This summary of the course Ethics and International Business is based on the year 2013-2014.

CHAPTER A: An introduction

About business ethics

Business ethics seems to be an oxymoron; it consist of two elements that do not seem to fit together. Many scandals and malpractices have been uncovered. However, even in  everyday business activities one needs basic ethical elements like co-operation, honesty, and trustworthiness. The definition of business ethics is ‘the study of business situations, activities, and decisions where issues of right and wrong are addressed’. The right and wrong in the definition are meant morally, not commercially, financially, or whatsoever. The issue of right and wrong brings us to the law, which actually specifies ethics, but does not cover the whole area of ethics. Some behaviours or actions are not legally forbidden, but can be said to be wrong from a moral point of view. The other way around is true as well; some rules and regulations in the law have nothing to do with ethics (that you have to drive on the right side of the road). Since business ethics is situated in the grey area of business, questions and dilemmas are often equivocal (not one right answer). The following definitions help you distinguish between ethics and morality. ‘Morality is concerned with the norms, values, and beliefs embedded in social processes which define right and wrong for an individual or a community’. ‘Ethics is concerned with the study of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for a given situation. These rules and principles are called ethical theories’. So their relationship:

Morality à Ethics à Ethical theory à Potential solutions to ethical problems

Whereby Ethics rationalizes morality to produce ethical theory that can be applied to a situation.

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:

1. Businesses have great power and influence over society; business ethics can help understanding why this happens and what the consequences might be, and what we can do about it.
2. Business has major potential to help society in economic and welfare context, how they use this potential raises ethical questions.
3. Malpractices can harm individuals, communities, and the environment enormously.
4. 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.
5. Many businesspeople lack ethical education; by studying business ethics, ethical decision-making can be done better because it can help identifying, diagnosing, analyzing, and solving ethical problems.
6. Ethical violations still occur; many employees do not find their employer fair. Business ethics can find out why that is like that and how we can deal with those problems.
7. Business ethics provides the tools to consider what way of managing ethical problems is beneficial for organizations.
8. Business ethics contributes to knowledge in the sense that it provides knowledge outside the regular frame of business studies; moving more to societal questions, so that we can understand society in a systematic way.

Many remain sceptical about business ethics, but that is more often based on the theories and their applicability than on the subject itself. As said, more and more attention is paid to the subject of business ethics, also by universities and movie makers. Also, the ‘business ethics industry’ is rising, to help businesses with their ethical issues. Furthermore, consumer spending on ethical products is rising (fair trade, energy efficient products, etc).

The 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). The major responsibility of private companies is their shareholders, that of civil society organizations their constituencies and donors. The public sector is mainly concerned with the general public and higher level government. The latter is concerned with ethical issues in the area of law, corruption, public accountability, distribution of resources, etc. That often results in a formal and bureaucratic approach to ethics. CSOs are usually focused on mission and values, which results in a more informal approach. The book focuses on larger firms. The table on page 17 summarizes the differences in business ethics that can be observed across various organizational types.

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 (they invest in countries that offer the best conditions in the area of taxes, environmental regulations, and worker’s rights).

People discuss whether globalization is even occurring at all. Internationalization is a part of globalization, but not the same as the process of globalization itself. Some say that Westernization is a better term to describe the process that is going on, since the western culture is diffused around the world. But that already happened in the colonization times as well. What then are the new developments? First, technological developments. We have increased communication opportunities and technologies that allow us to connect and interact with others at large distances. Also, transportation technologies have improved significantly. Second, political developments. Passing borders has become much easier and obstacles like the iron curtain have been removed.

One author says that deterritorialisation is the best word to describe the current process, and he proposes the following definition of globalization: ‘a process which diminishes the necessity of a common and shared territorial basis for social, economic, and political activities, processes, and relations’. For examples of globalization that fit this example, see page 20.

Globalization as deterritorialisation is important for three areas – culture, law, and accountability -, which will now be discussed.

First, culture. Ethical values that we consider as logical in our home country might not be seen the same way in foreign countries. An obvious example here is the area of gender and racial diversity.

Also firing employees may seen as a logical results of economic downturn in Europe, but is considered very unethical in Chinese companies. Cultural differences have existed forever, but globalization makes them visible and turns them in to potential ethical problems.

Second, the legal area. When a company only does business in its home country, it can rely on the legal framework there to decide on what is right and wrong. However, as soon as the company crosses borders, there is no one legal framework telling them what is right and wrong anymore. The demand for business ethics will increase since the national government cannot control the actions of the organization anymore.

Third, the area of accountability. Obviously, corporations are the most important players in the global field. They are suppliers, they own mass media, they pay wages, and  they pay taxes. Also, they account for a big percentage of GDP, while they have no formal responsibility or accountability for the people like the government has. So the more globalization occurs, the more demand for corporate accountability rises. The stakeholders of corporations and their ethical impact are summarized in the table on page 25.

As you have learned many times, globalization involves a paradox: on the one hand the world is converging, but on the other hand business face new, unknown regions and countries that have different ethical practices and values, which presents a diverging view on globalization. The formal academic subject of business ethics has its roots in Northern America, and is a relatively young subject in the rest of the world. In Europe attention for it was increasing from the 1980s.

