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1. Introduction, Business Ethics & Economic Relevance

Why do Ethics Matter? 1

1.1 Being a Professional of Integrity

  • In our professional lives, ethics guides our interactions with customers, clients, colleagues, employees, and shareholders affected by our business practices.
  • Stakeholders:
    • Stakeholders are the individuals and entities affected by a business’s decisions.
    • Clients, customers, suppliers, investors, retailers, employees, competitors, the media, the government, members of the surrounding community, competitors, and even the environment.
  • Patagonia expresses its commitment to environmentalism via its “1% for the Planet” program, which donates 1 percent of all sales to help save the planet.
  • Integrity:
    • It is a unity between what we say and what we do.
    • It means we adhere strongly to a code of ethics, so it implies trustworthiness and incorruptibility.
  • Ethical compliance and legal compliance are not the same; legal compliance is the baseline minimum that is mandatory to maintain a functioning society, while ethical compliance is of a higher standard and is voluntary.
  • Some professions, such as medicine and the law, have traditional codes of ethics, E.g., the Hippocratic Oath for doctors and the American Bar Association’s Model Rules of Professional Conduct for lawyers.
  • Normative ethical theories: three different perspectives help us assess whether our decisions are ethical on the basis of reason.
  • Descriptive ethical theories: in contrast to the normative theories. They are based on scientific evidence, primarily in the field of psychology, and describe how people tend to behave within a particular context.
  • The three normative ethical theories are:
    • Utilitarianism.
    • Deontology.
    • Virtue theory.
  • Utilitarianism:
    • This one examines the ends or consequences of our actions to determine whether they are ethical.
    • Variations: utilitarianism, teleology, consequentialism.
    • It defines an ethical action as one whose consequences produce the greatest good for the greatest number of people.
    • Focusing on the consequences does not require us to consider the means by which we achieve those consequences.
  • Deontology:
    • This theory focuses on the means by which we achieve our ends.
    • This approach is based on the idea that good means lead to good ends.
    • It is based on the idea that we have a duty to act in a certain way, regardless of the consequences.
    • The certain way is known as universal rules that apply to every situation and bind us to our duty.
    • It is also known as duty-based ethics.
    • The word deon means “duty” in Greek.
    • Most often thinker associated with this theory is Immanuel Kant (18th-century German philosopher).
  • Virtue theory:
    • This theory focuses on the character of the person who is acting (the decision-maker).
    • The character reflects the training (virtues) we received while growing up.
    • In this view, ethical analysis is connected to the person we choose to become, habits, and routines.
    • Most often thinker associated with this theory is Socrates (ancient Greek philosopher).

1.2 Ethics and Profitability

  • Measuring true profitability requires taking a long-term perspective, and not just focusing on short-term gains (E.g., quarterly profits).
  • Decades ago, some management theorists argued that a conscientious manager in a for-profit setting acts ethically by emphasizing solely the maximization of earnings.
  • Today, most commentators contend that ethical business leadership is grounded in doing right by all stakeholders directly affected by a firm’s operations, including, but not limited to, stockholders, or those who own shares of the company’s stock.
  • A company enters a social contract with society as a whole.
  • The Toyota way indicates a long-term perspective done by Toyota when they first entered the US market. They sold cars at a loss for years to achieve 2 long-term goals:
    • Build long-term loyal US-based customers built on trust.
    • Change the perception of Japanese cars as cheap and unreliable.
  • A business is profitable for many reasons, including expert management teams, focused and happy employees, and worthwhile products and services that meet consumer demand.
  • Warren Buffet: the most successful investor of all time, says: “Lose money for the firm, even a lot of money, and I will be understanding; lose reputation for the firm, even a shred of reputation, and I will be ruthless”.
  • It is often in the long-term interests of a business not to accommodate stock owners alone but rather to take into account a broad array of stakeholders and the long-term and short-term consequences of a course of action.
  • Goodwill: the positive feeling stakeholders have for any particular company. Among other intangible assets, goodwill might include:
    • The worth of business reputation.
    • The value of a brand name.
    • The intellectual property of a company.
    • The attitude of employees.
    • The loyalty of established customers.
  • The corporate culture consists of shared beliefs, values, and behaviors that create the internal or organizational context within which managers and employees interact.
  • Corporate Social Responsibility (CSR):
    • The idea is that businesses have a responsibility to society that goes beyond the legal and economic obligations of the firm.
    • CSR ensures that a company is engaging in sound ethical practices and policies in accordance with the company’s culture and mission, above and beyond any mandatory legal standards.
    • A business that practices CSR cannot have maximizing shareholder wealth as its sole purpose, because this goal would necessarily infringe on the rights of other stakeholders in the broader society.

