About business ethics
Business ethics seems to be an oxymoron; it consists of two elements that do not seem to fit together, like ‘deafening silence’. According to Duska there can be no ethics in business; business is unethical or at best amoral. 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). Business ethics starts where the law ends. 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 is:
Morality > Ethics > Ethical theory > Potential solutions to ethical problems
Whereby ethics rationalizes morality Academic Skills for Business Students produce ethical theory that can be applied to any situation. All individuals and communities have morality, a basic sense of right and wrong in relation to particular activities. Ethics represents an attempt to systematize and rationalize morality, into generalized normative rules that supposedly offer a solution to situations of moral uncertainty. The outcomes are ethical theories.
The importance of business ethics
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, and many members of the public are uneasy with that. Business ethics can help understanding why this happens and what the consequences might be, and what we can do about it.
Businesses have 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. Helping us to understand the causes and consequences improves the human condition.
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.
Employees face significant pressure to compromise ethical standards.
Business faces a trust deficit. Only 19% of the general population believes managers make ethical decisions. Enhancing business ethics is needed to restore that trust in the future.
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 moviemakers. 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 organizational context and business ethics
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). A civil society organization is a non-profit, charity or non-governmental organization. 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.
Globalization and business ethics
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: a process whereby multinationals pitch developing countries against each other by allocating foreign direct investment to countries that can offer them the most favourable conditions in terms of low tax rates, low levels of environmental regulation, and restricted workers’ 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. Globalization is the on-going integration of political, social, and economic interactions at the transnational level, regardless of physical proximity or distance. The new thing about these interactions is that they no longer need a geographical territory to take place, and territorial distances and borders no longer restrict them.
Globalization as closer integration of economic activities 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. Globalization makes regional differences less important, but reveals economic, political and cultural differences and confronts people with them.
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.What are the key ethical guidelines for ethical behaviour?
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.
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. There are five questions asked: (1) who is responsible for ethical conduct in business? (2) Who is the key actor in business ethics? (3) What are the key guidelines for ethical behaviour? (4) What are the key issues in business ethics? And (5) what is the dominant stakeholder management approach?
Who is responsible for ethical conduct in business?
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.
Who is the key actor in business ethics?
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.What are the key ethical guidelines for ethical behaviour?
What are the key ethical guidelines for ethical behaviour?
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 relies 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.
What are the key issues in business ethics?
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.
What is the most dominant stakeholder management approach?
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. European, African and Asian models of capitalism are not so dominated by the drive for shareholder value maximization compared to American companies.
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.
Sustainability as business ethic goal
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. 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.
As Elkington (1999) suggests, the TBL is less about establishing accounting techniques and performance metrics for achievements in the three dimensions, and more about revolutionizing the way that companies think about and act in their business.
Framing business ethics
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 individuals 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: they have certain rights and responsibilities in society, just as an individual
- Since corporations are independent of their owners, shareholders have limited liability: they are not responsible
- Managers and directors are responsible for protecting shareholders’ investments: they have a ‘fiduciary’ responsibility to hold shareholders’ investments in trust and act in their best interest
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 for their actions: so the humans who run the corporation are responsible for the actions of the corporation, corporations cannot be seen as humans and therefore cannot assume to have a true moral responsibility for their actions.
- 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 as long as a corporation abides by the legal framework society has set up for businesses. Acting for any other purpose constitutes a betrayal of their special responsibility to shareholders and represents a ‘theft’ from shareholders’ pockets.
- Social issues and problems are the proper province of the state rather than corporate managers: managers cannot and should not decide what is in society’s best interests; this is the job of the government. Corporate managers are neither trained to set and achieve goals, nor democratically elected to do so.
Can a corporation be morally responsible for its actions?
Most scholars and the wider public would say ‘yes’ nowadays to this question. Four considerations that have contributed to this situation are:
- Legal identity: corporations have increasing rights and a distinct legal identity;
- Agency: corporations can also be said to decide and act independent of their members. This is based on the idea that every organization has a corporate internal decision structure that directs corporate decisions in line with predetermined goals. So, corporations have an organized framework of decision-making that establishes an explicit or implicit purpose for these decisions.
- Organizational culture: all companies not only have an organized corporate internal decision structure, they also have a set of beliefs and values that set out what is regarded as right or wrong in the organization – the organizational culture.
- Functional identity: corporations present themselves and interact with customers and other stakeholders as if they were distinct persons.
Corporate social responsibility (CSR)
There are two key questions regarding this issue: (1) why have corporations’ social as well as financial responsibilities? (2) What is the nature of these responsibilities?
Many say that corporate social responsibility exists, often because it is in their own self-interest to have social responsibilities (enlightened self-interest). Four main arguments:
- Enhance (long-term) revenues: corporations perceived as being socially responsible might be rewarded with extra/more satisfied customers, and attract more employees.