The questions which are posed in the area of business ethics differ across the world. Figure 1.7 on page 26 summarizes the regional differences between Europe, North America, and Asia from a business ethics perspective.

We agree that there should be ethical conduct in businesses, but who should make sure that this really happens; who is responsible? In the US, the culture is individualistic, so the individual should make the choices that are ethically right.

Asia, on the other hand, relies more on the hierarchy, so top management are the ones responsible for ethical behaviour. In Africa and India, they take a similar perspective as in Asia. In Europe, it is found that the state is responsible because they make the rules and regulations. In most American states, there is not that much regulation on business ethics, so the key player is the corporation. In Europe, the regulations on business ethics are many. That results in governments, corporate associations, and trade unions being the main actors in business ethics. In Asia, there are also more regulations but it are the corporations rather than the trade unions that collaborate with the government. Another situation is that businesses are for a large part state-owned, as is the case in China. So we can say that in Asia the corporations and the governments are the main players. Developing countries like Southern America and Africa have yet another key player: the non-governmental organizations. Since the governments there are often corrupt or do not have enough money, they cannot establish the necessary legal frameworks.

Because of the legal framework in Europe, there is not so much freedom and flexibility for managers in deciding on ethical issues. In Asia there is more flexibility, and emphasis is placed on collective responsibility and relationships. The US rely heavily on rules and regulations; but these come from the businesses themselves rather than from the government. But punishments can be severe. The African approach to business ethics can be explained by the philosophy of Ubuntu, which is ‘a value system in which the commitment to co-existence, consensus, and consultation is prized as the highest value in human interaction’. A similar approach is the Chinese Guanxi idea.

The different regions find different things most important in business ethics. The European textbooks focus on capitalism and economic rationality, the US books focus on privacy, salary issues, whistle blowing, and privacy, the Asian on corporate governance and the accountability of management, and the countries in de developing world focus on ethical obligations to provide jobs that pay enough to live from, and to price goods fairly.

They also expect MNEs to make a contribution to healthcare, local development, and education. US companies often have their shareholders as only stakeholders, whereas companies in other regions have to deal with boards, other companies, and banks as well.

Why are there so many differences? In Europe, the Catholic and Lutheran Protestant religions resulted in a collective organization of the economy. The Calvinist-Protestant religion in the US resulted in a capitalist economy. So religion is the main source of these differences, which is also visible in other regions of the world. Asia is influenced by Hinduism, Buddhism, and Confucianism which resulted in a relational, flexible, and pragmatic approach. Muslims rely on justice, integrity, and trusteeship. There are also other sources. For example, Europe had to build its institutions again after World War II. In the US, scandals have been given a lot of attention which further drives the corporate need for ethical behaviour. The approach or situation can also be a result of a colonial history.

Until now we discussed differences, but there are also similarities. For instance within Europe, the national governments lose importance and the different business systems are becoming more similar. Deregulation takes place, due to which the European system becomes more similar to the US system.

In the Eastern European countries there are weak states and no tight regulations which results in the need for businesses to deal with ethical issues themselves as well.

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 from. The ethical issue here concerns managing physical resources effectively so that as few as possible are wasted. Bio systems have eternal life if they are treated well, so businesses must treat them in such a way that their health is not in danger. Also important are non-renewable resources and damaging environmental pollutants that are emitted while producing. The economy itself is also a concern here; business should try to maintain or increase the current living standard.

Next, the economic component. Economic growth is constrained by the possibilities that the earth gives us (e.g., population and economic activity cannot grow forever because there is no space for that).

The first implication for business ethics is that it is responsible for economic performance on the long-term. Furthermore, it includes the attitude that a company has towards the economic framework. This concerns for instance bribes and cartels, which would not be ethical.

Third, the social component, which is relatively new. It emerged as a response on unethical activities in less developed regions. The main issue here is the social justice issue. The welfare in the world is still very unequally distributed, but that is not the only gap. Social justice also addresses the differences between men and women, between the urban rich and the rural poor, etc. The UN developed the eight Millennium Development Goals:

• Stop extreme hunger and poverty
• Make primary education available everywhere
• Promote gender equality
• Reduce child mortality
• Improve mothers’ health
• Combat diseases
• Ensure environmental sustainability
• Establish a global partnership for development
• Governments are responsible for achieving those goals, but they influence businesses

CHAPTER B: The wider responsibility of corporations

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 his investors etc die). Furthermore, because it is independent, the corporation itself owns its assets. This leads us to the following implications:

• Corporations are seen as artificial persons for the law
• Since corporations are independent of their owners, shareholders have limited liability
• Managers and directors are responsible for protecting shareholders’ investments

This part was the legal responsibility, next come the social responsibilities. Nobel-Prize-winner Milton Friedman says corporations do not have social responsibilities because:

• Only human beings can have moral responsibility (so the humans who run the corporation are responsible for the actions of the corporation)
• Managers should only act in the interests of shareholders because that was the reason for setting up the company, the reason was not being socially responsible
• The state should pursue social responsibility, not corporate managers

Literature does not agree on whether corporations have social responsibility. Most say that they have some, but that the main responsibility lies in individuals, because one cannot show that corporations have agency independent of their members. Two arguments to show that:

1. There is a corporate internal decision structure which directs decisions to reach certain goals. Various elements interact to come to decisions, so they cannot be assigned to individuals.
2. There is an organizational culture which specifies values and beliefs and says what is right or wrong. This culture influences the actions of individuals.

