporting (pioneered in Europe; measure, evaluate, and communicate impact/performance to stakeholders)
Risk analysis and management (assessing and measuring (costs of) risks)
Stakeholder consultation, dialogue and partnership
Of course, not all businesses use all these components, maybe not even one. The emphasis changed from management of employee behaviour to management of broader social responsibilities (so more external, taking into account other stakeholders). We will now discuss the three most important areas for business ethics management:
Setting standards of ethical behaviour
Management of stakeholder relations
Assessment of ethical performance
This can be done by designing and implementing codes of ethics, which are ‘voluntary statements that commit organizations, industries, or professions to specific beliefs, values, and/or actions that set out appropriate ethical behaviour for employees’. The four types are:
Corporate/organizational codes of ethics (for a single organizations)
Professional codes of ethics (for a specific profession)
Industry codes of ethics
Programme/group codes of ethics (for instance a group of business leaders)
Codes of ethics are becoming more and more common, especially in large and medium-sized companies. An increase was especially observed during the 90s and 00s. Following are the several types of codes of ethics, ranged from most prevalent to least prevalent:
Labour standards
Environmental stewardship
Consumer protection
Bribery
Competition
Information disclosure
Science and technology
Taxation
Normally the goal of the codes is to define principles or standards that the organization/industry/profession/group beliefs in and wants to pursue; and/or to set practical guidelines for employees. The first is more general, the latter more specific. Some say that many companies just have codes of ethics to show that they are ethical, but that in practice employee behaviour is not that ethical.
How can a business make sure that its codes of ethics are lived up to by its members?
Participation (in developing the codes)
Discipline (employees who breach them)
Follow-through (found to be effective)
Audit instrument (to clearly and consistently assess whether employees behave as the codes prescribe)
Performance evaluation (it should be taken into account whether employees comply with the codes when evaluating a manager’s performance)
Guidelines for ethical conduct for the business in your home country may not applicable elsewhere. Absolutists would say that one code fits all, relativists would say that a unique code has to be developed for all different contexts.
There is a view in between, which says that a company should base its codes on the following three principles:
Respect for basic human values
Respect for local traditions
The belief that the context does matter when deciding what is right/wrong
There are some initiatives that sought to help global businesses:
The Interfaith Declaration: A Code of Ethics on International Business for Christians, Muslims, and Jews (principles: mutual respect, justice, honesty, stewardship)
The CAUX Roundtable (network of senior business leaders from the US, Europe, and Japan; principles: human dignity and kyosei, which is a belief of living and working together for the good of all)
The UN Global Compact (ten universally accepted principles on labour, human rights, the environment, and anti-corruption)
As we saw, codes of ethics are just one component of business ethics management, it can set minimum expectations but cannot replace the whole management.
This is the second of the three most important areas for business ethics management. Remember, we can have several perspectives. We will now focus on the instrumental perspective, whereas we discussed the normative and descriptive perspective before. The relationship with stakeholders has three attributes that form the perceived importance of the stakeholders:
Power (to what extent the stakeholder is able to influence organizational action
Legitimacy (whether the stakeholder’s actions are seen as desirable/proper/appropriate)
Urgency (whether what the stakeholder wants calls for immediate action)
The higher all three, the more important the stakeholder is perceived. The ones who only have one of the three are latent stakeholders. With two or more they are expectant stakeholders. If they have all three there are definitive stakeholders.
There are several forms of relationships with stakeholders:
Challenge (based on conflict and mutual opposition)
Sparring partners (based on ‘healthy conflict’ and periods of conflict)
One-way support (based on sponsorship, philanthropy, or other resource contribution)
Mutual support (formal/informal two-way support)
Endorsement (based on unpaid/paid public approval on specific product/programme)
Project dialogue (discussion between partners on project/proposal)
Strategy dialogue (discussion between partners on long-term issues and overall strategy)
Task force (co-operation on specific task)
JV/alliance (formal partnership, mutual resource commitment to pursue specific goal)
Keep in mind that collaboration does not necessarily mean that ethical outcomes will be better, but it provides for potential.
Of course, problems can arise when collaborating with stakeholders:
Schizophrenia (collaboration on one project, conflict over another different identities)
Culture clash
Accountability (to members or the public in general)
Resistance (from organization members/external parties)
Co-optation (of stakeholders by corporations)
Uncontrollability (consensus is difficult and collaboration can lead to a loss of control of strategic direction and corporate image)
Intensity of resources (because collaboration costs time and resources, especially a problem for small businesses)
This is the third of the three most important areas for business ethics management. To be able to assess ethical performance, we should first define it. However, literature does not agree on this. Still, there are many possibilities to assess performances that might be considered ethical. There are some general distinctions:
Ethical approaches focus on internal management systems or aspects of the business on the individual level, or on stakeholder values
Environmental approaches focus on the impact of the organization on the natural environment
Social approaches focus on a broader range of issues next to the environment (working conditions, human rights, health and safety, corporate giving, etc)
Sustainable approaches focus on economic, social, and environmental considerations
Auditing, reporting, and accounting are used interchangeably, but it is just checking and communicating data
The book uses the term social accounting to refer to all tools and approaches. The differences between social accounting and financial accounting are the following:
Social accounting focuses on other issues next than financial data
Its audience is stakeholders next to shareholders
Social accounting is not required by law
Social accounting is ‘the voluntary process concerned with assessing and communicating organizational activities and impacts on social, ethical, and environmental issues relevant to stakeholders’.
Some activities can be measured, but often it is qualitative data and it is not even sure what activities had what impact. Also, there are so many possible social impacts that organizations have to consider which impacts to account for, and that is different per organization. An example on how the Body Shop approaches social accounting can be found on page 213. Many organizations use stakeholder satisfaction surveys to make the data quantitative.
If it is so difficult to engage in social accounting, why do organizations do it?
More accountability and transparency
Internal/external pressures
Stakeholder management improvement (communication channel to improve reputation)
Identifying risks (because social auditing provides insight in social, ethical, and environmental impacts and shows potential problems)
Reasons not to engage in social accounting are:
Insufficient information
Perceived high costs
Inadequate information systems
Lack of standards
Unwillingness to disclose sensitive/confidential data
Secrecy
There are some key principles to determine the quality of social accounting:
Management policies and systems
Evolution (commitment to learning/change)
Comparability (across time and with other organizations)
Completeness
Inclusivity (involving stakeholders)
Disclosure
External verification
Continuous improvement
There are some processes in place to develop standards for social accounting:
Auditing and certifying (SA 8000, the social accountability standard)
Reporting (the Global Reporting Initiative (GRI), framework for reporting on economic, social, and environmental triple bottom line of sustainability)
Reporting assurance (AA1000S Assurance Standard, consistent with GRI)
Organization of business ethics management
In the US a more formal organization is normal, and in Europe and other parts informal organization is more common since the government is expected to establish the formal rules. There are four ways to formally organize business ethics management:
Compliance orientation (prevent, detect, and punish violations of the law)
Values orientation (encourage employees to commit to ethical organizational values; where no rules are in place)
External orientation (focus on satisfying external stakeholders)
Protection orientation (protect top management from blame; only to create legal cover)
The first form (compliance orientation) is most prevalent in the US, in Europe and Asia external orientation and values orientation are used more often. Firms can also use more than one of these orientations. Research says that values orientation is most effective, then external and compliance orientation, and protection orientation least effective. Next to a formal programme, a supportive culture is also very important.
A culture change approach should be taken if the organization has problems with ethics management. An organization-wide culture that supports ethical behaviour is the ideal idea. However, culture management is highly difficult and often unsuccessful. A slightly different approach is cultural learning. It focuses on subgroups within the organizational culture and encourages and enables employees to decide themselves on what they find ethical and to act according to that. Management should then identify values that conflict, and then promote moral imagination instead of ideological control (strict rules and regulations). The culture change approach might not result in real change but provides for more control. The cultural learning approach might bring out moral differences which can be damaging.
What is the role of leadership in the whole story of business ethics management? It is a significant one, since leaders set the ‘ethical tone’. Employees are likely to behave in the same way as their leader does. The difference between management and leadership is that management imposes orders (planning, organizing, controlling, budgeting) and that leadership copes with change (set direction/vision, motivate/inspire people, facilitate learning).
If a leader would use the culture change approach, he should articulate and personify the standards and values that the organization desires, and then motivate and inspire subordinates to live up to those. An authors suggests that a reputation of ethical leadership is dependable on two factors, to be perceived as:
Moral person (individual characteristics like honesty/integrity)
Moral manager (emphasis organizational ethics/values, establish guiding principles to comply with those)
If a leader would use the cultural learning approach, he is more focused on participation and empowerment to encourage moral imagination and autonomy, so there is more employee control.
The capitalists model of value creation says firms should pursue profitability to be able to provide dividends to shareholders. However, since the crisis there is more attention for business ethics since the core causes of the crisis had a strong ethical dimensions.
Nowadays, owner-managers are rare. Normally, if you own something, you can do with it whatever you want to. But concerning being an owner of a corporation (shareholder), there are some differences:
Locus of control: the owner does not have control over the property
Fragmented ownership: since there are so many shareholders, an individual is actually not really an owner
Divided functions and interests: shareholders might want profit whereas managers want growth; so sometimes there are different interests.
The following are the shareholders’ rights:
The right to sell their stock
The right to vote (in the general meeting)
The right to information about the company
The right to sue managers for (alleged) misconduct
Residual rights if liquidation takes place
The following are the mangers’ duties:
Duty to act for the benefit of the company (short-term financial/long-term survival)
Duty of care and skill
Duty of diligence
‘Corporate governance describes the process by which shareholders seek to ensure that ‘their’ corporation is run according to their intentions. It includes processes of goal definition, supervision, control, and sanctioning.