- Reduce costs: CSR can reduce costs as it helps in saving energy, reducing waste and cutting out inefficiencies.
- Manage risk and uncertainty: voluntary committing to social actions and programmes may forestall legislation and ensure greater corporate independence from government.
- Maintaining the social license to operate: CSR can effectively provide the right of gaining and maintaining a social license to operate to business.
However, should this be called CSR if it is actually only in self-interest? So, it depends on the primary motivations of the people taking the decisions. Other, moral arguments for CSR:
- The externalities argument: externalities are the positive and social impacts of an economic transaction that are borne by those other than the parties engaging in the transaction. Corporations create those, and they cannot escape responsibility for these impacts, whether they are positive, negative or neutral.
- The power argument: as powerful social actors, with resource to substantial resources, corporations should use the power and resources responsibly in society.
- The dependency argument: corporations have a duty to take into account the interests and goals of the stakeholders, as well as those of shareholders, because they contribute to the company.
What is the nature of corporate social responsibilities?
Carroll made a model for CSR in the form of a pyramid. He regards corporate social responsibility as the attempt by companies to meet the economic, legal, ethical and philanthropic demands of a given society at a particular point in time. ‘True’ social responsibility requires the meeting of all four levels:
- The lowest layer is the economic responsibility, which is required by society, to be a properly functioning economic unit and to stay in business. Therefore, corporations must provide return on investments, wages and a safe working environment, and a desired quality of services/goods. It is the reason why businesses are set up.
- Next, the legal responsibilities, required by society as well. Businesses need to abide by the law and ‘play the rules of the game’. Laws are codification of society’s moral views, and therefore abiding by these standards is a necessary prerequisite for any further reasoning about social responsibilities.
- 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. An example is the climate change.
- On top are the philanthropic responsibilities, which are desired by society. The word 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.
The benefit of the four-part model of CSR is that it structures the various social responsibilities into different levels, yet does not seek to explain social responsibility without acknowledging the very real demands placed on the firm to be profitable and legal. 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. This regards the philanthropic responsibility.
The way companies prioritize different levels of CSR depends on their overall strategy. There are two basic types of CSR strategies: traditional CSR and contemporary CSR. Traditional CSR considers CSR as a part of a strategy where a company generates its profits without too much consideration for wider societal expectations. However, when there is profit made, it will be partly spent on things that are important to stakeholders. So, CSR is ‘bolted on’ to the firm but without any real integration with its core business. Contemporary CSR sees responsible behaviour as an opportunity to generate profits while at the same time living up to expectations of society. CSR is built in to core business.
The concept of corporate social performance (CSP) says we can measure the outcome of CSR. According to Donna Wood (1991), CSP can be observed as the principles of CSR, the processes of social responsiveness (CSR strategy) and the outcomes of corporate behaviour. There are three areas in CSP:
- Social policies. These are made explicit and pronounced by companies, stating the company’s values, beliefs and goals with regard to its social environment.
- 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.
Firms’ stakeholders
So far we have assessed the responsibilities of the company, but not yet to whom 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 (corporation has the obligation not to violate the rights of others) and the principle of corporate effects (companies are responsible for the effects of their actions on others). Edward Freeman popularized the stakeholder theory of the firm in the 1980s.
It is not possible to identify a group of relevant stakeholders for any given corporation in any given situation.
- The traditional management model says that the firm is responsible for four groups: shareholders (‘owners’), customers, employees, and suppliers.
- The stakeholder model says firms are responsible for shareholders, suppliers, civil society, employees, customers, competitors, and the government. The corporation is situated at the centre of a series of interdependent two-way relationships.
- The network model says firms are responsible for the same stakeholders as the stakeholder model, but then also for the own 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? Freeman (1984) says:
- Legal perspective: because some groups have a legitimate stake, which is protected by law, for instance suppliers have contracts with corporations that are legally binding.
- Economic perspective: 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, law does not protect these.
- 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 > agency problem!
So what does this mean for the role of management? They have to balance their responsibilities for their multiple stakeholders. This is the new role of management. 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, according to Donaldson and Preston (1995):
- 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 citizenship – the firm as a political actor
Friedman states that corporations should not undertake social policies and programmes because this is the task of government. However, nowadays firms have become more and more political actors. There are three main areas where corporations’ activities overlap and interfere with that of governments:
- Governments retreating from catering to social needs. Many services like the provision of water and electricity are no longer a task of government, but privatized.
- Governments unable or unwilling to address social needs. There are places where businesses face governments that lack the resources to cater effectively for basic social needs.
- Governments can only address social problems within their reach.
Corporate citizenship (CC)
This is a pretty new concept, and therefore it is still difficult to define. There are three usages of the terminology. In a ‘limited view’ of CC, many refer to philanthropy as the main activity of a virtuous corporate citizen that shares its wealth with its ‘fellow citizens’. Second, CC can be seen as equivalent to CSR. Third, there is the extended view of CC (preferred one). 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., enables the individual to participate in the process of governance beyond the sphere of his/her own privacy.
