BUSINESS ETHICS



Business Ethics 229
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Ethics is the field of philosophy that studies systems, norms, or values that distinguish between what is good and bad or right and wrong. The field of business ethics focuses on examining conduct and policies and promoting appropriate conduct and policies within the context of commercial enterprise, both at the individual and the organizational level. Business ethics is a form of applied ethics where researchers and professionals use theories and principles to solve ethical problems related to business. Consequently, a central question of business ethics is "How do businesses determine what is appropriate or ethical conduct for any given commercial task?" Business ethics covers all levels of business activity, including the obligations and responsibilities of businesses to customers, employees, other businesses, national and multinational governments, and the environment.

As with other aspects of society relevant to ethics, conventions and folkways dictate the ethics of some kinds of business activities, while local, state, and federal laws regulate other kinds of activities. The latter kinds sometimes are referred to as institutionalized business ethics, which include laws covering warranties, product safety, contracts, pricing, and so forth. Furthermore, a number of corporations and professions contributed to the institutionalization of business ethics by establishing codes of ethics.

As in the broad field of ethics, many theories and approaches to business ethics exist. Business professionals and ethicists explore the field of business ethics in three common ways: (1) by studying the (often conflicting) views of famous philosophers, (2) by identifying major ethical concerns of businesses and proposing solutions to them through legislation or ethical theory, and (3) by examining case studies that shed light on ethical dilemmas.

The concept of business ethics is relatively new, having become an issue and an organized field of study only since the 1970s. Although numerous factors have contributed to the increased interest in business ethics, a chief influence has been a shift in societal values that underlie the business system. The change in American values has been characterized, in general, by a move away from traditional Judeo-Christian ethics toward pluralism, relativism, and self-fulfillment. The end result has been a diminished base of universal moral norms and a subsequent interest in, and concern about, resolving ethical conflict. Understanding the evolution of morality in the United States is crucial to the study of business ethics.

BACKGROUND: THE PROTESTANT WORK
ETHIC'S RISE AND DECLINE

Derived from the views of Protestants John Calvin (1509-1564) and Martin Luther (1483-1546), the Protestant work ethic that was imported from Europe to North America during the 17th, 18th, and early 19th centuries was a set of beliefs that encompassed secular asceticism—the disciplined suppression of gratification in favor of ceaseless work in a worldly calling according to God's will. This work ethic emphasized hard work, self-reliance, frugality, rational planning, and delayed gratification that formed the foundation of modern capitalism and allowed American and European societies to accumulate economic capital. The Protestant work ethic dominated white American society through the 1800s.

This ethic aided in the emergence of an upwardly mobile bourgeois class—comprised of successful farmers, industrialists, and craftsmen—that was preoccupied with social conformity and materialism. At the same time, a much clearer definition of success and failure developed that was wrapped up in material terms; this definition would play a major role in the societal evolution of the Western world.

A significant factor that contributed to the decline of the Protestant work ethic was the accumulation of wealth, which gradually diminished the religious basis of the ethic. As workers increased their wealth, consumption gradually became the motivation for work, replacing the work-for-work's-sake foundation of the Protestant work ethic. In the growing cities, the religious component, which included frugality, was jettisoned in favor of the conspicuous consumption of a consumer society as people began producing more than they could consume and marketing their products to others to avoid waste.

As the original Protestant work ethic gave way to a "success ethic," other factors contributed to a change in moral norms during the latter half of the 20th century. The demographic makeup of the United States changed as large numbers of non-Protestants immigrated and joined the workforce. They brought with them different value systems and confronted the society's Protestant bias. In addition, many Americans rebelled against what they viewed as suppressive social norms that had carried over from Protestant asceticism. Those norms were replaced by a belief in individualism and relativism—which holds that any individual's or group's values are as good as any other's. As a result, a societal bias against universal norms of behavior developed. Such beliefs carried over into views about business-related conduct.