So we can actually say that the corporation has more social responsibility than the individuals.

Corporate social responsibility (CSR)

Many say that corporate social responsibility exists, often because it is in their own self interest to have social responsibilities (enlightened self-interest). That is because:

• Customers might boycott socially irresponsible corporations
• Employees like working for and are more committed to socially responsible corporations
• Having CSR can ensure greater independence from the government because regulations may be a step ahead of legislation
• CSR can be seen as a long-term investment to ensure a better community which in turn ensures a stable competitive environment for the corporation

However, should this be called CSR if it is actually only to maximize profit? So it depends on the primary motivations of the people taking the decisions. Other, moral arguments for CSR:

• Corporations should solve the social problems they cause (pollution etc)
• Because corporations have their power and resources, they should use these responsibly in society
• All actions of corporations have social impacts (employment, provision goods/service), and corporations are responsible for those
• Shareholders are not the only stakeholders, so other stakeholders (like consumers and suppliers) should also be taken into account.

Now we have shown that CSR really exists and is necessary, we have to define what it includes. It includes ‘the economic, legal, ethical, and philanthropic expectations place on organizations by society at a given point in time’. Carroll made a model for CSR in the form of a pyramid which further explains this definition.

• The lowest layer are the economic responsibilities, which are required by society. So corporations must provide return on investments, wages and a safe working environment, and a desired quality of services/goods.
• Next, the legal responsibilities, required by society as well.
• Then, the ethical responsibilities, which are expected by society. Society wants corporations to act in a just, right, and fair way, even though it might be beyond the legal framework.
• On top are the philanthropic responsibilities, these are desired by society. The world philanthropy means love of the fellow human. So this means that lives should be improved; that of employees, but also local communities and even society in general. This can be done by giving money to charities, supporting local schools, or sponsoring social events. This category is least important.

A disadvantage of this model is that it does not tell us what to do when there are conflicts between these responsibilities. For example closing a plant can be an economic responsibility, but clashes with the ethical responsibility to provide secure jobs. Also, it is biased to the US, as we will see now.

The concept of CSR comes from the US, which is because US companies tend to be not so open about their social responsibilities. Therefore, an explicit model of CSR arose, whereas other countries have more implicit models since CSR is already embedded in the institutional and legal framework of society. In Europe regulations ensure that, and in countries like Asia or Africa, religious institutions ensure it. Some differences:

• The economic responsibility in the US focuses really only on profit. In Europe and Asia, economic responsibility is seen as a broader concept; corporations are economically responsible for local communities and employees as well.
• Legal responsibility in Europe is seen as the basis for social responsibility, since the state provides rules and regulations in order to ensure social responsibility. In the US, the government support private liberty and relies more on companies themselves.
• People in Europe tend to mistrust corporations to a bigger extent than US citizens. So corporations in Europe constantly have to ‘prove’ that they behave ethically and there is much more discussion about ethical behaviour of corporations. In Africa, the focus is on avoiding corruption and ensuring good governance.
• In the US it is quite normal that big companies donate much money. In Europe taxes are much higher and therefore people expect governments to fund activities like supporting education and funding art.

The sequence of the pyramid of CSR is not the same everywhere. US consumers find economic responsibilities most important, French and German people find complying with laws and social norms most important, and African consumers find economic responsibilities most important, followed by philanthropy, legal, and ethical responsibilities.

An idea related to CSR is corporate social responsiveness. It is ‘the capacity of a corporation to respond to social pressures’. There are four strategies to respond to social pressures:’

1. Reaction. Then, the corporation avoids responsibility by for instance saying that the government is responsible
2. Defence. The corporation admits that it is responsible, but try to do as least as possible.
3. Accommodation. The corporation accepts that it is responsible and does what relevant groups demand of them.
4. Pro-action. The corporation goes beyond the norms and anticipates on what might be coming in the future and thus does more than is expected.

The concept of corporate social performance (CSP) says we can measure the outcome of CSR. There are three areas in CSP:

• Social policies. These are made explicit by companies, for instance in a vision or mission statement.
• Social programmes. These are the specific activities, measures, or instruments that are established to execute social policies.
• Social impacts. We can measure these by assessing concrete changes achieved by the corporation. This is difficult because many changes are not measurable or if they are measurable, influenced by other factors as well. Some data, like education support or environmental damage prevention can be measured.

Firms’ stakeholders

So far we have assessed the responsibilities of the company, but not yet to who it is responsible. The book defines a stakeholder of a corporation as ‘an individual or a group which either: is harmed by, or benefits from, the corporation; or whose right can be violated, or have to be respected, by the corporation’. This definition includes the principle of corporate rights and the principle of corporate effects.

• The traditional management model says that the firm is responsible for shareholders, customers, employees, and suppliers.
• The stakeholder model says firms are responsible for shareholders, suppliers, civil society, employees, customers, competitors, and the government.
• The network model says firms are responsible for the same stakeholders as the stakeholder model, but then also for the stakeholders’ stakeholders.