The government is mainly responsible for these rights, so actually it is strange to call it corporate citizenship, because citizenship is about relations between individuals and government. 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 corporate citizenship 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.
Corporate accountability assesses ‘whether a corporation is answerable in some way for the consequences of its actions, and if so, to whom’. 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. Corporate transparency is ´the degree to which corporate decisions, policies, activities, and impacts are acknowledged and made visible to relevant stakeholders´.
According to Schnackenberg and Tomlinson (2014), the quality of corporate transparency depends on three elements:
- Disclosure: whether relevant information is made available in a timely and accessible manner;
- Clarity: the degree to which information is understandable to relevant stakeholders;
- Accuracy: whether the disclosed information is correct and reliable.
Asking for more transparency is about being able to hold corporations accountable for their actions. Only if stakeholders know what companies are doing, they are able to influence them to chance their behaviour or make decisions about whether to continue to support them.
CC does seem to add something significant that helps framing business ethics in new ways:
- 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 strongly related to the rights of citizenship.
- It provides us with a critical view on the social responsibilities of businesses.
Ethical theory
Normative ethical theories are the rules and principles that determine right and wrong for a given situation. There are two extreme thoughts on ethical theories, according to De George (1999). 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 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 questioning 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 approaches are much more based on religion or tradition, whereas European and North American approaches rely on philosophical arguments.
There are two main differences between religious teaching about ethics and normative ethical theory from philosophy:
Source of rules and principles: religions invoke a deity or an organized system of belief as the source of determining right and wrong, and therefore faith is the critical requisite for acting ethically. Philosophical theories are based on the belief that human reason should drive ethics, so rationality is the critical requisite for acting ethically.
Consequences of morality and immorality: to act ethically in a normative philosophical theory will create tangible social benefits and harms for others. Although this is also important in religious teaching, there is also an important element of spiritual consequence for the decision-maker.
Ethical theories – Western modernists
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). We will now discuss these two groups of normative theories.
Consequentialist 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 (e.g. not make faulty products because customers will not return). 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, linked to Jeremy Bentham and John Stuart Mill. 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. There are some disadvantages:
Subjectivity: pleasure/pain, happiness/unhappiness is not the same to everyone
Problems of quantification: how to measure pleasure/pain, happiness/unhappiness
Distribution of utility: minorities can be easily overlooked when assessing the greatest good for the greatest number
As the utilitarians 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.
Non-consequentialist theories
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. So, humans are independent moral actors who make own rational decisions regarding right and wrong. He developed a theoretical framework, which he called the categorical imperative. This should be applied to every moral issue, regardless of who is involved, who profits and who is harmed by the principles once they have been applied to specific situations. The three parts are:
Consistency: an action can only be regarded as right if the rule guiding that behaviour should be followed consistently by everyone in all cases, without contradiction.
Human dignity: 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.
Universality: the rules guiding our actions should be ‘universally lawgiving’, so they have to be acceptable to every rational human being.
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. It’s about universality. Do the NY Times test: would you be uncomfortable with your actions reported in the press?
There are some problems with ethics of duty:
Undervaluing outcomes: they may be incorporated, but they may not.
Complexity: the principles are quite abstract.
Optimism: 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. Most people now call it human rights, which are basic, inalienable entitlements that are inherent to all human beings, without exception.
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 others 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
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; why 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.
Alternative views on ethical theory
Ethical approaches based on character and integrity
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?
Ethical approaches based on relationships and responsibility
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 (not having it, but taking it), and experience. The latter means that we are formed by past experiences. This approach is similar to the Buddhist approach and the Confucian approach.
Ethical approaches based on procedures of norm generation
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.
Ethical approaches based on empathy and moral impulse
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
Practices instead of principles: narratives of experience/’moral instinct’
Think local, act local: focus on one situation after another
Preliminary character: seen as pessimistic since it is an on-going 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 ‘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
As said in Chapter 1, an ethical decision is a judgement about right and wrong. However, we have already identified that a situation is moral in nature. So there is an important process of identification that goes before this. 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?
If yes, it is an ethical decision.
Ethical decision-making translated to models
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 of ethical decision-making:
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 (given by birth: age and gender) and nurture (experience and socialization: education, personality and attitudes) factors.
Situational factors. These are contextual features like the work context (rewards, roles, culture) and elements of the issue itself (like the intensity of the moral issue).
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.
Individual factors
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, with his six dimensions:
Education and employment. Not that strong, but better supported than gender and age.
Psychological factors. Psychological factors are concerned with cognitive processes: how people actually think. There are two subcategories here.
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: what is right is what we perceive others to believe and what others expect of us. 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 individual adherence to a consistent set of moral principles or values’. It plays a role in incidents of whistleblowing. Whistleblowing are the intentional acts by employees to expose, either internally or externally, perceived ethical or legal violations by their organization.