In the narrow sense, it includes shareholders and the management of a corporation as the main actors; in a broader sense, it includes all actors who contribute to the achievement of stakeholder goals inside and outside the corporation.’
Shareholders and management have a principal-agent relation. The shareholder is the principal and contracts management as an agent to act in their interest. Two characteristics:
Conflict of interest: shareholders want profits and a higher share price, managers want to have high salaries, power and prestige. That clashes because a higher salary means lower profits and vice versa.
Informational asymmetry: the principal’s knowledge is limited.
The shareholder-manager relationship around the world
There are two broad systems of corporate governance:
Anglo-American model of capitalism (market-based)
UK, Ireland, US, Australia
Continental European model (‘Rhenish Capitalism’, network-based)
France, Italy, Germany, Spain etc
Some countries like the Netherlands and Sweden have elements of both models.
The Anglo-American model has a dispersed ownership structure. Owners are normally individuals or pensions and mutual funds. There are frequent changes in ownership, and its goals are shareholder value and profits in the short term. The board is controlled by executives and shareholders, and the shareholders are the key stakeholder.
The Rhenish Capitalism model has other features. There is a concentrated, interlocking pattern of ownership between banks, insurance companies, and corporations. So the main owners are the banks, the corporations, and the state. Changes in ownership are rare and its goals are sales, market share, headcount, and long-term ownership. The board is controlled by shareholders and employees. The key stakeholders are the owners and the employees (through trade unions and work councils). It shares features with the Asian approach, which is also relationship-based. Also, they both do not rely predominantly on the stock market for raising funds.
To make the shareholder-manager relationship work a spate body of people needs to be present to supervise and control management. So the executive directors run the corporation and the non-executive directors ensure that shareholders’ interests are being pursued.
The Anglo-American model normally has a single-tier board that includes both types of directors. In continental Europe, there usually is a two-tier board. The upper-tier (supervisory board) includes the non-executive directors and the lower the executive. The supervisory board often includes stakeholders other than just shareholders (banks, employees).
To ensure that the supervisory board is independent, a number of points are important. Non-executive directors should:
Be recruited from outside the corporation
Not personally have a financial interest other than the shareholders’ interests
Be chosen for a limited period
Be competent to judge how the company runs (therefore, information from insiders is necessary)
Have enough resources to gather information
Be chosen independently (by shareholders or the supervisory board)
It is common practice to give executives a high salary and on top of that a high bonus. In order to get rid of the principal-agent problem, executives are often paid in shares, so that interests are aligned. But often massive stock option deals are made. Three ethical problems with executive pay:
Performance-related pay: as a consequence of this, salary levels have exploded. Also, the share prices are influenced by other things as well, so management cannot ensure a rise in share prices
Globalization: executive talents are wanted everywhere and that increases the probability of further rises in pay.
Influence of the board: since the board has only limited influence, it often is not able to pursue shareholders’ interests.
Mergers and acquisitions can be beneficial for society if the new management is more effectively, incurs lower costs, is more innovative etc. However, the reason for a merger or acquisition often is executive prestige, while the shareholders want profit and increases of share prices. Hostile takeovers involve ethical issues. Then, an investor (or more than one) tries to buy a majority stake in the corporation while the board does not want that.
We can say that hostile takeovers are okay because apparently shareholders want to sell their stocks. But we can also take into account the other shareholders that did not want to sell, and then a hostile takeover interferes with their property rights. There are two options for the executives in such a situation:
They agree because they get offered something nice; for instance a so-called golden parachute (money to accept the merger and leave the company).
They can secretly send ‘greenmail’ (opposite of blackmail) to the hostile party in which they offer buying back shares at a higher price than the market price. So then their job is secured by using corporate money. This may or may not be in the interest of a company, but it is mostly used because a CEO does not want to lose his job.
We can argue that ethical issues do not matter that much for shareholders; they just want profit and an increase in share prices. The shareholder can always make economic calculations on whether to sell his stocks or not, and if he does not like it that the CEO receives a lot of money, he can just sell his stock. However, that is more part of the economic calculation than an ethical consideration. But when making this argument, we assume that the market works perfectly so that the stock price reflects all relevant available information. However, that is not always the case, these issues can arise:
Speculative ‘faith stocks’: blind faith might determine the stock price to a higher extent than relevant information. That happened with the crisis. There was faith that the real estate market would keep rising, but when it turned down, both the optimism turned out to be misplace and the products were too complex to grasp the consequences.
Insider trading: insider trading occurs with non-public information which gives an advantage over other players in the market. It is forbidden in most stock markets. The ethical arguments against insider trading:
Fairness
Misappropriation of property (the valuable information that is being used is property of the firm, and they have no right of access to it)
Harm to investors and the market (the market becomes riskier and confidence decreases)
Undermining of fiduciary relationship (insider traders act in their own self-interest instead of pursuing their obligation to their principal; the shareholders)
The boundaries are very difficult to define. If a manager receives shares as a remuneration, he is free to sell them. But he knows more than the general trader, so that would be already trading with insider information but he can also not trade without insider information.
Accountants and credit-rating agencies (CRAs) are the most important players. Accountants ensure a true and fair view of the financial situation of a company and CRAs judge the trustworthiness an investment opportunity is. the three major CRAs form a global oligopoly. In Anglo-American countries, accountants are involved in the accounting process itself. In continental Europe, their role is supervisory in the sense that they verify whether the financial accounts truly reflect the financial situation. Five ethical issues that financial intermediaries face:
Power and influence in markets: the judgments influence the mindset of (potential) investors. Also, they can have political influence since the CRAs also judge government-issued bonds.
Conflict of interest: since accountants are heavily involved in the firm, they often also provide management consultancy and that affects their neutrality. The problem of neutrality also exists for CRAs. Companies pay a CRA to rate them, and if they think another CRA would rate them better, they can just switch. CRAs might also provide consultations concerning the structure and design of a financial product to get a better ranking.
Long-term relationships with clients: a long lasting collaboration can threat independence.
Size of the firms: the bigger the firm (accounting/CRA), the more difficult to maintain standardized procedures and rating tools. Also, standardized procedures diminish the accountant’s personal sense of responsibility.
Competition between firms: can lead to attempts to reduce costs that may cause a loss of diligence and scrutiny.
Private equity (PE) firms and hedge funds (HFs) are rising. PE firms raise money from investors so that they can buy a majority stake in a public company. Then the company is made private and restructured so that the value of the firm (or parts of the firm) becomes as high as possible. An ethical issue here is that there is no legal obligation to provide public information. HFs are a form of PE firm. They invest in complex structured financial products to ‘hedge’ risks from other investment and also do other types of financial investments.
The ethical issue with HFs is that they are not transparent; they do not disclose their strategies and do not have to report to regulators. High risks are involved.
Shareholders globalize in 4 ways:
They become directly involved abroad (buying shares)
They become indirectly involved (buying shares in globally operating company)
They invest in multinational corporations (also indirect players)
They become direct players (investing in funds that operate in global capital market; significant players here are the ‘sovereign wealth funds’)
Being a shareholder in one of the first two ways raises similar ethical issues as discussed above. The other two concern a stronger involvement in global financial markets
‘Global financial markets are the total of all physical and virtual (electronic) places where financial titles in the broadest sense (capital, shares, currency, options, etc.) are traded worldwide’.
Recall that new features of globalization are technical advances and political developments. The technological advance here is that trading happens often electronically, the political development is the deregulation of financial markets. Some issues:
Governance and control: no single government is entitled to govern deterritorialized markets like the financial market. The only ‘law’ is supply and demand.
National security and protectionism: sovereign wealth funds are funds that government owns because they invest their budget surplus. Most of these governments are not from a country with a liberal democracy. What if they invest in Europe or Northern America for other reasons than value maximization? We do not want them to have strategic control over major financial institutions.
International speculation: speculation is not bad in itself but can have bad causes. They may affect the poor in developing countries. To counter that, the ‘Tobin Tax’ can be used due to which speculative trading is less beneficial.
Unfair competition with developing countries: if speculators invest in a booming economy and the investment turns out to not be that good, they can easily withdraw their capital. But meanwhile, that country invests in goods and services and that investment cannot be made undone that easily.
Space for illegal transactions: since national governments cannot fully control financial markets, there are many opportunities for illegal transactions.
The Sarbanes-Oxley Act was introduced in the US to improve internal controls and external reporting. Since there are also foreign countries in the US, it has effects on the rest of the world as well. In Europe, the reform consists of the definition and implementation of new corporate governance does. South Africa has a ‘King Code’ which serves as template for whole Africa. Codes of corporate governance describe:
Size/structure of the board
Independence of supervisory/non-executive directors
How often the supervisory body meets
Employees’ rights/influence in corporate governance
Disclosure executive remuneration
General meeting participation and proxy voting
Role supervising/auditing bodies
These codes are voluntary, and some have a ‘comply or explain’ rule. European countries seek a balance between shifting more towards the market-oriented Anglo-American style and the threats of ‘crowding out’ indigenous corporations. The principles of Islamic finance are also becoming more popular, because these countries were way less affected by the financial crisis.
A single shareholder’s influence is quite small, but the influence of institutional investors etc. is much larger. Still, their influence is retrospectively. They can approve or disapprove plans, but do not really have an influence on future plans. Anyway, corporations are accountable to shareholders. The most important instrument to provide information is the annual report, which often serves as a basis for the vote at annual general meetings (AGMs). Can shareholders also be a force for more social accountability and performance? That depends on:
Scope of activities
Adequate information
Mechanism for change
In an AGM, a shareholder can voice his concerns other than financial concerns. Often, the involvement of a larger institutional investor is necessary. Activists can also try to influence companies by using shareholders, but that is costly and might have a negative impact on other campaign tactics.