1.3 Multiple versus Single Ethical Standards

  • Multiple ethical standards occur when a person acts differently according to the context, while a single ethical standard occurs when a person acts the same way in all contexts.
  • Having a single standard ensures consistency in behavior, whether with family, colleagues, or strangers.
  • The adoption of a single ethical code is the mark of a professional of integrity and is supported by the reasoned approach of each of the normative theories of business ethics

Profiles in Business Ethics: Contemporary Thought Leaders 2

  • Dan Bane, chairman and chief executive officer of Trader Joe’s:
    • Bane’s Trader Joe’s has seven core values: demonstrating integrity, being product-driven, producing customer “wow” experiences, challenging bureaucracy, seeking continuous improvement, treating the store as the brand, and being a national and neighborhood company.
  • Mary T. Barra, chairman and CEO of General Motors:
    • She helped the company recover from bankruptcy and a massive recall of defective vehicles as a result of a faulty ignition switch.
  • Marc Benioff, chairman, CEO, and founder of Salesforce:
    • Since 1999, he has maintained what he calls his “1-1-1 model.” This is a company program that donates 1% of equity, 1% of employee time, and 1% of products to nonprofit organizations operating in locations where his companies do business.
  • John C. (Jack) Bogle, founder of The Vanguard Group:
    • He believes in treating the client as an owner rather than a customer.

A Succinct Theory of Business Ethics 3

  • Business ethics should be grounded in deontology more than in utilitarianism. That is, the ends should not typically be considered sufficient justification for the means when it comes to framing a business strategy.
  • Rather, it is the means that ennoble the ends.
  • Utilitarianism, as a consequentialist theory and when applied to business, emphasizes the greatest good (or profit) for the greatest number of shareholders.
  • Deontology focuses on the motives and reasons why entrepreneurs engage in business and the methods that they implement in doing so.

Corporations and their Social Responsibility 4

  • In 2000, it was reported that, of the 100 largest economic organizations in the world, 51 were corporations and 49 were countries.
  • Despite their vast social role, corporations remain poorly understood by the world’s citizens.
  • There were no corporations in ancient in the ancient world, there were some sort of communal and religious organizations, but not corporations.
  • The first corporations were created in the 17th century, and they were created to finance the voyages of exploration and colonization.

Corporations are Creatures of Law

  • Corporations must be authorized by the state to exist, and regulated by national and international laws.
  • Corporations seek influence over governmental regulators and lawmakers to ensure that the laws and regulations that govern them are favorable.

Corporations Raise Capital for Major Undertakings

  • Corporations pool capital from a large number of investors to finance large-scale projects.
  • The first two corporations were:
    • The English East India Company was chartered in 1600.
    • The Dutch East India Company was chartered in 1602.

Corporations and Other Business Structures

  • Not all businesses are corporations or public companies.
  • Sole proprietorships and partnerships are the most common forms of business organization.
  • Two aspects that define a company:
    • Limited liability: the owners of the company are not personally responsible for the company’s debts.
    • Status: public or private. Public companies are traded on stock exchanges, and usually bigger than private companies.

Limited Liability

  • Liability: the the risk of loss for debts incurred by the business, or for damages caused by the business.
  • The sole proprietor and the partners in a partnership are personally responsible for the debts of the business, and their personal assets can be seized to pay the debts or fines by court order.
  • The corporation provides a legal “shield” from liability. A shareholder of a corporation only risks the stock that the shareholder owns.
  • When a corporation suffers an adverse legal judgment and does not have sufficient funds to satisfy the judgment, the corporation simply goes bankrupt. The party or parties who have been injured cannot sue the owners—the shareholders—of the corporation because the corporation acts as a shield from liability.
  • The limited liability is to encourage investment and risk-taking; and to promote economic growth.
  • It can make sound economic sense to attract large corporations because they often become major employers and taxpayers.
  • Corporations may enhance the ability of the local economy to compete with foreign economies that are supported by the productivity of their own corporations.
  • Temporary bankruptcy:
    • Corporations are able to benefit from an option provided by US bankruptcy law, known as Chapter 11 reorganization, which allows them to enter bankruptcy temporarily.
    • The courts appoint a trustee to run the corporation, and the trustee is empowered to take any actions necessary to reduce the corporation’s debts, including revoking labor agreements with employees. Such corporations can later “emerge” from bankruptcy with fewer employees or with employees earning lower salaries.