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’. It is concerned with whether someone has ‘a sense of the variety of possibilities and moral consequences of their decisions, the ability to imagine a wide range of possible issues, consequences and solutions’.
Situational factors
These can be issue-related, or context-related.
First, the issue related factors, which are the differences in the importance we attach to ethical issues:
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: degree to which people are in agreement over the ethics of the problem/action.
Probability of effect: the likelihood that the harms/benefits actually happen.
Temporal immediacy. That is how quickly consequences will occur. The quicker, the higher the moral intensity.
Proximity: feeling of nearness (social/cultural/psychological/physical) the decision-maker has for those impacted by his/her decision.
Concentration of effect. 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: how is the problem presented? 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:
This can lead to amoralization, in which managers’ distance themselves and their project from being defined as ethical, and instead build a picture of corporate rationality suffused with justifications of corporate self-interest. Some ways of rationalizing unethical behaviour are the following: There are six main ways: (1) denial of responsibility, (2) denial of injury, (3) denial of victim, (4) social weighting, (5) appeal to higher loyalties and (6) metaphor of the ledger.
Second, the context-related factors, which are expectations and demands placed on employees within the work environment, that are likely to influence their perceptions of what is the morally right course of action to take:
Rewards. Strong evidence related to ethical behaviour, not that much research on other stages. System of rewards influences ethical behaviour.
Authority. Immediate superiors and top management have significant influence. People do what they (think they) are told to do.
Bureaucracy. It is a type of formal organization based on rational principles and characterized by detailed rules and procedures, impersonal hierarchical relations, and a fixed division of tasks. It tends to prevent personal moral reflection in favour of prescribed organizational policies. 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 (from the consequences of our action)
Denial of moral status (because humans become resources)
Work roles. Probably has an influence, but there is no empirical evidence
Organizational norms and culture. Strong influence, but still discussion about implications. It sets the acceptable standards of behaviour within the working company.
National and cultural context: limited empirical investigation, but some shifts in influence likely.
Defining business ethics management
‘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)
Codes of ethics (specific rules on what behaviour is desired/expected)
Reporting/advice channels (to gather information on ethical matters)
Risk analysis and management (assessing and measuring (costs of) risks)
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
Stakeholder consultation, dialogue and partnership programmes
Auditing, accounting, and reporting (pioneered in Europe; measure, evaluate, and communicate impact/performance to stakeholders)
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
Setting standards of ethical behaviour
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 (specific to a single organization)
Professional codes of ethics (for a specific profession)
Industry codes of ethics
Programme/group codes of ethics (for instance a group of business leaders)
There has been a lot of research on codes of ethics, mainly focused on four main issues:
Prevalence of corporate codes of ethics
Content of codes of ethics
Effectiveness of codes of ethics
Possibilities for global codes of ethics
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.
Normally the goal of the codes is to (a) define principles or standards that the organization/ industry/profession/group beliefs in and wants to pursue; and/or (b) 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 members live up to its codes of ethics? Schwartz’ (2004) study suggests the following factors are the most important:
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.
Management of stakeholder relations
This is the second of the three most important areas for business ethics management. Stakeholder management is the process by which organizations seek to understand the interests and expectations of their stakeholders and attempt to satisfy them in a way that aligns with the core interests of the company. 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 or salience 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 possible. Until recently, it was assumed that this relationship was somewhat confrontational in nature. However, nowadays it is recognized that there might also be a place for cooperation between stakeholders. Collaboration between stakeholders will certainly not always lead to beneficial ethical outcomes, but it is an increasingly important tool for managing business ethics.
Of course, problems can arise when collaborating with stakeholders:
Schizophrenia (collaboration on one project, conflict over another, different identities)
Culture clash (clashes in beliefs and ways of working, both between and within collaborating groups)
Accountability (to members or the public in general)
Resistance (from organization members/external parties)
Co-optation (of stakeholders by corporations)
Co-ordination (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)
Assessment of ethical performance
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. Social accounting is the voluntary process concerned with assessing and communicating organizational activities and impacts on social, ethical and environmental issues relevant to stakeholders. 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
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.
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)
Limits of the approach: it is voluntary and there are no adequate standards: organizations can effectively report on anything they want.
There are some key principles to determine the quality of social accounting:
Management policies and systems (to control and evaluate)
Evolution (commitment to learning/change)
Comparability (across time and with other organizations)
Completeness (all areas of activities should be included)
Inclusivity (involving stakeholders by having two-way communication)
Disclosure (of accounts and reports to all stakeholders)
External verification (is it a true representation of reality? Checked by external body)
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). Ethical leadership describes the role of senior managers in setting the ethical tone of the organization and fostering ethical behaviour among employees.
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)q
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 relation between shareholders and managers
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 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
These rights do not include the right to a certain amount of profit or dividend.