Investors increasingly take into account ethical concerns while making an investment decisions. They want to make a socially responsible investment (SRI). Also, there are more investments in emerging markets. But that may be more a case of good governance instead of environmental/social concerns. So instead of directly voicing concerns at AGMs, investments are made in socially responsible companies.
‘SRI is the use of ethical, social, and environmental criteria in the selection and management of investment portfolios, generally consisting of company shares’.
Negative criteria (reasons to not invest in a company):
Abortion, birth control
Alcoholic beverages production and retail
Animal rights violation
Child labor
Companies producing or trading with oppressive regimes
Environmentally hazardous products/processes
Genetic engineering
Nuclear power
Poor employment practices
Pornography
Tobacco products
Weapons
Positive criteria (reasons to invest in a company):
Conservation and environmental protection
Equal opportunities and ethical employment practices
Public transport
Inner city renovation and community development programmes
Environmental performance
Green technologies
There are two broad types of SRI funds:
Market-led funds: these assess the market and choose the companies to invest in according to that. Information is gathered from agencies like the Ethical Investment Research Service (EIRIS).
Deliberative funds: they use their own ethical criteria; assess companies themselves.
So shareholders can influence by choosing where to invest in and setting incentives for other companies to review their practices and policies. Banks and investors include ethical criteria more and more. For instance, the International Finance Corporation has the Safeguard Policies, commercial banks uses the Equator Principles, and the UN launched the Principles of Responsible Investment. The main issues concerning the SRI movement:
Quality of information: provided by companies themselves; no standardized way of verifying and comparing information.
Dubious criteria: some funds use specific ideological/political views, ‘irresponsible’ is quite subjective anyway.
Too inclusive: many companies are in at least one SRI fund, among which companies like Fanny Mae.
Strong emphasis on returns: usually financial performance is checked first, and only then the ethical criteria.
The Dow Jones Sustainability Index (DJSI) establishes share indexes according to sustainable performance. London has the FTSE4Good, and more such indices exist. Cleantech Indexes focus on companies with clean, environmentally friendly technology solutions. The DJSI shows sustainability leaders in every industry. Criteria are both general and industry-specific. These are the criteria:
Environmental sustainability
Economic sustainability
Social sustainability
Data is gathered from questionnaires, documentation, policies, reports, and public information. The DJSI performs slightly better than the DJI. Some criticisms:
Data dependable on data provided by company itself
Questionable criteria (and industries like tobacco are not excluded)
Focus on management processes (rather than sustainability of company/products)
Alternative ownership models than the shareholder as owner:
Government ownership (resurfaced again after crisis; because failure would hurt many people next to shareholders)
Family ownership (they have longer-term goals)
Co-operatives (owned and controlled by workers and customers; to meet retiling/production/buying needs, the 6 fundamental principles can be found on page 278)
Co-operatives are common in collectivist countries like southern Europe (especially Italy). An example is Mondragon, detailed information can be found on page 278/279.
Ethical issues concerning employees have existed for a long time already, for example during the industrial revolution in the 19th century. Employees in the working process formed the base for the division between capitalism and socialism or communism. There are still similar ethical employee issues in developing countries, but in developed countries they have a different nature. Also, before, governments established rules to address these issues, but now the corporations increasingly have to solve them themselves.
Shareholders own the firm, and employees constitute the firm, which justifies their important stake. The legal relation between the firm and the employee is the contract and employee legislation. The economic relation causes externalities, so costs to both parties that are not represented in the contract that can create a moral hazard.
The employee invests for example by moving to a new town, shaking up the circle of friends, finding a new school. And also, a big part of the day is devoted to working anyway, and because of that the social life also exists there for a big part.
The employer does not have full control over their employees, so employees have quite a lot of power, especially in knowledge-intensive industry.
The term human resource management (HRM) is already controversial. It implies that we use humans as resources, and according to Kant’s maxims we cannot treat them as resources only. HRM relies heavily on the rights and duties of employees. The most important ones are to be found in figure 7.2 on page 293 and will be discussed in more detail later. They come from the basic human rights and are especially advanced in Europe. Most likely as a consequence of globalization; there is a massive surge in businesses being involving in ethical issues. Some global codes of conduct are the codes of the International Labor Organization (ILO) or the SA 8000 standard. We will now discuss the eight employee rights from figure 7.2.
Discrimination occurs when employees ‘receive preferential or less preferential treatment on grounds that are not directly related to their qualifications and performance in the job’.
Discrimination is mostly based on race, gender, age, religion, disability, and nationality. Most issues are addressed by the law so business have to apply with them but sometimes the boundaries are not really clear. For instance if the owner of an Chinese supermarket in Groningen wants an employee who speaks Chinese, it may be acceptable to ask for a Chinese-speaking employee only. Also because every human being has the potential to speak Chinese. In developed countries, there are many issues of disable employees. For instance that the physical environment of a company is not adapted for disabled employees. Also, health problems like HIV are subject of discrimination. Sometimes there is institutional discrimination, which means that it is deeply rooted in the company’s culture.
Sexual and racial harassment form a part of discrimination. An issue can for instance be that sexual favors are requested for rewards like promotion. Other forms include jokes or comments. But the boundary between normal behavior and harassment is very thin so it is hard to regulate this.
Equal opportunities and affirmative action can be used to tackle discrimination. Many companies established programs to ensure that. An equal opportunity program means that procedures are structured in such a way that employees and potential employees are treated equally and fairly; so procedural justice is promoted. There are four areas of affirmative action:
Recruitment policies: actively recruit under-represented groups
Fair job criteria: for instance the poor do not have the same education opportunities and these might not even be crucial to do the job. Also, inflexible working times can discriminate the ones who take care of the children.
Training programmes: for discriminated minorities
Promotion to senior positions: for under-represented groups there like women and ethnic minorities.
Affirmative action is also called reverse discrimination. It targets discriminatory tendencies in the workplace. It often focuses on correcting past injustices. An example is trying to increase the relative number of women in executive jobs.
The Black Economic Empowerment (BEE) laws in South Africa attempt to achieve a fairer representation of black workers. The risk is that affirmative action becomes discriminatory itself, that becomes a problem when the minority candidate is less qualified. An argument to justify reverse discrimination it is that it corrects the past; those minorities were discriminated in the past so now it is fair that they are at an advantage. That is called retributive justice. But against that one can say that the people now are not responsible for those circumstances in the past. Other arguments are based on distributive justice (so a fair allocation among groups). These say we can focus on fair procedures, but there are some deep-rooted assumptions that hinder objective procedures, so focussing on outcomes would be better. For example, we all assume a company director to be a white man in his fifties rather than a young black woman. On the other hand, if we give a certain position to a minority person, his colleagues may not respect him. The law says that aims or targets for certain groups of people are acceptable, but explicit quotas are not allowed.
Employees’ privacy is increasingly invaded. For instance, many companies have questionnaires asking all kinds of privacy questions to ‘test’ employees. Four types of privacy that could be protected:
Physical privacy (cameras invade this)
Social privacy
Informational privacy
Psychological privacy (concerns controlling emotional and cognitive inputs and outputs, and not being compelled to share private thoughts and feelings)
By determining whether something is private or not, we can look at the relevance of the information for the employer.
This remains a controversial issue in businesses. On the one hand we can argue that employer’s have the right to do such tests because they then know about future costs due to loss of productivity and absenteeism. On the other hand, one can say that health and drug tests invade privacy. The three main aspects:
Potential to do harm (health and drug use information only matters in few jobs, so the key question is whether it involves a clear and present danger to do harm)
Causes of employee’s performance (the employer has the right to know about an employee’s performance, but not about its causes)
Level of performance (an acceptable performance is required, not an optional performance, and health and drug issues can potentially influence performance)
Still, these tests are used often, especially in the US.
Working hours increase in all kinds of jobs. The two issues here are the following:
Excessive working hours and presenteeism: excessive work hours affect employees’ overall state of physical/mental health. Presenteeism means being at work when you are supposed to be at home, which occurs due to feelings of pressure.
Flexible working patterns: the disadvantage is that flexible workers may have poorer working conditions, lower pay, increased insecurity, or exclusion from certain benefits. The ultimate example is the zero-hours contract.
Using the computer increases the options to monitor employees. Employer can exactly trace employees’ work. Cameras can monitor the workplace. That invades the physical privacy and remains a controversial issue. Companies often have guidelines concerning using working time and company material for own purposes. In the US there is less regulation than in Europe and Canada, for instance. As with health and drug use tests, these controls are based on the threat of potential harm rather than actual harm. However, the controls can harm employees and with that the firm as well as for instance trust may decrease. There might also be problems with employees’ data. Usually, it is not a problem that the company has that data, but once it comes available to others, it can become a problem. Information and communication technologies change fast, and the law often cannot catch up with the speed.
Employees have the right to due process, which comes from procedural process. It means that rules and procedures should be applied to people in a consistent, equal way. It is important in disciplinary proceedings, promotion, and firing. The law normally provides for detailed procedures on firing.
Rules on redundancy and downsizing are less common. Remember that the most important element of CSR is economic responsibility, which may require cutting back on labour costs.
Some ethical issues in the process of downsizing:
Involvement: employees have the right to know that redundancy is about to occur well before it occurs. Also, they should know the causes so that they can judge the fairness.
Remuneration: employers should offer enough money so that the employee can find a new job.
Companies are increasingly restructuring and becoming more flexible. That causes employees to make occupational transitions (work in new industries) and to increase their employability. Corporations are expected to develop outplacement strategies for employees that are laid off.