Corporations Permit Wealth Creation and Speculation in Stocks

  • While all corporations possess limited liability, not all of them are permitted to raise money in the stock market or have their shares traded in stock markets.
  • Private corporations are not allowed to sell their shares to the public, and their shares are not traded in stock markets. But they can raise money by borrowing from banks, or by selling shares directly to investors.
  • Selling shares to the public is much easier than selling shares in a private or sole proprietorship; as more approvals are needed to perform the latter.
  • The shareholders benefit from shares in two ways:
    • Dividends: the corporation pays a portion of its profits to the shareholders, as an annual amount per share.
    • Capital gains: the shareholders can sell their shares at a higher price than they bought them for.
  • Speculation has its pros and cons. The potential for wealth creation through stock ownership has spawned an important industry that employs hundreds of thousands of people and generates vast profits: financial services:
    • Stock brokerages.
    • Investment banks.
    • Trading houses.
  • Corporations donate stocks to universities, and when corporations donate cash, the universities usually invest the cash in stocks. Thus, the largest universities have amassed vast holdings of corporate stock, among other investments.
  • The financial resources of a university are often held in the form of a special trust known as an endowment. Universities prefer not to sell off parts of the endowment but rather seek to cover costs by using the interest and dividends generated by the endowment.
  • At times, the corporate holdings of universities have become quite controversial. For example, in the 1970s and 1980s, a growing student movement called on universities to divest (to sell all their stock) in any corporations that did business with the racist apartheid regime that controlled South Africa at that time. Many commentators believe that it was this pressure on corporations that led to the fall of the apartheid regime and the election of South Africa’s first black president, Nelson Mandela.

Corporations Can Have a Perpetual Existence

  • Corporations can exist indefinitely, and they can continue to operate even if the original owners or managers die or retire.
  • It is possible but rare for family-owned businesses to remain sole proprietorships for several generations; more commonly, they eventually become corporations, or they are sold or transferred to a new business operator.
  • Very often, a small business is sold when the founder dies, because the founder’s children or heirs either do not want to work in the family business or are not as gifted in that business as the founder; or this may happen two or three generations later.
  • Corporations are structured from the outset to have a potentially perpetual existence; because corporations do business through their officers and executives rather than through their owners.
  • Although it is possible for owners to have dual roles as shareholders and as executives, it is not necessary.

Disadvantages of the Corporate Form

  • Separation of Ownership and Management Functions:
    • As the corporation grows, the original founders may lose control and even be pushed out of the corporation by newcomers.
    • Founders sell stocks to investors.
    • Corporations are ultimately controlled by the board of directors, who are voted into office by the shareholders.
    • If a founder allows his or her share of corporate stock to drop beneath 50%, then the founder will no longer be able to elect a majority of the board of directors; and may become subject to termination as an officer by the board.
    • Board of Directors: a sort of committee that controls the fate of the corporation, and it does this principally by choosing a CEO and supervising the CEO’s performance.
  • Dual Taxation:
    • The practice in most countries of taxing corporate profits twice:
      • Once when the corporation declares a certain amount of profit.
      • And again when the corporation distributes dividends to shareholders.
  • Quarterly Financial Reporting for Publicly Traded Corporations:
    • The highest degree of regulation applies to public corporations, which raise capital by selling stock in stock markets.
    • This first public sale of stock is known in the US as the initial public offering or IPO.
    • Google raised $1.67 billion with its IPO in 2004, and Facebook raised $18 billion with its IPO in 2012.
    • Public corporations are obligated to report their financial results to the public every three months, and the reports must be audited by an independent accounting firm.
    • These requirements:
      • Require more money spent on accounting.
      • Make the information available to competitors.
      • Make executives focus on short-term profits.
    • Going private is the opposite of the IPO, where a public corporation becomes a private corporation to get rid of the quarterly financial reporting requirements.