The following are the managers’ duties:
Duty to act for the benefit of the company (short-term financial/long-term survival)
Duty of care and skill (managers seek to achieve the most professional and effective way of running the company)
Duty of diligence (expected level of active engagement in company affairs)
‘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 three broad systems of corporate governance:
Anglo-American model of capitalism (market-based): UK, Ireland, US, Australia
Continental European model (network-based): France, Italy, Germany, Spain etcThe relation between shareholders and managers
Asian model (relationship based approach): Asia, developing countries
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. Executives and shareholders control the board, and the shareholders are the key stakeholders. Typical ethical problems would be insider trading or manipulated accounting statements.
The continental European 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. Shareholders and employees control the board. 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. The central focus is on long-term preservation of influence and power.
Ethics in corporate governance
To make the shareholder-manager relationship work, a spate body of people needs to be present to supervise and control management. There needs to be executive accountability: the systems and processes through which senior executives can be held responsible for the performance of the firm by shareholders and other stakeholders, typically via the board of directors. 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. They effectively oversee the lower-tier, who concerns about the day-to-day running of the company. 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)
Executive pay
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
Globalisation: 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
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 (often secretly) 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.
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.
High-frequency trading: brokers using HFT buy financial assets and only hold them for microseconds to benefit from minimal changes in the value of the assets before selling them. Two main problems of this practice: (1) some players in the market may have their information microseconds before others, because they have a better cable connection, and that can be seen as unfair advantage; (2) all trades are executed through electronic algorithms and because most traders use very similar algorithms, there is a substantial risk of market crashes.
Insider trading: insider trading occurs with non-public information, which gives some traders an advantage over other players in the market. It is forbidden in most stock markets. The ethical arguments against insider trading:
Fairness: weakest but most common argument
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 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.
Market intermediaries and financial professionals
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 (institutional and wealthy individuals) 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 and there is a lack of consideration for other stakeholders. 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.
Globalisation and ethical shareholder issues
Shareholders globalise 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. This deregulation makes it possible to talk about one global market rather than many individual places.
Some issues:
Governance and control: no single government is entitled to govern deterritorialised markets like the financial market. The only ‘law’ is supply and demand.
National security and protectionism: sovereign wealth funds are funds that government owns and they invest their budget surplus in capital markets worldwide. 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 (a marginal tax imposed on international currency transactions).
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. This is bad for local economies and people.
Space for illegal transactions: since national governments cannot fully control financial markets, there are many opportunities for illegal transactions.
Reformations worldwide
The Sanenesses-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 codes. 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 becoming more popular, because these countries were way less affected by the financial crisis. Islamic finance is concerned with providing financial products and services that are sharia compliant. The key differences between Islamic finance and conventional finance are its:
Prohibition on charging and paying interest (ribs) in financial transactions;
Prohibition on uncertain and speculative transactions (gharar);
Requirement for profit, equity and risk sharing in investments;
Prohibition on investment in sinful (haram) activities, including pornography, gambling and alcohol;
Requirement for all financial products to be backed by a tangible asset (because money has no value in itself).
The shareholders’ power
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: social accounting
Mechanism for change: to use for communication about ethical choices and influencing corporations
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. These activities are known as shareholder activism: the attempt to use shareholder rights to actively change the practices and policies of a corporation.
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’. Key actors are investment brokers, portfolio management companies and funds.
There are positive and negative criteria to select a company to invest in. 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.
Shareholders and sustainability
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 factors: eco-design, environmental management systems, executive commitment to environmental issues, climate change mitigation
Economic factors: risk management, quality and knowledge management, supply-chain management, corporate governance mechanisms and anti-corruption policies.
Social factors: employment policies, management development, stakeholder dialogue, affirmative action and human rights policies, supply chain standards, social reporting.
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)
Ownership models
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 retailing/production/buying needs.
Co-operatives are common in collectivist countries like southern Europe (especially Italy). An example is Mondragon. The contribution of co-operatives strikes:
A more recent innovation in the trend of ownership and governance of firms is social purpose corporations. This is a type of corporation that is legally required to pursue a social purpose in addition to its commercial goals. Such firms must do the following:
Pursue a general public benefit in addition to profit;
Consider the effect of their decisions on stakeholders, employees, suppliers, customers, community and environment;
Produce an annual benefit report detailing their performance in relation to their proposed public benefit against a third-party standard.
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.
The role of employees
Shareholders own the firm, but 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.
Ethical issues
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. Employee rights are the entitlements of workers with respect to their employer, based on a general understanding of human rights and often codified in employment law. Employee duties are obligations of workers towards their employer, based on individual contracts and wider employment laws. 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:
1. Discrimination
Workplace 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, an enduring human characteristic that is irrelevant to the effective performance of the job in question. 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 a 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: there is an equal opportunity to apply. In developed countries, there are many issues of disable employees. For instance, that the physical environment of a company is not adapted to 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 favours are requested for rewards like promotion. Other forms include jokes or comments. But the boundary between normal behaviour 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 that target those who are underrepresented in the workforce:
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 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 of jobs and pay 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.