Some argue that since we cannot use humans as just resources, they should have a say in company decisions that affect them; so a right to participate. This right is based on basic human rights, Kant, and egoism (employee can only pursue his own interest if he has some influence). There are two broad areas of employee participation:
Financial participation: share in ownership/income; for instance with shares
Operational participation: different dimensions:
Delegation: also called job enrichment/job enlargement
Information: which has effect on their work
Consultation: express views on employer’s decisions
Co-determination: full and codified right to determine major decisions (strongest form)
In the US, employees usually learn from the papers that their job is in danger. In Sweden of France, employees are involved heavily. Often, the law provides for a representative organization of the workforce such as work councils, trade unions, or other bodies. The right that employees have to participate in such an organization is the right to association. Companies often fight against these unions and in most countries, the union density decreases (as can been seen in figure 7.4 on page 312). This might be because companies increasingly take the right to participate serious since it is beneficial for them as the employees will work more efficiently.
Trade unions are also important for working conditions. The debate on working conditions started during the industrial revolution. Most developed countries nowadays have a broad set of regulations on health, safety, and environment (HSE). So the main issue is enforcing and implementing that regulation. The employer is responsible for enforcing it, especially if employees do not want to comply.
The general rule is the principle of informed consent: every worker should be aware of the risks that he is exposed to while performing his job. HSE issues are particularly important concerning new diseases and new technologies. Employers want to protect employees but do not want to discriminate patients. New technologies may carry unknown risks (asbestosis).
The law often provides for protection concerning fair wages, especially in the area of lower incomes. We can determine whether a wage is fair on the basis of what the employer expects from the employee and how the employee performs towards goals. But it does not mean that everybody who is expected to do something and performs an equal amount of hours should get the same. For instance, a player of FC Groningen does not earn the same as Ronaldo. Compensation can be said to be related to the consequences of the employee’s activities. If you compare the salary of Ronaldo to what his club earns from media deals, it might be acceptable. Since firms have to compete for good employees, they just have to pay what the market demands, even though it might not be fair in their eyes. Some companies try to decrease the gap between CEO and ‘normal’ employee salary by providing salaries in the form of shares to all employees. Such performance-related pay (PRP) can cause ethical problems:
Risk: salaries become less secure and may become more subjective.
Representation: collective representation of employees’ interests is reduced because employees are being individualized.
In the US and some developing countries, employers rather than the public welfare system typically pay pensions. But these are not secure and even often used as source of capital to cover for losses. So employees are dependent on employers and might be willing to give up demands in order to not lose health and pension coverage.
The law protects this but still situations in the workplace might require additional regulations. Normally there is no problem, for instance when there is some new R&D feature. Then, employees will not talk about it as it does not make sense to do so. In other cases it can be problematic, for instance when you are being asked to do some creative accounting. Whistle blowing involves a considerable risk but doing something immoral is also not preferable.
The right to work is a basic human right. It comes from the right to life, since money is needed to live. We can also say that it linked to the right to human respect, since self-respect comes (partly) from the ability to create goods or services. Governments can provide the right to work indirectly, so should we say that people can demand employment from corporations, since only they can directly provide employment? Therefore we have to assess the rights of the employer as well, and see if they collide. So we can translate the right to work by saying that every individual should have equal conditions in exerting this right.
The most important duties are complying with the labour contract and respecting the employer’s property. Also, an acceptable level of performance should be provided, working time and company resources should be used appropriately, and illegal activities like fraud should be refrained from. Ethical issues appear when we discuss how an employer can ensure employees’ compliance with their duties. For instance, can he monitor everything an employee does? That goes back to the issue of privacy, which was already discussed. It is difficult to say whether a company or an individual is responsible for illegal activities. Companies should provide a context that discourages dubious behaviour. The most common way to do that is establishing codes of conduct and employee training. Such a code should be clearly communicated to employees. The main thing to show that a corporation has done all it can is to report on its policies. But often the codes of conduct are more ‘red tape’ than they really work.
Outsourcing production to low-wage countries often includes poor working conditions for the workers there. Also, the 8 employee rights just discussed are not interpreted in the same way across countries and cultures. The underlying issues are:
National culture and moral values (Hofstede!)
Problem of absolutism versus relativism: relativism would say that exploitation is not an ethical problem as long as the country or culture where it takes place does not see it as such. Absolutism would say that employee rights should be respected equally all around the world. Generally, human rights should be used as direction. Also, one could assess the economic situation and ask whether certain conditions are appropriate.
Race to the bottom
Companies often change employment standards. Their location choice is broad and that makes developing countries compete for attracting foreign investment due to which conditions can become even worse. Next to being responsible for the employment conditions in their own divisions, company could also be held responsible for ‘background institutions’ like trade unions, health and safety standards etc.
Migrant labour and illegal immigration
Employee mobility increases with globalization. It often results in drug abuse or prostitution. Corporations should arrange social infrastructure. Migrant workers are often willing to accept working conditions that we find unacceptable. Often, employing them is illegal. There is a grey zone: employing them is illegal but once businesses employ them they have the right to become legal residents.
If we view the employee as corporate citizen, the corporations should govern their civil rights. The extent to which corporations take over this role varies across the world. The first reason for this is the law. Some laws require companies to do more than others. In Europe, there are most regulations, in the Anglo-Saxon there are less; there are more institutions to take care of employees. Co-determination says that employees (providers of labour) and shareholders (providers of capital) have an equal say in government of the company. It is common in Europe. In the Anglo- American area, shareholders are considered most important. Employee protection is of a quite low level in developing countries, but the further they develop the more the regulations are strengthened. Ruggie (UN representative) developed a framework to understand business responsibilities concerning human rights:
Protect: states should protect human rights even if their companies operate in another country.
Respect: corporations have to obey human rights laws and should follow general principles of human rights.
Remedy: both governments and firms should investigate and punish abuses of human rights.
There is always a trade-off between employee protection and promotion of sustainability. For instance, expansion of the airline industry is good for job creation but bad for the environment.
We can contribute to long-term sustainability in three ways:
Economically: if we are gainfully employed in useful work and feel respected
Socially: if we are treated in such a way that we can stabilize and maintain social relationships
Ecologically: if material and energy are efficiently used (also the potential workforce)
Three ways in which sustainable employment problems are addressed:
Re-humanized workplaces: from mass production to smaller-scale units where workers can perform more creative and meaningful work.
Wider employment: initiatives to employ more people include shortening the work week (French government) or reduce working time for all workers (corporate level)
Green jobs: both the industry and the way labour is organized should become more environmentally sustainable. Solutions include car pooling, videoconferencing, recycling, and teleworking. Teleworking brings social benefits (more time for the family), economic benefits (less travel costs), and ecological benefits (less resources used).
It is a common assumption that treating the customers well is also beneficial for the company. Still, we hear a lot about ethical abuses of customers and the reputation of sales and marketing professions are not that good. Maybe the common assumption is not always true; interests of buyers and sellers might diverge. The extent to which interests determine depends on the availability of alternative choices. Also, we need to define a normative basis to determine what ethical behaviour towards consumers looks like. That is based on consumer rights:
‘Consumer rights are inalienable entitlements to fair treatment when entering into exchanges with sellers. They rest upon the assumption that consumer dignity should be respected, and that sellers have a duty to treat consumers as ends in themselves, and not only as means to the end of the seller’.
Caveat emptor (let the buyer beware) is an important notion here. It means that the only right that the consumer has is to purchase or not, and that all risks are with the consumer. Now, there are several consumer rights such as the UN guidelines (figure 8.1 page 343) and the EU regulations. For instance, the consumer has to right to truthful information about products. But if a package says low fat it can also mean that it is lower in fat than an alternative, which can be misleading. The customer also has certain responsibilities. For instance, when you buy a product you are supposed to deal with it ethically. Also, consumers might have some bargaining power, for instance when they are firms themselves. It would not be ethical to exert pressure on suppliers to get the lowest possible price. Also illegally downloading stuff is unethical.
There are three areas of marketing:
Marketing management (marketing mix):
Product policy
Marketing communications
Pricing
Distribution
Marketing strategy
Market research
We will discuss each in more detail. First, marketing management, product policy. Consumers have the right to safe, efficacious product and services that are fit for the purpose. Almost all products and services can potentially inflict some form of harm. Manufacturers should exercise due care, so that should take all reasonable steps to ensure that their products do not have defects and are safe to use. So that is almost the opposite of caveat emptor. If the producer has exercised due care, the consumer must take responsibility for what he does with the product. For instance, it is the consumer’s fault if he drives way too fast and causes damage to himself or the car.
Next, marketing communications. Discussions on marketing are usually on two levels; individual and social. At the individual level, there are often misleading or deceptive practices that create false beliefs. At the social level, there are aggregate social and cultural impacts such as promotion of materialism. Marketing communications should inform consumers and persuade them. So it is not just about communicating literal facts, and even if marketing communication just tells facts, it can be misleading. A shortcoming often lies in slogans, for instance ‘Red Bull gives you wings’, which is obviously not true. Persuasion is not wrong in itself, only if it involves deception.
‘Deception occurs when a marketing communication either creates, or takes advantage of, a false belief that substantially interferes with the ability of people to make rational consumer choices’.
Since many misleading actions are legal, there is a lot of self-regulation. For instance the European Advertising Standards Alliance (EASA) and the Advertising Standards Authority (ASA, UK). The latter says advertisements should be ‘legal, decent, honest and truthful’, so they should:
Not cause serious/widespread offence
Not cause undue harm/distress
Contain nothing that might provoke anti-social or violent behaviour
Contain nothing that is likely to result in the physical, mental or moral harm of children
Criticisms on marketing communication are the following, they:
Perpetuate social stereotypes
Reinforce consumerism and materialism
Are intrusive and unavoidable
Create artificial wants (Galbraith: firms make us want things that we do not need)
Create insecurity and perpetual dissatisfaction (we worry that we do not have the products that society requires us to have)
The next element of marketing management is pricing. Here, the potential deviation is highest. Consumers have the right to a fair price; which is the market price (where marginal costs are equal to marginal revenue). Other market conditions like the monopoly can result in unfair prices. Most countries have regulations to counter that. Four pricing problems:
Deceptive pricing (the real price is hidden; costs turn out to be higher, many airlines do this)
Excessive pricing
Price fixing (illegal in Europe, US, and more, but still occurs)
Predatory pricing (below market price to force out competition)
The fourth and last element of marketing management: distribution. Many ethical problems arise in the product supply chain, which will be discussed in the next chapter.