A depiction of all three models is to be found on page 63.

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?

1. Because some groups have a legitimate stake which is protected by law, for instance suppliers have contracts with corporations which are legally binding.
2. Because there are externalities caused by doing business, for instance when a plant in a small community is closed many more people than just the employees will be affected. However, these are not protected  by law.
3. Because saying that the owners (so the shareholders) are the only ones who have rights is a too narrow view. Most shareholders do not own shares because they want to own the company, but just because they want to earn some money.

So what does this mean for the role of management? They have to balance their responsibilities for their multiple stakeholders. It is even suggested that all stakeholders should have a say in the managerial decisions (stakeholder democracy).

In the US the shareholder was long seen as the dominant stakeholder, therefore there was a necessity to shift to a responsibility for other stakeholders as well.

In Europe and other parts of the world that was not so much the case, since the government automatically plays a bigger role as stakeholder, and is held responsible for the other stakeholders as well. So we can say that the stakeholder concept is pretty new in literature, but that it has been practiced for quite a long time already in other countries than the US.

There are different forms of stakeholder theory:

1. Normative stakeholder theory. This theory tries to explain why corporation should take into account stakeholder interests.
2. Descriptive stakeholder theory. Tries to describe whether and how corporation actually do take into account stakeholder interests.
3. Instrumental stakeholder theory. Tries to assess whether it is beneficial for the corporation to take into account stakeholder interests.

Corporate accountability

Corporate accountability assessed ‘whether a corporation is answerable in some way for the consequences of its actions’. Friedman (the one who said that by pursuing their own self interests, corporations where socially responsible) says that corporations are only answerable to their shareholders. But firms have become more and more political actors, because of governmental failure and the increasing influence and power of corporations. We will now discuss these reasons in more detail.

First, governmental failure. Beck wrote a book (Risk Society) that describes several risks that we are exposed to nowadays (global warming, industrial agriculture etc). We expect governments to deal with those risks but it turned out that they were often not able to, or were even responsible for a problem. Why is that? Sometimes because they are just part of the problem. Often, resolving issues would really change the lifestyle of modern society or decrease our welfare, which politicians do not dare to do. Sometimes governments are simply not able to control risks (Chernobyl). Beck says that the governments are not the only ones responsible anymore, there are also ‘subpolitics’ (for instance Greenpeace).

Second, there has been an enormous rise in corporate influence and power due to several developments:

• Liberalization and deregulation of markets
• Privatization of public services
• Unemployment struggles (government cannot directly control this)
• Globalization (which could force governments to engage in a race to the bottom)
• Industrial society becoming too complex and far-reaching to allow for appropriate laws, as a result of which companies have to regulate themselves.

It is said that consumers have a democratic vote in corporations since they decide what to buy (‘purchase votes’). However, one cannot really see his choice reflected in the actions of corporations. Furthermore, consumers are constrained by the choices they have. So how can we make corporations more accountable? For instance by letting them report and audit on their ethical, environmental, and social performance or by developing stakeholder partnerships and stakeholder dialogue. So in other words; by ensuring transparency on their corporate social activities. Transparency is ´the degree to which corporate decisions, policies, activities, and impacts are acknowledged and made visible to relevant stakeholders´.

Corporate citizenship (CC)

This is a pretty new concept, and therefore it is still difficult to define. We offer three perspectives: a limited view (corporate philanthropy), an equivalent view (CSR), and an extended view (emphasizes extended political role of corporations) (the table on page 75 provides an overview).

First, the limited view. It focuses on the direct physical environment in which the company acts, so the local community is the most important stakeholder. It implies that the company should do something back for community  because community also helps them. However, there is nothing very new here and the world ‘citizenship’ is not really used.

Second, the equivalent view. Actually, this is just an updated label for CSR, which is quite confusing. Anyway, it focuses on all areas of CSR and assumes a broad range of stakeholders and citizens (society in general).

Third, the extended view of CC. It defines citizenship as a set of individual rights. There are several rights:

• Social rights, which imply freedom to participate in society (education, healthcare etc.). Also called positive rights because they are entitlements towards third parties.
• Civil rights, which imply freedom from interference and abuses by others (rights to own property, freedom of speech, right to engage in free market). Also called negative rights because they protect against stronger parties.
• Political rights (right to vote, hold office, etc).

The government is mainly responsible for these rights, so actually it is strange to call it corporate citizenship. But still, corporations are individuals for the law and they have significant power and can take over some of the responsibilities of the government. The extended view defines CC as ‘the corporate function for governing citizenship rights for individuals’ . Concerning social rights, the corporation provides or ignores the role of providing social services. Concerning civil rights, the corporation enables or disables them. Concerning political rights, the corporation channels or blocks them. The concept of extended CC is descriptive rather than normative.