2. Privacy in the workplace
Employees’ privacy is increasingly invaded. For instance, many companies have questionnaires asking all kinds of privacy questions to ‘test’ employees. Employee privacy is an individual employee’s ability to control information about themself, and the circumstances under which that information is shared inside and outside the workplace. Four types of privacy that could be protected:
Physical privacy: cameras invade this
Social privacy: freedom to interact with people in whichever way we choose
Informational privacy: determining how, when and to what extent private data is released to others
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.
2.1 Health and drug testing
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.
2.2 Electronic privacy and data protection
Using the computer increases the options to monitor employees. Employers 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.
3. Due process and lay-offs
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 (compensation package and other benefits) 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.
4. Association and participation
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 employee participation 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 or co-operative firm
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 or 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. 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.
5. Working conditions
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). Therefore some argue for the precautionary principle: the burden of proof of harmlessness is on those introducing a technology.
5.1 Work-life balance
Working hours increase in all kinds of jobs. Therefore it is harder to maintain a healthy work-life balance: an employee’s preferred ratio between work-related and non-work related activities. 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. It is said that flexibility is “just another way of saying that management can do what it wants”.
6. Fair wages
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.
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.
7. Freedom of speech and conscience
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.
8. Right to work
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 is linked to the right of human respect, since self-respect comes (partly) from the ability to create goods or services. Therefore, there needs to be a fair treatment in the interview and there should be non-discriminatory rules for recruitment. Governments can provide the right to work indirectly, so should we say that people could 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.
Employees’ duties
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.
Globalisation and ethical employee issues
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:
The employee as corporate citizen
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, even if not enforced, and should follow general principles of human rights.
Remedy: both governments and firms should investigate and punish abuses of human rights.
Employment and sustainability
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)
There are 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).
Consumers as stakeholders
Consumers are the whole chain of internal and external constituencies that receive goods or services through exchange. 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 is not that good. Ethical problems with consumers are most visible and most difficult to hide. 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 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.
Marketing
There are three areas of marketing:
Marketing management (marketing mix):
Product policy
Marketing communications
Pricing
Distribution
Marketing strategy
Market research
Marketing management
We will discuss each in more detail. First, marketing management, product policy. Consumers have the right to safe, efficacious product and services that fit the purpose. Almost all products and services can potentially inflict some form of harm. Manufacturers should exercise due care, so they 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. There is not an unlimited right.
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 fulfill two main functions: (1) inform consumers about goods and services and (2) persuade consumers to actually go ahead and purchase products. 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.
‘Consumer 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’.
Deception deliberately creates false impressions. If there is deception depends on the degree of interference in customers’ rational decision-making that is acceptable, how well consumers can delineate between fact and fiction, and whether it is harmful to get this wrong.
Marketing communications have a social and cultural impact on society. The Advertising Standards Authority (ASA, UK) states that advertisements should be ‘legal, decent, honest and truthful’, so they should:
Not cause serious/widespread offense
Not cause undue harm/distress
Contain nothing that might provoke anti-social or violent behaviour
Not condone or encourage an unsafe practice
Not encourage customers to drink and drive
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: also known as price gouging
Price fixing: illegal in Europe, US, and more, but still occurs. It is a collusion between competing firms to fix prices above market rate
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.
Marketing strategy
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. 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 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, for example due to previous negative experiences
Price exclusion: too expensive
Access exclusion: lack of distribution channels for health services/utilities/food
Marketing exclusion: firms deliberately exclude certain groups from target marketing and sales
Condition exclusion: restrictive conditions on product offerings as financial service products
Market research
This especially concerns the right to privacy, since market research is about collecting and analysing data. Developments especially endanger online privacy. Consumer privacy is the right of a consumer to control what information companies can collect about them and how it is stored, used and shared. 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.
Globalisation and ethical consumer issues
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: erosion of local cultures, through mass marketing and removal of incumbent local rivals
The role of markets in addressing poverty/development: the bottom of the pyramid concept. 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 has 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.
The employee as corporate citizen
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’. These are decisions beyond self-interest. 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
Consumers and sustainability
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, to provide benefits to consumers in ways that impact less on the environment (sustainable marketing).
Product recapture: recycling waist so that less ‘virgin’ material is needed. This helps to bring product costs down. Europe has the Waste Electrical and Electronic Equipment (WEEE), which make producers responsible for recycling electrical and electronic equipment.
Service replacements for products: we buy many products not because we want the product itself, but 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: of cars or washing machines. There is a rise of the sharing economy: an economic system built around the sharing of human and physical resources. Major disadvantage of this is inconvenience.
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.
Ethical problems between businesses stay relatively hidden from public view, and violations are harder to uncover. Violations arise both by being too adversarial and too cosy.