The second marketing area is the marketing strategy. It concerns decisions of market selection and targeting. There is a potential threat to the consumer’s right to be treated fairly:
Vulnerability (children/elderly/poor, etc; can be taken advantage of)
Exclusion (discrimination so that some are not able to gain access to the products)
Critics about unfair targeting practices are based on the perceived harmfulness of the product and the degree of vulnerability of the target. Consumers might be vulnerable for one of the following reasons:
Can be easily confused/manipulated because they are old or senile.
Lack sufficient information/education to use products safely or understand consequences of their actions.
Are in exceptional emotional/physical need due to illness etc.
Lack income
Are too young to competently make independent decisions (from 8 years on they can)
Sellers owe a duty of care to (vulnerable) consumers. For some restrictions on advertising to children in Europe, see page 361. There is also a lot of self-regulation on advertising to children, for instance in the industry of soft drinks. The perceived harmfulness of the product also matters in the sense that taking advantage of consumer vulnerability is especially wrong when the consumer will probably suffer from the product (like cigarettes).
There are several forms of consumer exclusion:
Self-exclusion (consumer exclude themselves because they think they would be refused anyway)
Price exclusion (too expensive)
Access exclusion (lack of distribution channels)
Marketing exclusion
Condition exclusion
This especially concerns the right to privacy, since market research is about collecting and analyzing data. Developments especially endanger online privacy. Another controversial area is that of genetic testing by insurance companies. We can argue that such information is private, but we can also say that if all information is available, the price is fairer.
It is often said that convergence in consumer needs is the main driver of globalization. There are three issues here:
Different standards of consumer protection (which companies can exploit)
Exporting consumerism and cultural homogenization
The role of markets in addressing poverty/development
The bottom of the pyramid concept concerns the latter; the role of markets in addressing poverty and development.
It says multinationals have the potential to stimulate development at the bottom of the economic pyramid, so for world’s poorest people, and that this can also be in their own interests.
The UN have the United Nations Development Programme (UNDP) to help achieving this. Critics say that the opportunity to make profit at the bottom of the pyramid is quite small and that it is better to use the poor as producers than as consumers. So the basis is probably corporate responsibility rather than making profit.
Consumer sovereignty says that consumers drive the market (under perfect competition). However, there rarely is perfect competition, which limits making informed choices. The two ethical problems may be that individual transactions may be unfair and that the economic system as a whole is not efficient and does not provide for a fair resource allocation. Smith says that the more consumer sovereignty, the more ethical marketing is. He developed the consumer sovereignty test (CST). It says that consumer sovereignty consists of:
Consumer capability (how rationally they can make decisions)
Information (availability and quality of relevant data)
Choice (whether it is possible to switch to another supplier)
‘Ethical consumption is the conscious and deliberate choice to make certain consumption choices due to personal moral beliefs and values’.
An example is to buy detergents low in bleach to save the environment. Ethical consumption increases, especially in finance and food and drink industries. Survey results might not be representative, since people tend to provide socially desirable answers. Firms can provide ethical products in a certain niche or just adopt a mainstream ethical orientation. Through consumer citizenship, consumers can force companies to provide ethical products, as consumers demand something and purchase according to that. Hertz suggests that the way people vote has changed from voting at the ballot box to voting by purchases. Some downsides of ethical consumption:
Corporations will remain to have financial motives rather than moral
Market choices depend on the consumer’s willingness and ability to pay
If we see purchases as votes, the rich have way more voting power
The contemporary consumption society can increase forever since there are no resource limits and since the wastes can be disposed off forever.
This forms a barrier for sustainable development.
‘Sustainable consumption is the use of goods and services that respond to basic needs and bring a better quality of life, while minimising the use of natural resources, toxic materials and emissions of waste and pollutants over the life-cycle, so as not to jeopardise the needs of future generations’.
The problem is that we are not easily willing to give up our level of consumption. Buchholz suggests that first there was the Protestant ethic which limited consumption and promoted productive capacity. But then religion became less important and now we are in the consumerism ethic which limits saving and encourages immediate gratification and consumption. We have to move to environmental ethic which again limits consumption and encourages alternative meanings of growth and environmental investment. We can achieve this with steps in the following areas:
Producing environmentally responsible products: and marketing them in such a way that consumers want them, for instance with eco-labels. In a broader sense, product service systems should be established, so a change of whole markets.
Product recapture: recycling waist so that less ‘virgin’ material is needed. Europe has de Waste Electrical and Electronic Equipment (WEEE) which makes producers responsible for recycling electrical and electronic equipment.
Service replacements for products: we buy many products not because we want the product itself because we want them to do something for us (washing machine, for instance) so instead of selling to us, producers can also lease them to us. Then, they can manage potential wastes and reuse the material.
Product sharing: for instance cars or washing machines
Reducing demand: this is not really a popular idea but for some products like plastic bags it turns out to work because the state required it. Consumers can also initiate it.
We should go from a linear flow of resources:
Extraction manufacture distribution consumption disposal
To a circular flow of resources, where manufacture, distribution, consumption, and product recapture form a circle and extraction goes to manufacture and consumption to disposal in the same way as with the linear flow. A picture of both flows is available on page 379.
Remember that a stakeholder is an individual or a group that is ‘harmed by or benefits from the corporation or whose rights can be violated or have to be respected by the corporation’. So suppliers clearly are stakeholders. They are mutually dependent but that does not mean that their interests are the same. Competitors are often not seen as stakeholders. However, competitors have legal rights that other organizations must respect, for instance the right to freely enter or leave the market and to set the prices they want. We can also add the moral right of fair play. Competitors can be harmed by or benefit from the organization, which is part of the stakeholder definition. We should see firms as part of an industrial network rather than isolated players. The way a firm treats another firm also affects others in the market which can cause ethical problems.
There has been a change from traditional relationships with suppliers (short-term, transactional) to approaches that are more based on partnerships (long-term, based on trust and collaboration). Still, ethical problems arise in such partnerships, for instance individuals that execute these collaborations face ethical dilemmas:
Misuse of power: relative power can be assessed using resource dependence theory (dependence on other’s resources, depends on scarcity and utility). The deontological view would say that those with more power have to duty not to misuse it. Consequentialists would say that the consequences are not only for the weaker party but ultimately also the stronger party. Why does it happen then? Because of short-term profit advantages and because firms do not see the broader consequences.
Question of loyalty: loyalty to suppliers sometimes clashes with the economic view of the firm. However, loyalty does not mean accepting everything, it is just establishing long-term, mutually beneficial outcomes. A benefit includes less switching and transaction costs and better ways of collaboration.
Preferential treatment: there is a thin line between loyalty and preferential treatment. We can asses that with procedural justice. Sometimes individuals are rewarded in order to achieve something and that can cause a conflict of interest between the interests of that individual and those of his company.
Conflicts of interest: ‘occurs when a person’s or organization’s obligation to act in the interests of another is interfered with by a competing interest that may obstruct the fulfilment of that obligation’. For instance if an individual consultant wants to do more work for his client which is not beneficial for his company.
Gifts, bribes, and hospitality: typically include preferential treatment and a conflict of interest between personal and corporate gain. We have to consider the intention of the giver, the impact on the receiver, and the perception of other parties. Organizations often have purchasing codes of ethics and there are professional bodies like the Chartered Institute of Purchasing and Supply.
Ethical negotiation: ten questionable negotiating tactics:
Lies
Puffery
Deception
Weakening the opponent
Strengthening one’s own position
Non-disclosure
Information exploitation
Change of mind
Distraction
Maximization
Rigid negotiating (only using a few tactics that you find good ones)
Damaged relationships (unethical negotiations may result in enemies)
Sullied reputation
Lost opportunities (for instance progressive discussions that could provide new, profitable opportunities)
Competing is not unethical in itself since it is necessary to benefit consumers and other stakeholders. So ethical issues can result from overly aggressive competition or insufficient competition. We will discuss both in more detail.
Here, competitors are harmed in an unethical way.
There are three ways:
Intelligence gathering and industrial espionage: gathering information is unethical if the tactics used are unethical, the information is private, or the purposes are against the public interest.
There are grey areas, page 407 provides an overview. The golden rule can be used (do not do to others what you do not want them to do to you). Also the universal principle applies because if those practices are generally accepted the industry suffers from a loss of trust and firms have to use resources to protect themselves. The privacy of corporations is harder to define since they have few boundaries, they deal with multiple individuals, and much of their activity takes place in (quasi-)public space. However, we can argue that the important information is intellectual property and thus protected. Spying can be used against the public interest, for instance if its purpose is anti-competitive behaviour. Consequentialists would say that the result will be an overall aggregate reduction in happiness for the ones involved.
Dirty tricks: industrial espionage is one, others:
Negative advertising
Stealing customers
Predatory pricing
Sabotage (can also include malware to sabotage computer systems)
Anti-competitive behaviour: usually against law but difficult to prove. Forms:
Collusion and cartels
Abuse of dominant position (example: Microsoft)
Globalization and ethical suppliers and competitors issues
Key forces that drive globalization in businesses:
Convergence of markets
Global competition
Cost advantages
Government influence
There are four things we need to consider:
Different ways of doing business: the issue here for competitors is that intellectual property may not be respected the same way. For suppliers there are more issues, concerning gift giving, bribery, and corruption.