At this point, the book finds out that CC does not really add something to our understanding of CSR since it is mostly used in the first two forms, so nothing new to CSR is added and CC is actually just a buzzword. However, if CC would be used in the extended view, it would provide a number of advantages:

• It helps us understanding better the political role of corporation and it emphasizes the corporate accountability
• It helps us to deal with globalization because it lets us see the relation between businesses and common rights across cultures
• Sustainability is a new goal, and is strongly related to rights of citizenship
• It provides us with a critical view on the social responsibilities of businesses

But still, it is a new concept which is not yet widely accepted.

CHAPTER C: Normative theories to evaluate business ethics

Ethical theory

There are two extreme thoughts on ethical theories. First, ethical absolutism. It says that universally applicable and eternal moral principles exist. It sees business ethics objectively, which means that right and wrong can be determined by applying rationale. Second, ethical relativism. This has a subjective view on business ethics, so every individual can have a different view on what is right or wrong. Most theories that come from the Western modernists are absolutist. Sometimes there are some alternative perspectives, which means that a relativism element is included. The book relies on pluralism, which is in between absolutism and relativism. It says that there are some basic principles but that backgrounds and moral convictions can influence the way these are dealt with. This view is based on two elements of morality. First, morality is a social phenomenon. It is observable that there are differences in moral views (descriptive relativism), so the absolutism view cannot be completely true. Businesses have to solve questions that deal with these differing moral views. Second, morality is mostly about harm and benefit. To do right is to avoid harm and to provide benefits. Since we can observe actual harms and benefits, the relativism perspective can neither be completely true.

Differences between normative ethical theories in North-America and Europe

We already discussed the differences in views on business ethics in Chapter A. We will now summarize the differences (again) in three points:

• Institutional morality versus individual morality: the normative ethical theories from the US are applicable to individual behaviour, and the European theories are based on the design of institutions.
• Accepting capitalism versus questioning capitalism: the US theories see the capitalist system as giving, and addresses questions within this system. The European theories tend to focus on the ethical justification of capitalism.
• Applying moral norms versus justifying moral norms: in both regions secularization takes place (moving away from a religious from or organizing). This allows for many approached. In Europe, the focus is therefore on justification and ethical legitimation of norms on how to address ethical dilemmas. The US theories focus on the application of morality, because there is still a quite rigid set of Christian-based values.

Asian approach are much more based on religion or tradition, whereas European and North American approaches rely on philosophical arguments.

Ethical theories – Western modernists

The enlightenment in the 18^th century was the starting point of modernity, where philosophical thinking started to be more influential. These theories tend to be absolutist. They are normative because they assume something about the world, and then they assume something specific about humans’ nature. So if we share the assumptions on which a theory is based, we can apply it. The advantage of such theories is that they provide an unequivocal solution to ethical problems. We can divide them in two groups. On the one hand we have the consequentialist theories. These assume that whatever action you take; if the outcome is morally right, then the action is morally right.

We call them teleological as well (based on the Greek word teleo which means goal). On the other hand there are non-consequentialist theories. These say that if the intended outcome is morally right, then the action is morally right. We also call them deontological (deonto means duty). A summary of some major normative theories in business ethics can be found in the table on page 98. We will now discuss these two groups of normative theories.

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. A criticism on this theory can be best explained by an example. A student who does not study and gets drunk every night follows his desire, and a student who never goes out and always studies hard also follows his desire. Both are right according to the egoism theory. So egoism based on pursuing interest is the best use of this theory. Also to mention is enlightened egoism, which is for example a company investing in education so that the level of the workforce is improved.

This theory works well when one person’s interest do not clash with other persons’ interests, but that is often not the case. Also the market could work if everyone pursues his own self-interest, but that process does not ensure environmental sustainability etc.

Next, Utilitarianism. According to the theory of utilitarianism, ‘an action is morally right if it results in the greatest amount of good for the greatest amount of people affected by the action’. Some call it the ‘greatest happiness principle’. Utilitarianism comes from the word utility, which is seen as the main goal in life. There are several interpretations of utility. First, the hedonistic view, where utility looks at pleasure and pain. Then, the eudemonistic view, where it is measured in happiness and unhappiness. Third, the ideal view, which is rather broad. It also takes into account intrinsically valuable human goods like love and trust. The word utility is also used to measure the economic value of goods, which explains why its analysis is similar to the quantitative methodology of economics (cost-benefit analysis). This theory is useful in situations like animal testing for medical research; it is painful for the mice, but helps a lot of humans, so the overall gain is positive. On page 103 an example of a utilitarian analysis is shown. There are some disadvantages:

• Subjectivity: pleasure/pain, happiness/unhappiness is not the same to everyone
• Quantification: how to measure pleasure/pain, happiness/unhappiness
• Distribution: minorities can be easily overlooked when assessing the greatest good for the greatest number

As the utilitarian’s knew that subjectivity was involved, they further refined their theory into act utilitarianism and rule utilitarianism. The former assesses single actions and checks how much pleasure and pain it causes, the latter assesses classes of actions and checks whether the principles of an action result in more pleasure than pain in the long run for society.

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. He developed a theoretical framework which he called the categorical imperative. The three parts are:

1. Act only according to that maxim by which you can at the same time will that it should become a universal law.
2. 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.
3. Act only so that the will through its maxims could regards itself at the same time as universally lawgiving.