Suppliers and competitors as stakeholders
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. An industrial network is a group of businesses bound by mutual interests and interlinked flows of resources and rewards. The way a firm treats another firm also affects others in the market, which can cause ethical problems.
Ethical issues surrounding suppliers
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 the 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.
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 fulfillment of that obligation’. Conflicts of interests can arise in two main ways: (1) conflict of professional and organizational interests and (2) conflict of personal and organizational interests.
Gifts, bribes, and hospitality: these are official and unofficial ‘perks’ that purchasing staff might be offered. They 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: there are ten questionable negotiating tactics:
Lies
Puffery: exaggerating the value of something
Deception: including misleading promises or threats and misstatements of facts
Weakening the opponent: by directly undermining the strengths/alliances
Strengthening one’s own position: by means not available to the opponent
Non-disclosure: deliberately withholding pertinent information
Information exploitation: misusing information provided by the opponent in ways not intended by them
Change of mind
Distraction: deliberately attempting to lure the opponent into ignoring information or alternatives that might benefit them
Maximization: exploiting a situation to one’s own fullest possible benefit without concerns for the effects of the other
Negotiation costs might occur:
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
Ethical issues surrounding competitors
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.
Overly aggressive competition
Here, competitors are harmed in an unethical way. A company goes beyond acceptable behaviour in direct relationship with a competitor.
There are three ways:
Intelligence gathering and industrial espionage: gathering information is unethical if the tactics used are unethical, the nature of information is private, or the purposes are against the public interest, although there are always grey areas. 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: rival’s customers are specifically approached
Predatory pricing: deliberate setting prices below costs
Sabotage: can also include malware to sabotage computer systems, is a direct interference in a competitor’s business in order to obstruct, slow down or derail their plans.
Anticompetitive behaviour
Insufficient competition
Insufficient competition contains actions of one company that restricts competition in the market. This is usually against law, but difficult to prove. Forms: Collusion and cartels
Globalisation 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. 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.
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.
Suppliers and competitors and corporate citizenship
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 the 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 do 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.
Business-to-business regulation
There are three main ways in which firms can effect ethical sourcing through the supply chain:
Compliance: setting clear standards for suppliers, coupled with a means for assessing compliance with those standards.
Collaboration: also involves getting standards and compliance procedures, but tends to rely on longer-term ‘aims’, together with incremental ‘targets’, in order to foster a step-by-step approach to improving standards.
Development: there is focus on ensuring that workers understand their rights and are provided with training to improve their capabilities and future prospects.
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’. This is initiated by alternative and charitable organizations, nowadays also be found in supermarkets etc. Commercialization might pressure the ethical standards. The most important question is whether the continued success of fair trade is providing a positive force for change for the growers it is intended to help.
Sustainability and business relationships
There are three key levels in the corporation’s relationships with other companies in the context of sustainability:
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. Hence, a circular economy is created: a way of organizing economic activity, based on returning all resources involved in the productions of goods and services back into productive use with the goal of eliminating waste and reducing material inputs. 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 that are interdependent because of all kinds of resources (and wastes); these are industrial ecosystems. They use each other’s waste and by-products to minimize the use of natural resources.
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.’
CSOs guard against abuse of power and ensure that people’s interests are served. They are voluntary, non-profit bodies outside of business. They have a renewed attention, because of failure of state/market to ensure effective provision of social welfare. Next to this, there is scepticism that they actively listen to and serve the interests of public sectors.
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: what kind of group/organization
Structure: what kind of business structure
Focus: where is the focus on
Activities: what kind of activities is it involved in
Scope: how broad is the scope of the CSO
CSOs as stakeholders
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 stakeholder. 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 represents 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). So, the stake of CSOs is indirect and representative. CSOs form part of the license to operate for companies. This social license to operate is the on-going approval and acceptance of a company’s activities by society, especially among local communities and civil society.
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: you have to fulfill certain objective criteria to become a member
Represent section of society
Goal based on self-interest
Status is insider
Approach is consultation
Pressure through 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: less easy access to governmental/corporate policy-making
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.
Ethical issues surrounding CSOs
There are three main issues in ethics, concerning CSOs:
We will now discuss them in more detail.
Recognition of CSOs
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 who the stakeholders are, but it depends on the subjective interpretations of managers. That is especially important for promotional CSOs, because they 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.
Tactics used by CSOs
Indirect action: research and communication. An ethical problem is the provision of misleading information.
Violent direct action: generates most publicity, but is usually 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: far more common approach for CSOs to use. Forms:
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 (collective action) to achieve certain objectives by urging individual consumers to refrain from making selected purchases in the marketplace due to perceived deficiencies in social, ethical and/or environmental performance’. Ethical choice for the company here is which company to target and why. Four reasons for boycotts:
Punitive: punish; cause the firm harm. Companies are aiming for significant erosions of sale.
Instrumental: force to change policy. Goals may be very clear.