In China it is desirable to give and accept favours and gifts under the practice of guanxi (‘a system of personal connection that carry long-term social obligations’). We discussed how to evaluate a gift the previous page. Bribery is more common in construction, real estate, and public works. The likeness of countries to bribe is shown on page 413. Some argue that if bribery is normal in the country, then we should adapt to it (just as with giving gifts).
But that it is normal does not mean that it is right. The OECD has the Anti-Bribery Convention but enforcement remains difficult. Often it is not the question whether bribery is right or wrong, but whether it is possible to do without.
Impacts on indigenous businesses: harm can result from strong competition and offering employment alternatives for ones who would otherwise found their own business. It can also be a force for improvement and an opportunity to collaborate. In becomes unfair when the viability of an entire local industry is in danger (example: ‘banana war’, page 415 bottom).
Differing labour and environmental standards: the issues are pay, child labour, working conditions, freedom of association, abolition of forced labour, equality, etc (the broader ones added by the International Labour Organization). Often, environmental standards from the home country are avoided through exporting waste to developing countries that do not have such regulations. That is sometimes illegal but it still happens a lot.
Extended chain of responsibility: there is no global government so the responsibilities of corporations grow, also because there are more and more pressure groups.
We already mentioned that firms start to take over government’s role, especially concerning control and regulation of other businesses. The supply chain is the best example; the process is called ethical sourcing.
‘Ethical sourcing is het inclusion of explicit social, ethical, and/or environmental criteria into supply chain management policies, procedures, and programmes.’
Such pressure from the buyer to the supplier turns out to work; suppliers try to get some environmental or social certification such as the environmental quality standard ISO 12001, the staff training and development award, and Investors in People.
The relationship between the purchaser and the supplier determines whether the supplier is willing to take on such initiatives; the more dependent they are the higher the willingness. If suppliers doe so, they reduce the information asymmetries that exist between them and their buyers.
Where governmental regulations do not exist or are not enforced, ethical sourcing can take over that role. It works even better if competitors establish guidelines together so that it becomes even more difficult to not comply for the suppliers.
Then, the whole supply chain becomes involved because the suppliers also involve their suppliers etcetera; a multiplier effect will be activated.
Actually, this works the same as with the customer in the previous chapter: if the customer (the purchaser here) demands ethical products, the firms (suppliers) have to arrange that. Whether ethical sourcing will be a success depends on:
Reputational vulnerability of network members
Power of suppliers
Length of supply chain between corporate buyer and companies with most ethical problems
Diffuseness of supply base
Ethical sourcing is more successful in apparel industries and forestry products than in confectionery industry.
Strategies that can be used in ethical sourcing:
Business-business regulation
Disengagement: set standards, assess compliance, punish with disengagement (compliance pattern)
Engagement: develop step-by-step plan and work to the goal together (collaboration pattern)
Remember the four types of codes; corporate, professional, industry, and programme. The successfulness depends on the workability, the monitoring system, and the enforcement policies.
Fair trade
‘Fair trade is a system aimed at offering ‘the most disadvantaged producers in developing countries the opportunity to move out of poverty through creating market access under beneficial rather than exploitative terms.
The objective is to empower producers to develop their own business and wider communities through international trade.’
Initiated by alternative and charitable organizations, now also in supermarkets etc
Commercialization might pressure ethical standards
Sustainability and business relationships
There are three key levels here:
Sustaining the supply chain: Fair-trade standards say that traders must:
Ensure the guaranteed minimum price
Pay a premium for development
Provide pre-financing for those who need it
Set minimum progressive criteria for social and economic fairness and environmental responsibility
The focus in sustainable supply-chain management is supply-chain continuity
From supply chains to supply loops: so a circular flow instead of a linear flow; as we discussed before. Two criteria:
Collect end-of-life products for economic value recovery
The recovery provides for secondary resources so that primary resources have to be used less or preferably not at all (then it is a closed-loop supply-chain)
Building industrial ecosystems: rather than viewing a firm as a single entity, we can also see firms as wider communities of organizations which are interdependent because of all kinds of resources (and wastes); these are industrial ecosystems.
The four main stakeholders so far were shareholders, employees, consumers, and suppliers. The concept of civil society is pretty young. First, we assumed that there were two sectors: the market and government. Later, a third institutional actor was added: civil society.
‘Civil society organizations (CSOs) include pressure groups, non-governmental organization, charities, religious groups and other private, non-profit distributing, organizational actors that are neither business nor government institutions, and which are involved in the promotion of societal interests, causes, and/or goals.’
The presence of CSOs varies across countries. Also, the percentage of national employment accounted for by CSOs differs, from for instance 10% in the Netherlands to less than 1% in Mexico. CSOs differ on the following aspects:
Type
Scope
Activities
Focus
Structure
CSOs have a different relationship with firms than the other stakeholders. The others directly provide something to the firm, whereas CSOs do not. That does not mean that a CSO cannot be a stakeholders. For instance, if its mission is to protect the environment and a company pollutes the environment, it has a stake in that company. So their stake largely represent the interests of individual stakeholders because if they want to achieve something alone it would be way more difficult. We can also say that CSOs represent the interests of non-human stakeholders like animal welfare of the environment (since they cannot speak for themselves). We can distinguish two groups of CSOs:
Sectional groups: member-based, represent interest of their members (who belong to a certain ‘section’ of society), for instance trade unions, parent associations, etc.
Closed membership
Represent section of society
Goal based on self-interest
Status is insider
Approach is consultation
Pressure trough threat of withdrawal
Promotional groups: promote causes or issues, represent people with common attitude about the issue, for instance anti-smoking, environmental groups etc.
Open membership
Represent issues/causes
Goal based on social goals
Status is outsider
Approach is argument
Pressure trough mass media publicity
Before, CSOs and corporations were enemies and conflict was used as main approach. Now, they are becoming more an accepted part of business.
There are three main issues:
Recognition of CSO as being stakeholders
Tactics used by CSOs to get attention
Accountability of CSOs
We will now discuss them in more detail.
There are several approaches to determine whether potential stakeholders should be seen as stakeholders or not. One was the instrumental approach, which assesses relative salience (power, influence, urgency) but ignores that if salience lacks, they might still have an ethical right. So it cannot be objectively determined but depends on the subjective interpretations of managers. That is especially important for promotional CSOs because have no specific constituency that protects their rights. They self-declare that they are stakeholders, but that does not have to lead to recognition. On the other hand, if corporations ignore CSOs, it is likely that it results in long-term damaging consequences. Firms tend to recognize CSOs that are trusted, known, and not too critical. Listening is already a good start
Indirect action: research and communication. An ethical problem is the provision of misleading information.
Violent direct action: generates most publicity but is illegal. Consequentialists could say that it is in the long-run interest of society to do so but still they are often unsuccessful.
Non-violent direct action:
Stunts
Protests
Letter, email or social media campaigns
Occupations
Demonstrations/marches
Picketing
Non-violent sabotage and disruption
Boycotts: ‘an attempt by one or more parties to achieve certain objectives by urging individual consumers to refrain from making selected purchases in the marketplace’. Examples can be found on page 458. Ethical choice for the company here is which company to target and why. Four reasons for boycotts:
Punitive: punish; cause the firm harm
Instrumental: force to change policy
Expressive: generally communicating displeasure
Catalytic: raise awareness; create publicity
Whether consumers join and continue boycotts depends on how much effort it costs to switch to an alternative, how likely success is, the appeal of the product to the consumer, and the social pressure.
Even CSOs have to deal with a lot of accountability critics. We can assess this accountability the same way as we do for ‘normal’ corporations. Following are potential CSO stakeholders:
Beneficiaries
Governmental organizations
Other CSOs
General public
Employees
Members
Donors
There are also organizations similar to CSOs that focus on business itself as stakeholder. So they deal with CSO issues but approach them with a focus on business interests. With a lot of different stakeholders, there are a lot of different expectations. The accountability to the supposed beneficiaries of CSOs is most controversial, issues are the following:
CSO in developed countries often establish own agendas without understanding wants and needs of the local people.
Beneficiaries are often limitedly involved.
Since they need money, CSOs are often focused more on what donors want than what the intended beneficiaries want.
Beneficiaries are often not able to (dis)approve CSO performance.
The informal accountability is more important for CSOs than the formal accountability. These are the main questions that corporations should ask concerning CSO accountability:
How do we assess the legitimacy of CSO contribution to business ethics?
What consequences does this have for responding to CSO challenges? (work together/ignore/somewhere in the middle)
Three areas where globalization affects the relationship between CSOs and corporations:
Engagement with CSOs abroad
Chinese CSOs deal with political constraints and can only work through non-confrontational approaches; so co-operation and participation.
Few developing/transitional economies have strong CSOs (might be preferential for businesses since they are not bothered by them).
Many of the problems that CSOs deal with transcend national boundaries.
Some CSOs critique globalization itself.
ATTAC: works towards environmental, social, and democratic rules in the globalization process.
Biotic Baking Brigade: throw pies at leading advocates of globalization.
Reclaim the Streets: dance parties and tree planting on public roads.
Latter two kind of postmodern: loose, temporary coalitions,
Globalization of CSOs
The rise of CSOs has been made possible through the internet.
As CSOs globalize, they might be expected to take over some governmental tasks.
The contribution of corporations to CSOs used to be charitable giving. Nowadays, the business-CSO collaboration is increasing. Sometimes there are even partnerships; social enterprises. Beyond collaboration is some kind of civil regulation. In whatever way (as fellow citizens as in the limited/equivalent view or as governors of individual citizenship as in the extended view), corporations have to be involved in civil society.