The new morality underlying business behavior in the United States was characterized by an emphasis on salary and status, self-fulfillment, entitlement, impatience, and consumption, and an attitude that the ends justify the means (or it is all right to break the law to achieve your goal as long as you do not get caught). Proponents of the new morality point out that it has resulted in the most productive economy and living standard in the history of the world. Critics argue that the lack of moral norms has created havoc in the business world (and society) that threatens long-term economic stability. They cite destructive business behavior, such as the dumping of hazardous wastes and the exploits of corrupt financiers.

THE ETHICAL DILEMMA

In addition to ethical issues arising out of changing norms and contrasting social theories, ethical dilemmas plague everyone, even individuals who are honest and confident in their moral stance. Conflicts result from day-to-day business decisions that are intrinsically influenced by factors such as loyalty. For example, in choosing a course of action, individuals must ask themselves whom they are serving with their decisions: society, the corporation, their God, themselves, their family, or some other entity. Saul W. Gellerman, in his essay "Why 'Good' Managers Make Bad Choices" in The Business of Ethics and the Ethics of Business, identified four common rationalizations that lead to unethical business behavior by well-intentioned managers.

One reason often cited for engaging in immoral behavior is that the activity seemed to fall within reasonably acceptable moral bounds; because everybody else was doing it, it was not "really" illegal or unethical. A second rationalization was that the unethical act was performed in the interest of the corporation; perhaps the company even expected or ordered the violator to perform the act, possibly with the threat of reprisal for inaction. A third reason was that the offender believed that the conduct was safe because it would never be discovered—because the risk of getting caught was so low, it was okay to commit the act. Fourthly, offenses are carried out because the company condones the behavior, minimizes its impropriety, and assures protection for those who engage in it.

In fact, employees often do have a motivation to engage in technically unethical behavior for their corporations. Studies have indicated that whistle-blowing, or divulging unethical corporate behavior, is generally frowned upon by American society. Pressure from fellow employees, managers, and even the local community can cause an employee to continue even highly unethical behavior, in the interest of being a team player and not being labeled a tattletale.

KEY THEORIES OF BUSINESS ETHICS

The intensified interest in business ethics, particularly during the 1980s and 1990s, was partly the result of diverging moral norms and a perceived decay of self-regulation and honesty. Paradoxically, however, it is the accompanying bias against moral norms that makes the study of business ethics so imprecise. Because all philosophies relating to ethics are generally assumed to have merit (i.e., none is right or wrong), most treatises and educational programs on the subject do not advocate a philosophy. Instead, they offer contrasting views for contemplation, such as those outlined below.

ALBERT CARR.

The 20th century thinker Albert Carr believes that ethics do not necessarily belong in business; they are a personal matter. The business world might contain a set of rules for participants to follow, but those have nothing to do with the morals of private life. Business, Carr asserts, is really more like a poker game, the purpose of which is to win within the context of the rules. Cunning, deception, distrust, concealment of strengths and strategies—these are all parts of the game. Businesspeople cease to be citizens when they are at work. Furthermore, no one should criticize the rules of the game simply because they differ from societal morals.

Carr's basic views on ethics in business are recognized for the insight they provide into the dynamics of a free and competitive market. Critics point out that he views business ethics very narrowly, simply as a set of rules created by the government and the courts that must be obeyed. He assumes that one's role as a businessperson takes precedence over one's other societal roles. But, if one's personal morals conflict with business rules, should one have to compromise one's personal beliefs?

Further study of Carr's views reveals a bent toward ethical relativism, which supports his view that we should not criticize rules of business, even if they conflict with our personal ethics. A positive aspect of relativism is that it cultivates tolerance of other people and groups (after all, who is qualified to determine what the social norms should be for everyone?). But it also raises questions about ethical conduct. For example, is it okay to accept a bribe to award a contract in a country where that practice is accepted? Were the Nazis correct in their beliefs simply because others did not have a right to judge them?

MILTON FRIEDMAN (1912-).

Milton Friedman advocates the classical theory of business, which essentially holds that businesses should be solely devoted to increasing profits as long as they engage in open and free competition devoid of fraud. Managers and employees, then, have a responsibility to serve the company they work for by striving to make money for it. The very act of seeking profits is, according to Friedman, a moral act. An extreme example relates his point: If a person invested all of his or her savings into a venture and then the company gave away the money to the homeless, would that be ethical? No, proffers the classical theory, because the investor gave the money to the company in good faith for the purpose of earning a profit.