An action is right if it complies with all three tests. Since they are pretty vague and difficultly formulated, they will be explained in more detail. With the first one he means that a moral proposition that is true must be one that is not tied to certain conditions, including the identity of the person making the moral consideration. The universality part means that it must not be tied to specific physical details, and could be applied to any rational being. So murder is immoral because if everybody would do so there would not be human life on earth. It comes close to the ‘golden rule’ present in many religions: treat others as you want them to treat you’. With the second, Kant wants to say that one should not use humanity of yourself or others merely as a means to some other end. For instance we can use people as means under the condition that we pay them, but not for example as a slave. So it is about human dignity. The last one is the final check, and is meant to question yourself whether every human being finds it acceptable, which overcomes the subjectivity problem in the utilitarian theory.

Now some disadvantages:

• Undervaluing outcomes
• Complexity (since the principles are quite abstract)
• Optimism (because Kant assumes that human behave rationally)

Next, the ethics of rights and justice. This theory is based on the concept of natural rights established by Locke. These rights include rights to life, freedom, and property, and more were added later.

This theory defines natural rights as ‘basic, important, unalienable entitlements that should be respected and protected in every single action’. Duties are related to rights, since others have the duty to respect rights. That is also the case in Kant’s theory but here there is no complex theoretical deduction, it is just assumed that there is a consensus about the nature of human dignity.

This theory is widely used, for instant in the UN Declaration of Human Rights and the European Union rules. A limitation is that the assumptions about the rights are rooted in the Western region.

Justice is ‘the simultaneously fair treatment of individuals in a given situation with the result that everybody gets what they deserve’. Fairness in this context can be seen in two manners:

• Fair procedures (procedural justice, whether everybody got rewards for their performance)
• Fair outcomes (distributive justice, whether the consequences are distributed fairly; in accordance with need)

It is not always possible to comply with both in the same situation. There are two views on distribution of wealth. First, egalitarianism. It says that justice and equality are the same, like Karl Marx says. A problem here is that there are differences between people. For instance if someone is just more skilled than someone else, should they still get the same? Also if I want to do some investments and earn money with it, should I be stopped doing that because other’s do not? The other view is non-egalitarianism. It says that the free market determines justice; supply and demand results in a fair distribution. Of course it leads to inequality, and some say that because of that it is not a good view. Rawls proposes the theory of justice, which lies in between the former two views. He says that there is justice when:

1. Everybody has the same right to the most complete total system of basic liberties compatible with a similar system of liberty for all.
2. Economic and social inequalities should be arranged so that

•  They provide the greatest benefit of the least advantaged; and
• They are tied to offices and positions which are open to all under the same conditions

So first we should consider human rights and then we should check whether everyone who is involved is better off, not equally better off, but just better off. By using this theory, we can explain that it is fair that MNCs exploit low wages etc in poor countries when they provide for some education or healthcare; because everybody is better off then.

There are some general disadvantages of the Western modernist theories, they are too:

• Abstract  (not practical/applicable to business problems)
• Reductionist (only focus on one aspect of morality; choose between consequences/duties/rights?!)
• Objective and elitist (truth determined by specialists is objective truth?!)
• Impersonal (personal bonds and relationships not taken into account as possibly shaping our ideas about right and wrong)
• Rational and codified (focussing on rationality underestimates the importance of feelings and emotions)
• Imperialist (Western theories might not be suitable for the whole world)

Some other views on the ethical theories were developed as a response to these disadvantages.

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, 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)
• Examples instead of principles
• Think local, act local (focus on one situation after another)
• Preliminary character (seen as pessimistic since it is an ongoing learning process)

It shares characteristics with the virtue ethics since that is also based on the individual.

CHAPTER D: Decision-making in the context of business ethics

In this chapter, descriptive ethical theories will be discussed. They ‘seek to describe how ethical decisions are actually made in business, and what influences the process and outcomes of those decisions’. So they look at what people actually do and why they do it, rather than telling business people what they should do.

Defining ethical decisions

A number of factors determine whether a decision is ethical or not:

• Is it likely to have a significant effect on others?
• Is it likely to be characterized by choice (so, are there also other possibilities)?
• Is it perceived as ethically relevant by one or more parties?

Then, it is an ethical decision.

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:

1. Recognition of a moral issue
2. Morally judging about that issue
3. Establish the intention to act upon that judgement
4. Act upon that intention (so engage in moral behaviour)

Important here is that knowing what the morally right thing to do would be, does not necessarily mean that the person also acts upon that moral judgment.

In a way, normative theory is attached to this because we talk about moral judgments. It is often suggested in literature that commercial managers mostly rely on consequentialist theories.

Second, the different influences on the process of ethical decision-making:

• Individual factors. These are the unique characteristics of the person who makes the decision. These are nature and nurture factors.
• Situational factors. These are contextual features like the work context (rewards, roles, culture) and elements of the issue itself.

They both have an influence in all stages of decision-making.

There are some limitations of models of ethical decision-making. Many stages are interdependent and cannot really be separated. And of course, as with all models, they might be too simple to represent real situations. Also, they are mostly from the US.

Research on the individual factors that influence ethical decision-making comes mostly from the US, and research on the situational factors mostly from Europe. So again; the North American focus is on choice within constraints, and the European focus on constraints themselves.