Expressive: generally communicating displeasure, more vague goals.
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.
Accountability of CSOs
CSO accountability concerns with the principles, processes and mechanisms through which stakeholders hold CSOs responsible for their performance. 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.
There is no input from beneficiaries to CSO performance measures and they are frequently not communicated to them in a meaningful way.
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:
CSOs and globalization
Globalisation has brought two significant changes to CSOs that are relevant: (1) MNCs have to deal with a new set of local CSOs in other countries; (2) CSOs themselves increasingly globalise in terms of scale and/or scope. There are two areas where globalization affects the relationship between CSOs and corporations:
Engagement with CSOs abroad
Many developing and transitional economies tend to lack a strong and institutionalized civil society. On the one hand, a lack of local CSOs can be a plus for corporations because they can engage with more familiar international organizations or conduct their business unhindered by CSO activism. On the other hand, international groups may lack legitimate representation of local communities, and this absence can reinforce welfare and democracy deficits in countries where corporations would benefit from greater social governance.
Globalisation of CSOs
It offers the opportunity to address global business ethics issues on a wider scale than previously possible.
As CSOs globalise, they might be expected to take over some governmental tasks.
CSOs and corporate citizenship
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 (tighter interrelationships). 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.
Charitable giving and community involvement
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 (social investments). Employees are involved through employee volunteering which is sometimes in company time. It is the giving of time or skills by company employees to a civil society organization during a planned activity endorsed, arranged or funded by their employer. The aims of that are:
Build ‘social capital’ within the community
Enhance reputation firm
Contribute to development own human resources
Increase employee morale and teamwork
Meaningful social contribution
Compensating for lack of meaning workers’ jobs
Better job performance and employee retention
Terms as strategic philanthropy and cause-related marketing are used to describe how charitable giving can be aligned with firm self-interest. This is a form of one-way support from business to civil society.
Business-CSO collaboration
Collaboration between businesses and CSOs includes dialogue and strategic alliances on certain matters. 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
CSOs because of:
The approach is similar to discourse ethics. 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)
Social enterprise
The approach of CSOs becomes more business-like, that is called venture philanthropy. Also the organizational structure is copied from businesses; the CSO becomes a social enterprise. A social enterprise is a hybrid form of organization that pursues a clear social purpose through commercial trade. 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 and higher innovation: can pose threats to both essential services and clients
Prioritization of profitable markets: where clients are willing to pay
Compromise of social mission
Civil regulation
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 (so make it more than just one action like boycotting). 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.
Sustainability and 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 corporation should take. These are the considerations:
Balance the competing interests of different actors
Forecasting participation and democracy
Actively seek to sustain civil society (especially in other parts of the world like Africa because the civil society is underdeveloped there)
Government as a stakeholder
‘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 behaviour. Regulation includes rule definitions, laws, mechanisms, processes, sanctions, and incentives’. Regulation can be understood at two levels. There is imperative regulation, which are rules that are issued by governmental actors and other delegated authorities to constrain, enable or encourage particular business behaviour. It includes rule definition, laws, mechanisms, processes, sanctions and incentives. There is also private regulation, which are rules that are issued by business associations, or civil society actors to standardize and harmonize ethical business practices. Their force normally relies on market mechanisms. It is important to note that regulations also include rules that are obligatory, and that private bodies can establish regulations.
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 dependent
Also competition with business in areas like health care or television
Ethical issues surrounding government
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 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
‘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)
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.
Party and campaign financing
This means that businesses provide funds to political parties or campaigns. 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
‘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). 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.
Privatization and deregulation
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 profit 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 government and globalization
Global governance is the management of economic, social, ethical and environmental issues beyond national borders through rules, standards and norms. It involves governments, international organizations, civil society and business. Because of globalization, the roles of government and corporations begin to change. The consequences of these changes is that there are four different constellations where business-government relations have been transformed through globalization:
Business as actor within the national context: businesses are still located within national states and therefore still subject to national imperative regulation. Globalisation weakens governments’ ability to impose imperative regulations.
Business as actor within the national context of authoritarian/oppressive regimes: 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
Business as actor in the global context: at a global level, corporations assume a more dominant role, while governments only have limited influence beyond national boundaries. 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.
Business-government relations in international trade regimes: 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.
The government and corporate citizenship
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)
There are some trends in the space of shared global governance between business, governments and civil society:
Deliberate rather than dictate: a new generation of standards is characterized by increasing collaboration between all relevant stakeholders.
Process rather than outcome orientation: the goal is to prescribe management processes which can be implemented in individual businesses and can guide management practices that then will be able to lead to the desired changes in performance.
Frameworks rather than specific norms: there can be no fixed rules and clear goals, because of the global character. Therefore, a new generation of standards serves as a framework for guiding responsible business behaviour while leaving individual actors the space to adapt and implement these ideas on the ground.
Government and sustainability
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.
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