ADAM SMITH (1723-1790).

Friedman's views generally support those of Adam Smith, who held that the best economic system for society would be one that recognized individual self-interest. That concept seems to conflict with the classical theory of business ethics. In his renowned Inquiry into the Nature and Causes of the Wealth of Nations (1776), however, Smith stated that society is best served when each person pursues his own best interests; an "invisible" hand will ensure that self-interested behavior serves the common social good. The competition that would result between individuals would be played out within the confines of government regulations.

Smith's invisible hand concept is based on the theory of psychological egoism, which holds that individuals will do a better job of looking after their own interests than those of others. A tenet of that theory is that enlightened egoists will recognize that socially responsible behavior will benefit them.

Both psychological egoism and the classical theory can be defended by the utilitarian argument. Utilitarianism maintains that any action or system is good if it results in the greatest good for the greatest number of people. In summary, if, as Smith contended, self-interest is a chief motivator and the invisible hand really works, then as companies seek to maximize profits, the greatest public good will result for the greatest number.

Critics of Smith's and Friedman's theories contend that they neglect the need for cooperation and teamwork in society, and that chaos can be avoided only with heavy policing of self-interested behavior. Proponents of the invisible hand counter that individuals will usually pursue cooperation and self regulation because it is in their own interest.

JOHN LOCKE (1632-1704).

Although perhaps best known for his advocacy of life, liberty, and property during the 17th century, John Locke is credited with outlining the system of free enterprise and incorporation that has become the legal basis for American business. His philosophy was founded on a belief in property rights, which are earned through work and can be transferred to other people only at the will of the owner. Under Locke's theory, which now seems intuitive because of its commonality, workers agree by their own will to work for a company for a wage. Shareholders receive the profits because they have risked their property. Thus, it is the responsibility of the company's workers to pursue profits.

Opponents of Locke's system, particularly proponents of socialism, argue that property rights are not inalienable. For that reason, Locke-style capitalism is morally unacceptable because it prohibits the public from benefiting from property that actually belongs to everyone. Indeed, according to socialists, the right to profits is not assumed because the profits emanate from the surplus value created by the work of the entrepreneur and laborer. In fact, property ownership itself is unethical. It is merely an attempt by powerful owners to keep control of their property and to exploit other people.

To their credit, socialist and Marxist systems do lead to less inequality. Utilitarians, however, would counter that those more equitable systems do not produce the greatest good for the greatest number.

IMMANUEL KANT (1724-1804).

The German philosopher Immanuel Kant believed that morality in all spheres of human life should be grounded in reason. His renowned "categorical imperative" held that: (1) people should act only according to maxims that they would be willing to see become universal norms (i.e., the Golden Rule); and (2) people should never treat another human as a means to an end. The categorical imperative is easily demonstrated: It would be unethical for a person to break into a long line at a theater, because if everyone did the same thing anarchy would result. Similarly, it would be immoral for a person to have a friend buy him or her a ticket under the agreement that he or she would reimburse the friend, but then fail to pay the friend back.

Kant's theory implied the necessity of trust, adherence to rules, and keeping promises (e.g., contracts). When people elect to deviate from the categorical imperative, they risk being punished by the business community or by government enforcement of laws. More importantly, Kant suggested that certain moral norms that are ingrained in humans allow them to rise above purely animalistic behavior. People have the capacity to forgo personal gain when it is achieved at the expense of others, and they can make a choice as to whether they will or will not follow universal norms.

MAJOR ISSUES OF BUSINESS ETHICS IN
THE LATE 20TH CENTURY

In the late 1980s, the Conference Board published a report that surveyed about 300 corporate executives from around the world. The report indicated the primary ethical concerns of businesses fell into four categories: equity, rights, honesty, and the exercise of corporate power, each of which is addressed below.

Equity—referring to general fairness—includes the disparity between executive/manager salaries and entry-level worker salaries. The ethical question here is whether it is fair to pay executives over 30 times more than entry-level workers earn. Researchers of business ethics such as Peter Drucker (1909-) propose that companies ensure fair compensation by limiting executive compensation to just 10 times what entry-level workers earn. In addition, fair product pricing also falls into this category.