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, his five dimensions:

• Individualism/collectivism
• Power distance
• Uncertainty avoidance
• Masculinity/femininity
• Long-term/short-term orientation

• Education and employment. Not that strong, but better supported than gender and age.
• Psychological factors. There are two subcategories here.

• Cognitive moral development (CMD), which has a small but significant effect. It is ‘the different levels of reasoning that an individual can apply to ethical issues and problems’.

• Level one: a concern with self-interest, external rewards, and punishments is exhibited
• Level two: the individual behaves in the way others expect him to
• Level three: the individual develops more his own way of decision-making based on justice and rights more than external influences

Within each level there are two stages, so there are six stages in total. It is more about how something is decided then what is actually decided. Most people think with the level two idea, which implies that the situation is quite important. Some criticisms include gender bias, implicit value judgements, and invariance of stages.

• Locus of control, which has a small effect on decision-making but a bigger influence in predicting the apportioning of approbation or blame. ‘An individual’s locus of control determines the extent to which he or she believes that they have control over the events in their life’. Someone with an internal locus of control believes that he has a control over his life, someone with an external locus of control thinks that others, luck, or fate control his life.

• Personal values. These have a significant influence. A personal value is ‘an enduring belief that a specific mode of conduct or end-state of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state’. They persist over time (enduring), influence behaviour, and are concerned with individual and/or collective well-being.
• Personal integrity. They probably have a significant influence, but there are no really models or empirical tests to provide evidence. It is ‘an adherence to moral principles or values’. It plays a role in incidents of whistle blowing.
• Moral imagination. Has a considerable potential, but there is not much evidence on it. It is ‘the creativity with which an individual is able to reflect about an ethical dilemma’.

Situational factors

These can be issue-related, or context-related.

First, the issue related factors:

• Moral intensity. Quite new, but evidence of significant effect. It means how important the problem is to the person making the decision. There are six factors to it:

• Magnitude of consequences. That is the sum of harms/benefits expected for the ones that are affected by the issue.
• Social consensus.
• Probability of effect.
• Temporal immediacy. That is how quickly consequences will occur. The quicker, the higher the moral intensity.
• Proximity.
• Concentration of effect. So consequences can be heavy for a few or light for many.

• Moral framing. Limited evidence, but strong influence on aspects of moral awareness. It is about the language used to describe a problem. When moral terms like honesty are used, moral thinking will be triggered. But many business people do not use moral terms (‘moral muteness’). Research suggests that this is because of perceived threats to:

• Harmony
• Efficiency
• Image of power and effectiveness

Some ways of rationalizing unethical behaviour can be found in the table on page 167.

Next, the context-related factors:

• Rewards. Strong evidence related to ethical behaviour, not that much research on other stages.
• Authority. Immediate superiors and top management have significant influence.
• Bureaucracy. Significant influence but only from empirical research. Its negative effects are:

• Suppression of moral autonomy (‘just following the rules...’)
• Instrumental morality (achieving goals instead of questioning the morality of the goals)
• Distancing
• Denial of moral status (because humans become resources)

• Work roles. Probably has an influence, but there is no empirical evidence
• Organizational culture. Strong influence, but still discussion about implications.
• National context.

CHAPTER E: Tools and techniques to manage business ethics

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)
• Ethics managers, officers, and committees (more common in US)
• Ethics consultants (all kinds, environmental, research, strategy, projects, etc)
• Ethics education and training (more common in US) Goals:

• Identify situations where ethical decisions are to be made
• Understand organizational culture/values
• Evaluate impact of ethical decision on organization

• Reporting/advice channels (to gather information)
• Codes of ethics (specific rules on what behaviour is desired/expected)
• Auditing, accounting, and reporting (pioneered in Europe; measure, evaluate, and communicate impact/performance to stakeholders)
• Risk analysis and management (assessing and measuring (costs of) risks)
• Stakeholder consultation, dialogue and partnership

Of course, not all businesses use all these components, maybe not even one. The emphasis changed from management of employee behaviour to management of broader social responsibilities (so more external, taking into account other stakeholders). We will now discuss the three most important areas for business ethics management:

• Setting standards of ethical behaviour
• Management of stakeholder relations
• Assessment of ethical performance

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 (for a single organizations)
• Professional codes of ethics (for a specific profession)
• Industry codes of ethics
• Programme/group codes of ethics (for instance a group of business leaders)

Codes of ethics are becoming more and more common, especially in large and medium-sized companies. An increase was especially observed during the 90s and 00s. Following are the several types of codes of ethics, ranged from most prevalent to least prevalent:

• Labour standards
• Environmental stewardship
• Consumer protection
• Bribery
• Competition
• Information disclosure
• Science and technology
• Taxation

Normally the goal of the codes is to define principles or standards that the organization/industry/profession/group beliefs in and wants to pursue; and/or to set practical guidelines for employees. The first is more general, the latter more specific. Some say that many companies just have codes of ethics to show that they are ethical, but that in practice employee behaviour is not that ethical.

How can a business make sure that its codes of ethics are lived up to by its members?