Corporate Social Responsibility

  • CSR is the ethical role of the corporation in society.
  • Corporate Philanthropy:
    • Gifts from the corporation to charitable organizations.
    • these donations burnish the corporation’s reputation and public image.
  • Stakeholder Capitalism:
    • The company has duties to all stakeholders, not just the shareholders.
    • The US grants more freedom to corporations than Europe.
    • Example: co-determination in Germany, where corporations give one seat on the board of directors to a representative of the workers or unions.
  • Cause-Related Marketing CRM:
    • The corporation associates the sales of its products with a program of donations, support of charitable or civic organizations, or other social causes.
    • Example: Red Campaign, where a portion of the sales of products goes to the fight against AIDS in Africa.
    • The corporation markets its brand at the same time that it promotes awareness of the given social problem or civic organization that addresses the social problem.
    • Example: Pink Ribbon Campaign, where a portion of the sales of products goes to the fight against breast cancer.
  • Sponsorship:
    • A corporation’s financial support for sports, art, entertainment, and educational endeavors in a way that prominently attributes the support to the particular corporation.
    • Sponsors expect a clear return from the sponsored organization, such as the right to use the organization’s logo in advertising.
    • Example: Marlboro is restricted from running ads, they sponsor Formula 1 cars, and the cars are painted with the Marlboro logo.
    • Industries that are not allowed to advertise, such as tobacco, alcohol, gambling, and pharmaceuticals are the most common sponsors.
  • Sustainability:
    • Sustainability should not be confused with CSR, but it is a part of it.
    • Sustainability is derived from environmentalism; it is the ability of a society or company to continue to operate without compromising the planet’s environmental condition in the future.
    • No company is 100% sustainable, but some companies are more sustainable than others.
  • GreenWashing:
    • GreenWashing refers to corporations that exaggerate or misstate the impact of their environmental actions.
    • Example: products that are labeled as “green” or “eco-friendly” but are not.
  • Social Entrepreneurship and Social Enterprise:
    • It is the use of business organizations and techniques to attain laudable social goals.
    • Example: TOMS Shoes, started when the founder visited Argentina and saw many school children without shoes. He decided to donate a pair of shoes for every pair sold.
  • Social Marketing:
    • Social marketing refers to the use of business marketing techniques in the pursuit of social goals.
    • Example: TV ads that promote the use of seat belts, or the use of condoms to prevent the spread of AIDS.
    • Social marketing is usually used to try to convince citizens to drive more safely, eat better, report child and domestic abuse, and avoid various forms of criminality and drug use.
  • Business Ethics:
    • It is closely related to CSR, but it is not the same.
    • CSR applies to corporations, while business ethics applies to all businesses.
  • White-Collar Crime:
    • White-collar crime is a term that refers to nonviolent crimes committed by high-profile business people or government officials.
    • Example: embezzlement, insider trading, and fraud.
    • This should be distinguished from corporate crime, which refers to crimes committed by the corporation itself, such as pollution, unsafe working conditions, and false advertising.
    • The Sarbanes-Oxley Act was passed in 2002 to prevent white-collar crime by increasing the penalties on such crimes, and by requiring more transparency in financial reporting.

Animal Rights and CSR 5

  • PETA:
    • (People for the Ethical Treatment of Animals) is an organization that has been very successful in raising awareness about the treatment of animals in the food industry, in laboratories, and in the fashion industry.
    • A lot of companies have their PETA-approved label, which means that they are not using animal products in their products.
    • PETA adopted the rights/abolitionist doctrine of animal ethics.
    • It was founded in 1980.
  • DKNY fashion brand refused to stop using fur in their products, and PETA started a campaign against them (including social media, posters, and online) with the slogan “DKNY: Bunny Butcher”.
  • Leather from cows remains the preferred material for shoes, belts, and handbags.
  • Is it hypocritical to stand up for the rights of cute animals like bunnies, dogs, baby seals, and dolphins, all while preparing to eat a bacon burger?
  • Businesses that are dependent on medical and scientific research, such as pharmaceutical and cosmetics companies, have been forced to implement policies and reviews to determine whether the laboratory animals they use for testing purposes are treated humanely.
  • According to Factory Farm Map, there are four factory-farmed chickens for every single American.
  • US commercial livestock and poultry operations produce three times more waste a year than that produced by the entire human population.