This is the starting point; ‘putting something back’. It is a form of one-way support. Corporations have special units or corporate foundations to manage such philanthropic activities. Employees are involved through employee volunteering which is sometimes in company time, the aims of that:
Build ‘social capital’ within the community
Enhance reputation firm
Contribute to development own human resources
Increase employee morale
Meaningful social contribution
Terms as strategic philanthropy and cause-related marketing are used to describe how charitable giving can be aligned with firm self-interest.
This includes dialogue and strategic alliances on certain matters. Examples are to be found on page 471. The degree of interaction rises, it goes from transactional to integrative. Why do they work together? Businesses want it because of:
Interest in leveraging CSO credibility
Consumer expectations
Avoid potentially negative publicity
Potential for new thinking
Improved market access
Better resources
Access to supply chains
Disenchantment with governments
The approach is similar to discourse ethics, which was discussed in the material for the midterm. There are some limitations to this approach:
Potential culture clash
Power imbalance
Distribution of benefits (partners more benefit than supposed beneficiaries)
Corporations may co-opt CSO partners (threats independence; the CSO should retain its distinctly moral orientation, while making a constructive and positive contribution to business practice)
The approach of CSOs becomes more businesslike, that is called venture philanthropy. Also the organizational structure is copied from businesses; the CSO becomes a social enterprise. The distinctions between social enterprises, CSOs, and corporations can be found in a table on page 475. The primary difference is that co-operatives focus on their members’ interests and social enterprises on a broader set of stakeholder obligations and social goals. Some issues with social enterprises:
Moral legitimacy (is less because it becomes more like a business and people trust businesses less than CSOs)
Escalation of risk
Prioritization of profitable markets
Compromise of social mission
The different ways in which CSOs can exert influences all fall under the header ‘civil regulation’. By doing that, businesses create norms and enforce them. When assessing civil regulation, we should assess both the relations between businesses and CSOs and their outcomes. For instance, the Ethical Trading Initiative (ETI) prescribes its members a code of practice and they have to report on the performance. The disadvantage is that is it voluntary whereas governmental regulations are obligatory. So individual citizens can influence by voting, making consumer choices, and participating in civil society.
Most sustainability issues are also issues that CSOs focus on (the economic element to a lesser extent). We can expect CSOs to encourage businesses to engage in sustainable practices, but since different CSOs stand for different aims, it is difficult to agree on what action a corporations should take. These are the considerations:
Balance the competing interests
Level of participation
Actively seek to sustain civil society (especially in other parts of the world like China because the civil society is underdeveloped there)
‘Government consists of a variety of institutions and actors at different levels that share a common power to issue laws’.
‘Laws serve as a codification into explicit rules of the social consensus about what a society regards as right or wrong’.
‘Regulation can be defined as rules that are issued by governmental actors and other delegated authorities to constrain, enable, or encourage particular business behaviors. Regulation includes rule definitions, laws, mechanisms, processes, sanctions, and incentives’.
It is important to note that regulations also include rules that are obligatory, and that regulations can be established by private bodies.
The two basis roles of government are:
Represent citizens’ interests (by restricting or enabling business)
Stronger incentive to do this in democracies, since there are electives
Government defines conditions for license to operate of business
Enabling role includes providing for markets, good legal system, efficient sanctioning mechanisms
Degree of responsibility controversial
Be an actor with own interests (by depending on or competing with business)
Self-interest to be re-elected
Dependence on business since re-election depends on economical state; governmental has no direct influence so they are weak and highly dependant
Also competition with business in areas like health care or television
The main ethical problems come from the fact that government has a mutual relationship with both society and businesses. Society expects government to provide regulation to protect their interests, and they give consent and tolerance.
Businesses provide government with taxes, jobs, investment, etc., and they receive a profitable and stable economic frameworks. So businesses have a big influence on the government. The legitimacy of that influence is controversial. One can say that expecting a sound economic framework is normal. However, if that interferes with acting in the interests of citizens, it is not so normal anymore. Governments are accountable to citizens. There are several forms of businesses influencing government:
Content of communication (information-oriented/pressure-oriented)
Approach to decision-maker (direct/indirect)
Breadth of transmission (public/private)
Ethical problems arise mainly through direct forms of private influence. Lobbying is the weakest from of businesses taking over governmental responsibilities, privatization of governmental function the strongest. We will now discuss all forms.
‘Lobbying represents a direct, usually private, attempt by business actors to influence governmental decision-making through information provision and persuasion’.
There are different types of lobbying:
Atmosphere setting (events/dinners/etc to make issues visible)
Monitoring (to get up-to-date information from policy makers)
Advocacy and influencing (by offering ‘consultancy’ or expert knowledge)
Provision of information to policy-makers
Application of pressure (for instance implicit/explicit warnings about consequences policies)
A few examples can be found on page 505. Lobbying might improve regulations but business interests groups have easier access than others like CSOs because they lack resources or legitimacy, which can be seen as unfair. The main problem is that businesses might expect something back, which might threaten the trust between governments and lobbyists. Also, lobbying is often invisible for outsiders.
This means that businesses provide funds to political parties.
That could be seen as something for which the businesses want something back in the form of preferential treatment, which refrains the system from being democratic. We can use the three steps for gift-giving again here. Firms can establish rules that forbid such donations, like BP did.
Conflicts between businesses’ and governments’ interests
The term ‘revolving doors’ describes how business and political people switch jobs. It is questionable whether a former CEO acts in the interests of government or for his (former) company. Berlusconi is a famous example, as he controlled the media and influenced public opinion about his activities. On the other hand, we can argue that some business experience is necessary to better understand the issues where government has to decide on. That is a utilitarian argument: both parties are better off. This question is one of procedural justice.
‘Corruption is the abuse of entrusted power for private gain’.
In this context, we are talking about private firms shaping public policies or rules by payments to politicians and public officials. This influence is very direct, and private. Transparency International is an anti-corruption pressure group. It establishes an annual Corruption Perceptions Index (CPI). An overview is available on page 510. There is no doubt that corruption is unethical. However, it is a huge dilemma when companies go to countries where it is seen as normal and unavoidable.
Some issues here:
Privatization profits: finding a fair price is difficult. Too high would cause the new owners to feel exploited because they earn less than they thought. Too low might mean that they make huge profits on something that formerly belonged to the taxpayer.
Citizens are now consumers: because economic considerations become more important, some citizens may be at a disadvantage.
Natural monopolies: like rail companies and telecommunications.
Full privatization is an option, another is public-private partnerships (PPP). Then, the government still has a large responsibility, and private companies provide the investment. This is especially popular in the UK.
The process from acting national to acting global has several features:
Society: rather than thinking of ourselves as ‘the Dutch’, or ‘the Chinese’, we can also think of ourselves as ‘Philips employee’, ‘student’, or other transnational groups. So we are becoming more a world society rather than a national society.
Holder of political power: government influences mainly on a national level, on global level private actors, civil society, and governmental actors have the power.
Manifestation of political activity: next to the national regulations we also have systems of transnational negotiations (EU, NAFTA).
Addressee of regulation: next to social actors (citizens, domestic companies), also nation states and private transnational actors are subject to regulation.
Intensity of regulation: national level of regulation is decreasing, transnational/global level of regulation is increasing (for nation states and private actors, the latter in the form of for instance codes of conduct of the OECD).
Democratic control of political power: democratic control and political power decrease because the power of national governments decreases.
These features reshape the roles for business and government. The role of the state in a national context (in the Westphalian setting) is dominant, it acts as regulator. Now, in the global context (Post-Westphalian setting) it becomes dependent; as addressee of regulation. The national role of the company is dependent; as addressee of regulation, but becomes more dominant (for instance with the corporate power of withdrawal). The type of regulation in national context is imperative (national law), and now the nation states still have imperative regulation but it is complemented with private and self-controlled regulation. An overview is available on page 517.
Where businesses act in the national context of authoritarian/oppressive regimes, the story is different. Collaboration with the regime is required to a certain extent.
Even if they do not collaborate directly, they also contribute to wealth and economic stability of the existing regime. Multinationals have a moral duty to become involved in certain areas:
Upholding human rights through normal business operations
Contributing to economic development
Direct involvement in creating background institutions for good governance
Whereas there seems to be a general acceptance of race to the bottom practices, some argue that multinationals do good work in developing countries. For instance by introducing environmental management systems there.
Some transnational governmental institutions have a big influence. Their general role is to enable trade and exchange of goods and services. On the other hand, they also increase competition which may limit business. So they are heavily lobbied.
Since businesses are increasingly involved in making new regulations, they are also increasingly involved in governing citizenship rights; their political role grows. Self-regulation is the most common word for the new trend in regulation. It has to do with privatization, since regulation is normally a governmental issue. An advantage is that businesses can learn from their experiences and adjust regulations accordingly, that is called learning legislation. The aims of firms who take on this approach are the following:
Cost-effectiveness (cheaper to set your own standards than to comply with governmental standards and control compliance)
Encouragement of a pro-active approach from industry
Faster achievement of objectives (it takes a long time for governmental proposals to be accepted)
The different actors can establish regulations in several combinations and on several levels:
Government
Local/regional level: regional imperative regulation (anti pollution, waste)
National level: national imperative regulation (35hr week France, nuclear power)
International/global level: international imperative regulation (increasingly innovative; GATT/EU regulations)
Business
Local/regional level: codes of conduct SMEs/local subs
National level: self-regulation (FSA UK, BDI Germany)
International/global level: global industry codes of conduct (ISO26000)
Business and government
Local/regional level: regional agreements (environmental alliance Bavaria)
National level: country wide agreements (Irish farm plastic recycling)
International/global level: global industry codes (EMAS for environment)
Business and CSOs
Local/regional level: regional agreements (mediation)
National level: country wide agreements (trade union agreements)
International/global level: global industry codes of conduct, self-commitments
Business, government, and CSOs
Local/regional level: regional multipartite agreements/projects
National level: country wide multipartite agreements/projects (Covenant for Work in Germany, Dutch covenant approach in environmental management)
International/global level: global codes, self-commitments etc (UN Global Compact, OECD, ILO codes of conduct for multinationals)
The initial idea of sustainability focused on sustainable use of natural resources. For renewable resources, we should not use them beyond their capacity of regeneration. Non-renewable resources should not be used if future generations are then to a lesser extent able to meet their needs than we are now. As corporations seem to resist sustainability to a certain extent, it is no surprise that governments come up with sustainability regulations. But should they do that with imperative regulation or with voluntary, market-based approaches?