The category of rights covers entitlements of employees, customers, communities, and other parties as established by laws, court rulings, and social conventions. Rights generally protect these various parties from activities by businesses that can limit their freedom and safety. This rubric also subsumes issues such as sexual harassment, discrimination, and employee privacy.

Honesty, the broadest category, refers to the truthfulness and integrity of businesses' actions and policies, including corporate conduct as well as employee conduct done in the name of the company. Furthermore, issues of honesty pertain to advertising content, financial procedures, bribes and gifts, fraud, and wastefulness. In addition, honesty also includes employee obligations, such as not disclosing confidential information to a company's competitors.

The key issue surrounding exercise of corporate power is whether companies ethically can fund and support certain political action committees whose efforts may benefit their businesses but cause social harm. This category also covers worker, product, and environmental safety concerns and raises questions about employers' responsibilities for workplace equipment that may cause injuries after prolonged use, products that may harm consumers, and conduct and products that may contaminate the environment.

CASE STUDIES

Ethical violations at the Manville Corporation (formerly called Johns Manville), a manufacturer of asbestos, reflect the many dynamics that influence immoral behavior in large organizations. In the 1940s the company's medical department began to receive information that indicated asbestos inhalation was the potential cause of a debilitating lung disease. Manville' s managers suppressed further research and elected to conceal the information from at-risk employees, even going so far as refusing to allow them to view chest X-rays. The company's medical staff also participated in the cover-up.

After more than 40 years of suppressing this secret, Manville was exposed and was forced to turn over 80 percent of its equity to a trust that would pay benefits to affected workers and their families. An important point of the case is that many employees—mostly ordinary men and women—participated in the cover up, with reasons ranging from company loyalty to fear of job loss. Rather than hurt the company or damage their career, executives and managers chose to remain silent and conceal data.

A similar incident occurred in the 1980s at E. F. Hutton & Company, a brokerage that pleaded guilty to more than 2,000 counts of mail and wire fraud. The company stole money from 400 of its banks by drawing against uncollected funds or nonexistent sums. It would return the money into the accounts after it had used it—interest free. Like Manville's cover-up, the E. F. Hutton conspiracy involved many managers over a period of several months. The company encouraged its branch managers to illegally borrow from the accounts, suggesting to them that the practice was savvy business rather than a violation of law or ethics. In some instances, E. F. Hutton even rewarded managers for their skill at utilizing the funds. The managers were likely influenced by the perception that everyone else was doing it and that the company would protect them in the unlikely event that they were caught. In the end, several managers were fired and/or indicted. E. F. Hutton agreed to pay between $3 million and $11 million in damages, and its reputation in the financial community was damaged.

An ongoing ethical dilemma in the business world involves the tobacco industry. Critics of cigarette companies argue that, despite abundant evidence that smoking is a health hazard responsible for millions of deaths, manufacturers continue to produce and sell the deadly goods. The cigarette manufacturers counter that their product embodies a heritage of smoking that dates back several centuries. They also argue that data linking smoking to cancer and other ailments are lacking. Cigarette makers continue to advertise their products using positive, alluring images, and to play down the potential health risks of smoking. As with most business ethics dilemmas, rationalization and the lack of a clear-cut solution cloud the issue.

[ Dave Mote

updated by Karl Heil ]

FURTHER READING:

Bowie, Norman E. Business Ethics. Blackwell Pub., 1999.

Braybrooke, David. Ethics in the World of Business. Totowa, NJ: Rowman & Allanhead, 1983.

Cavanaugh, Gerald F., and Arthur F. McGovern. Ethical Dilemmas in the Modern Corporation. Englewood Cliffs, NJ: Prentice Hall, 1988.

Freeman, Edward R., ed. Business Ethics: The State of the Art. New York: Oxford University Press, 1991.

Harvard Business Review. The Business of Ethics and the Ethics of Business. Boston: Harvard College, 1986.

Madsen, Peter, and Jay M. Shafritz. Essentials of Business Ethics. New York: Meridian, 1990.



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