The Development of Animal Ethics and Rights

  • Animal rights movements started in the 17th century:
    • The fair treatment of animals was the sole responsibility of their owners.
    • Anyone who does not own animals has no responsibility to them.
  • In the mid-18th century, the British philosopher Jeremy Bentham was the founding ethicist of the modern animal rights movement.
    • Jeremy Bentham was a utilitarian; he believed that all humans have equal responsibility to animals.
    • Bentham’s thinking prompted the creation of Britain’s Society for Prevention of Animal Cruelty (SPCA, later the Royal SPCA, or RSPCA), and the adoption of the first laws curbing animal mistreatment in England throughout the 1830s–1850s.
  • The first major American animal rights group, the American Society for the Prevention of Cruelty to Animals (ASPCA), was created in 1866 by Henry Bergh.
    • Charles Darwin’s theory of evolution also played a role in the development of animal rights as it suggested that humans and animals share a common ancestry.
  • Throughout the nineteenth and early twentieth centuries, activist groups in the United Kingdom and the United States promoted the fair treatment of domesticated animals.
    • Upton Sinclair’s The Jungle (1906), a novel describing the violent and unclean practices of the Chicago meat industry was influential in the development of the animal rights movement.
    • The Jungle drew public attention to labor abuses in the meat industry, and also to the horrors of the slaughterhouse floor.

Animal Liberation: The Contribution of Peter Singer

  • Animal Liberation is a book published by Australian philosopher Peter Singer in 1975.
  • He argued that just because animals cannot think on the same level as humans does not mean they cannot suffer.
  • Singer applied the term speciesism, which had been coined by Richard Ryder, to the unjustifiable discrimination against animals by humans, reminiscent of racism, sexism, and other forms of intolerance.
  • Speciesism:
    • The biased preference for one’s own kind.
    • Animals can be exploited to provide benefits to humans without regard to the suffering or well-being of animals.
  • Singer’s radical argument (that we should move to the vegetarian diet) has been labeled the rights/abolitionist doctrine of animal ethics.
  • Rights/abolitionists believe that humans have no moral right to slaughter, domesticate, or use animals for pleasure or consumption in any way; and animals should be left in the state of nature and allowed to live their lives free from human interference.
  • Welfarists seek to recognize and protect animal welfare within the current system of consumption. Animals may ethically be used for human benefit, so long as they are treated humanely and fairly.

Factory Farming

  • As of 2007, approximately 56 billion animals were being slaughtered annually worldwide for human consumption in farm settings (excluding fish and other sea creatures).
  • United States growers annually slaughter some 9 billion chickens (31 billion worldwide).
  • As of 2011, 5.8 million pigs were bred for slaughter in the United States.
  • Cattle production for beef, the most expensive of the meat-producing industries, is somewhat more humane, despite the large numbers involved (upwards of 34.2 million cows slaughtered for meat in 2010 alone).
  • US dairy-producing cows, numbering 9.3 million in 2008, with roughly 2.3 million of these being sent to slaughter.
  • A high percentage of the leather apparel items sold in the United States are manufactured from leather that was harvested abroad. China, the world’s leading leather exporter, has been criticized for poor supervision of factory farms, where animals are not properly anesthetized before they are skinned.

Animal Consumption in Research and Cosmetics

  • Approximately 100 million animals a year are killed as a result of cosmetic, medical, and scientific experimentation in the United States alone.
  • Though laboratory animals are generally euthanized following the completion of the experiment or trial, it is not uncommon for many to die in the testing process.
  • These tests include skin and eye irritation tests, repeated force feeding, “lethal dose” injection tests, vivisection, bone-breaking, paralyzing, and infection with diseases.
  • According to DoSomething.org, “92 percent of experimental drugs that are safe and effective in animals fail in human clinical trials because they are too dangerous or don’t work.”
  • The large margin of error in the trials and experimentations suggests that many laboratory animals experience great suffering for relatively little benefit to humans.