Global climate change is a big area of discussion. The Kyoto Protocol was signed to do something about it. Some industries are threatened by the protocol, for instance the oil industry because it is based on burning fossil fuels. So this industry founded the Global Climate Coalition (GCC) to lobby against cutting back greenhouse gas emissions. Member companies used different approaches. Two European countries left when it turned out that their countries had to live up to the Kyoto Protocol anyway and because they were confronted with CSO pressure. Members from the US, Canada, and Australia had a different approach. Because lobbying did not seem a feasible option, they used for instance advertisements.
Resistance has weakened; companies seem to increasingly understand that tackling climate change is necessary.
An issue for every government is supply of food and water. Businesses play a big role in that, since water management is privatized a lot around the world. Their influence can reach far. For example, in Bolivia there was a government change after many protests against a French company that took over the water supply. The markets of wheat and rice are very volatile, which is a disadvantage for poorer countries.
Ethics = Deals with values, with good and band, with right and wrong
Ethics differs across the globe. What is regarded ethical in one society may not be so regarded in another
Elements of ethics are choice; values; rules; power; control; culture; institutions; objectives; and stakeholders
In order to address differences across countries, six questions can be asked
What choices are available to individuals and organizations in the decisions they make?
What values influence or govern these choices?
What rules are followed in order to make such choices?
How do these rules control the levels and nature of choice in a society or an organization?
What are the power relations among the different stakeholders within the organization or society that control the rules and the values that influence choice?
What different objectives do the different stakeholders have that influence choice in decision making?
Table 2.1 on page 15 presents a descriptive conceptualization of variables involved in cross-cultural analysis. This table is very important
Context in cross-cultural analysis
Structuralism = Human beings are not free agents but act according to structures, norms and rules laid down within the society (macro level) and within the social and work organizations in which people live and work
Content in cross-cultural analysis
Phenomenological theory = Social institutions comprise people, or are constituted through people, who make sense of social actions within social groups. Individuals and groups have goals and objectives. Organizations as entities do not have goals, values, attitudes or beliefs like individuals do. Therefore, conflicting or competing world views or value systems lead to different approaches to managing the organization
Conduct in cross-cultural analysis
Behavioral theories see observable behavior as the main subject of social interaction. Conduct, thus, is about interactions at the macro- meso- and micro-level.
Context, content and conduct, being separate facets of organizational and social phenomena, they are dynamically connected. In a globalized world, organizations and nations are also connected by numerous interactions. Cultures do not exist in isolation >> Figure 2.3 on page 27
Convergence
Divergence
Crossvergence
>> Interface = Culture should be understood between and among different cultural influences; between attitudes, beliefs and values, and institutions as cultural manifestations; and within relationships containing power dynamics.
Culture = That complex whole which involves knowledge, beliefs, art, morals, law, customs and other capabilities and habits acquired by man as a member of society
Cultural values differ across countries, but due to globalization, cultural values are also in interaction with each other across countries
World Values Survey: To study the values and attitudes of mass publics across nations of different economic, educational, and cultural backgrounds
>> Main theory here is that the shift of societies generally towards modernization and materialist values, emphasizing economic and physical security, is giving way to postmodern/postmaterialist values
Modernization = Industrialization, increased urbanization, growing occupational secialization and higher levels of formal education.
Postmodernization = Later stage of development that is linked with very different beliefs from those that characterize modernization. These belief systems are not mere consequences of economic or social change, but shape socioeconomic conditions and are shaped by them, in reciprocal fashion.
Schwarz argues that there are three basic issues that confront all societies
Relation between individual and group
Conservatism versus Autonomy
The way it is possible to guarantee responsible behavior to maintain the social fabric
Egalitarianism versus Hierarchy
The relationship between humankind and the natural and social world within which they exist
Harmony versus Mastery
Smith reanalyzed the work of Trompenaars and came to two major value dimensions:
Conservatism: Comprises items that represent ascribed status, universalistic and non-paternalistic values, as well as functional hierarchy and internal locus of control.
Egalitarian commitment: Comprises achieved status, universalistic and non-paternalistic values, as well as functional hierarchy and internal locus of control
Utilitarian involvement: Aspects of individualism that emphasize individual credit and responsibility. Correlates with Hofstede’s individualism and low power distance
Loyal involvement: Aspects of collectivism that stress loyalty and obligation to the group, as well as corporate loyalty and obligation.
Hofstede developed a framework with respect to comparing cultures. He identified four dimensions:
Individualism – collectivism; The extent to which one’s self-identity is defined according to individual characteristics or by the characteristics of the groups to which the individual belongs on a permanent basis, and the extent to which individual or group interests dominate.
Power distance; The extent to which power differences are accepted and sanctioned in a society.
Uncertainty avoidance; The extent to which societies focus on ways to reduce uncertainty and create stability.
Masculinity – femininity; The extent to which traditional male orientations of ambition and achievement are emphasized over traditional female orientations of nurturance and interpersonal harmony.
GLOBE study:
Institutional collectivism; The degree to which organizational and societal institutional practices encourage and reward collective distribution of resources and collective action.
In-group collectivism; The degree to which individuals express pride, loyalty, and cohesiveness in their organizations or families.
Power distance; The degree to which members of a collective expect power to the distributed equally.
Uncertainty avoidance; The extent to which a society, organization, or groups relies on social norms, rules, and procedures to alleviate unpredictability of future events.
Gender egalitarianism; The degree to which a collective minimizes gender inequality.
Assertiveness; The degree to which individuals are assertive, confrontational, and aggressive in their relationships with others.
Humane orientation; The degree to which a collective encourages and rewards people for being fair, altruistic, generous, caring, and kind to others.
Future orientation; The extent to which people engage in future-oriented behaviors such as delayed gratification, planning, and investing in the future.
Performance orientation; The degree to which a collective encourages and rewards group members for performance improvement and excellence.
Structure of ethical decision making = Comprises those aspects which contribute to the making of a judgement as to whether or not a decision is ethical.
The basis for ethical judgements seems to logically fit into two broad dimensions
Judgements based on consequential considerations (teleology)
May be based on their having a result which on balance is good for the majority of stakeholders (utilitarianism)
May be based on their having a result on the overall interests of the person making the decision or those with whom he or she identifies (egoism)
Judgements based on non-consequential considerations (deontology)
Based on prior considerations of an explicit or implicit set of rules or principles which guides conduct (deontology)
Content of ethical decision making = Concerned with the content of ethical judgement, or what managers regard as ethical or not ethical.
Ethical content and value dimensions
Individualism versus Collectivism >> In a collectivist culture, the nature of the relationship of individuals to organizations is likely to be based on obligation and moral duty. In an individualist culture it is likely to be calculative, and based contractually on self-interest.
Uncertainty avoidance >> Generally, the higher the degree of uncertainty avoidance in a society, the higher the level of regulation should be in such areas as the economy or business life
| Low Uncertainty Avoidance | High Uncertainty Avoidance |
Individualism | Group 1: Britain, United States, Australia | Group 2: Germany, Switzerland, France |
Collectivism | Group 4: Hong Kong, India | Group 3: Spain, China |
Geopolitics = The nature of the type of power dynamics involved in globalization and its influences on social and organization characteristics worldwide
America’s role in international management ethics >> Why is the role of America rather dominant?
Phronesis = The analysis of values or things that are good or bad for a man as a point of departure for action. It is based on praxis, context
To study the US and their global role in the formulation of ethical values and action, it is to focus on power relations, its desirability and implication for action
Postcolonial theory = Proposes that the developing world is represented in the eyes of the developed world
The USA is individualistic, with medium power distance, fairly high femininity and reasonably low uncertainty avoidance. The USA are also characterized by;
Liberalism: Minimal government intervention in private life and economic and political freedoms along with equality of opportunity
Ethnoculturalism: A tradition that sets rigid boundaries on group membership. In its extreme, ethnoculturalism maintains that Americans are white, English-speaking Protestants of northern European ancestry
Civic republicanism: The responsibilities, rather than the rights of citizenship. Well-being of the community is more than the sum of individualistic pursuits of private gain. All Americans should be involved in social and political life and pursue ends that serve the public good
Action oriented: Actual membership of civic organizations
Identity oriented: Based on expressions of opinion
Incorporationism: America’s unique identity is grounded in its immigrant legacy and in its ability to convert the challenges immigration brings into thriving strengths. Incorporationism celebrates the ability to assimilate and maintain difference and diversity.
Acculturation = The process of cultural change and psychological change that results following meeting between cultures.
American corporations typically have very serious business ethics programs
Summary with the 4th edition of Business Ethics: Managing corporate citizenship and sustainability in the age of globalization by Crane and Matten
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Alternative sanderP contributed on 15-04-2021 14:28
I found an alternative for non JoHo members on WorldSupporter, different book by Velasquez, also business ethics. If you really need Crane, join JoHo WorldSupporter
:) Daan Blitz contributed on 14-04-2021 18:35
:)
1. Join JoHo and become a member
2. Connect your JoHo account with your WorldSupporter account by editing your personal WorldSupporter Magazine
3. You get access to all content on JoHo WorldSupporter!
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