Proposed Solutions: Vegetarianism, Ecofarming, and Cruelty-Free Production

  • PETA’s principal goal is to raise awareness of the abuses that occur in factory farming; so that consumers will be motivated to seek alternatives.
  • Vegetarian/Vegan Diets:
    • Vegetarian diet: a diet that is free from meat, fish, and poultry.
    • Vegan diet: a diet that is free from all animal products, including eggs, cheese, and dairy.
    • As of 2012; 5% of Americans identified as vegetarian, and 2% identified as vegan.
    • The vegetarian trend is only increasing, 1% in 1971, 3% in 2009, and 5% in 2012.
    • The reasons behind vegetarianism are 50% health reasons and 50% for animal welfare.
    • India is generally considered to be the country with the highest percentage of vegetarians (20-40% of the population).
    • Italy is the country with the highest percentage of vegans (10% of the population).
    • France has 1.5% of the population as vegetarians.
    • Women are more likely to be vegetarians (60% of vegetarians).
  • Vegetarian/Vegan Clothing:
    • Vegetarianism in clothing is marginal and it has not been adopted yet.
    • Stella McCartney and MooShoes are two companies that are known for their vegetarian/vegan clothing.
  • Cruelty-Free Products:
    • Cruelty-free products are those that are not tested on animals and do not include animal ingredients.
    • Methods of cruelty-free production:
      • Rely on alternative testing methods, such as computer-based simulations.
      • Develop new products only from ingredients referenced in a large European database of 20,000 compounds that have already been tested as safe.
      • Test products on reconstructed human skin samples made from donated skin from cosmetic surgeries.
    • Leading cruelty-free cosmetics brands include Aveda, M.A.C., Bobbi Brown, and Urban Decay.
  • Humane Farming and Meat Consumption:
    • Humane farming refers to animal husbandry that respects codes of conduct so that animals are raised and slaughtered in a way that minimizes suffering.
    • Whole Foods supermarket chain has adopted the Animal Welfare Rating Standards developed by the Global Animal Partnership in order to source meat products from humane producers.
    • According to these standards, animals must:
      • Be given space to move around and have access to outdoor areas.
      • Must be permitted natural behavior such as wallowing for pigs or pecking for chickens.
      • Must spend their entire lives on a single farm.

The Moral Basis for Business Activity 6

  • Dimensions of corporate responsibility:
    • Must: the legal and regulatory requirements that a company must comply with.
    • Ought-to: the ethical and moral obligations that a company should comply with.
    • Can: the discretionary activities that a company can engage in.

Sustainability, Ethics and Work 7

  • Forms of sustainability:
    • Micro-level sustainability: Employees and firms.
    • Societal-level sustainability.
    • Systemic sustainability.

References

  1. Byars, S. M., & Stanberry, K. (2022). Business ethics. OpenStax College and Rice University. https://openstax.org/details/books/business-ethics?Book%20details. Chapter 1: Why Ethics Matter. ↩

  2. Byars, S. M., & Stanberry, K. (2022). Business ethics. OpenStax College and Rice University. https://openstax.org/details/books/business-ethics?Book%20details. Appendix B: Profiles in Business Ethics: Contemporary Thought Leaders. ↩

  3. Byars, S. M., & Stanberry, K. (2022). Business ethics. OpenStax College and Rice University. https://openstax.org/details/books/business-ethics?Book%20details.Appendix C: A Succinct Theory of Business Ethics. ↩

  4. Jimenez, G. C., & Pulos, E. (2016). Good Corporation, Bad Corporation: Corporate Social Responsibility in the Global Economy. Open SUNY Textbooks. Retrieved from: https://milnepublishing.geneseo.edu/good-corporation-bad-corporation. Chapter 1: Corporations and their Social Responsibility. ↩

  5. Jimenez, G. C., & Pulos, E. (2016). Good Corporation, Bad Corporation: Corporate Social Responsibility in the Global Economy. Open SUNY Textbooks. Retrieved from: https://milnepublishing.geneseo.edu/good-corporation-bad-corporation. Chapter 12: Animal Rights and CSR. ↩

  6. SDG Academy. (2019, August 20). The Moral Basis for Business Activity [Video]. Made available through https://sdgacademylibrary.mediaspace.kaltura.com/media/The+Moral+Basis+for+Business+Activity/1_ru5mrpbl ↩

  7. Peetz, D. (2019). Sustainability, ethics and work. In The Realities and Futures of Work (pp. 247-278). ANU Press. https://www.jstor.org/stable/j.ctvq4c16w.14 ↩