• Participation (in developing the codes)
• Discipline (employees who breach them)
• Follow-through (found to be effective)
• Audit instrument (to clearly and consistently assess whether employees behave as the codes prescribe)
• Performance evaluation (it should be taken into account whether employees comply with the codes when evaluating a manager’s performance)

Guidelines for ethical conduct for the business in your home country may not applicable elsewhere. Absolutists would say that one code fits all, relativists would say that a unique code has to be developed for all different contexts. There is a view in between, which says that a company should base its codes on the following three principles:

1. Respect for basic human values
2. Respect for local traditions
3. 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. Remember, we can have several perspectives. We will now focus on the instrumental perspective, whereas we discussed the normative and descriptive perspective before. The relationship with stakeholders has three attributes that form the perceived importance of the stakeholders:

• Power (to what extent the stakeholder is able to influence organizational action
• Legitimacy (whether the stakeholder’s actions are seen as desirable/proper/appropriate)
• Urgency (whether what the stakeholder wants calls for immediate action)

The higher all three, the more important the stakeholder is perceived. The ones who only have one of the three are latent stakeholders. With two or more they are expectant stakeholders. If they have all three there are definitive stakeholders.

There are several forms of relationships with stakeholders:

• Challenge (based on conflict and mutual opposition)
• Sparring partners (based on ‘healthy conflict’ and periods of conflict)
• One-way support (based on sponsorship, philanthropy, or other resource contribution)
• Mutual support (formal/informal two-way support)
• Endorsement (based on unpaid/paid public approval on specific product/programme)
• Project dialogue (discussion between partners on project/proposal)
• Strategy dialogue (discussion between partners on long-term issues and overall strategy)
• Task force (co-operation on specific task)
• JV/alliance (formal partnership, mutual resource commitment to pursue specific goal)

Keep in mind that collaboration does not necessarily mean that ethical outcomes will be better, but it provides for potential.

Of course, problems can arise when collaborating with stakeholders:

• Schizophrenia (collaboration on one project, conflict over another à different identities)
• Culture clash
• Accountability (to members or the public in general)
• Resistance (from organization members/external parties)
• Co-optation (of stakeholders by corporations)
• Uncontrollability (consensus is difficult and collaboration can lead to a loss of control of strategic direction and corporate image)
• Intensity of resources (because collaboration costs time and resources, especially a problem for small businesses)

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. However, literature does not agree on this. Still, there are many possibilities to assess performances that might be considered ethical. There are some general distinctions:

• Ethical approaches focus on internal management systems or aspects of the business on the individual level, or on stakeholder values
• Environmental approaches focus on the impact of the organization on the natural environment
• Social approaches focus on a broader range of issues next to the environment (working conditions, human rights, health and safety, corporate giving, etc)
• Sustainable approaches focus on economic, social, and environmental considerations
• Auditing, reporting, and accounting are used interchangeably, but it is just checking and communicating data

The book uses the term social accounting to refer to all tools and approaches. The differences between social accounting and financial accounting are the following:

• Social accounting focuses on other issues next than financial data
• Its audience is stakeholders next to shareholders
• Social accounting is not required by law

Social accounting is ‘the voluntary process concerned with assessing and communicating organizational activities and impacts on social, ethical, and environmental issues relevant to stakeholders’.

Some activities can be measured, but often it is qualitative data and it is not even sure what activities had what impact. Also, there are so many possible social impacts that organizations have to consider which impacts to account for, and that is different per organization. An example on how the Body Shop approaches social accounting can be found on page 213. Many organizations use stakeholder satisfaction surveys to make the data quantitative.

If it is so difficult to engage in social accounting, why do organizations do it?

• More accountability and transparency
• Internal/external pressures
• Stakeholder management improvement (communication channel to improve reputation)
• Identifying risks (because social auditing provides insight in social, ethical, and environmental impacts and shows potential problems)

Reasons not to engage in social accounting are:

• Insufficient information
• Perceived high costs
• Inadequate information systems
• Lack of standards
• Unwillingness to disclose sensitive/confidential data
• Secrecy

There are some key principles to determine the quality of social accounting:

• Management policies and systems
• Evolution (commitment to learning/change)
• Comparability (across time and with other organizations)
• Completeness
• Inclusivity (involving stakeholders)
• Disclosure
• External verification
• Continuous improvement

There are some processes in place to develop standards for social accounting:

• Auditing and certifying (SA 8000, the social accountability standard)
• Reporting (the Global Reporting Initiative (GRI), framework for reporting on economic, social, and environmental triple bottom line of sustainability)
• Reporting assurance (AA1000S Assurance Standard, consistent with GRI)

Organization of business ethics management

In the US a more formal organization is normal, and in Europe and other parts informal organization is more common since the government is expected to establish the formal rules. There are four ways to formally organize business ethics management:

• Compliance orientation (prevent, detect, and punish violations of the law)
• Values orientation (encourage employees to commit to ethical organizational values; where no rules are in place)
• External orientation (focus on satisfying external stakeholders)
• Protection orientation (protect top management from blame; only to create legal cover)

The first form (compliance orientation) is most prevalent in the US, in Europe and Asia external orientation and values orientation are used more often. Firms can also use more than one of these orientations. Research says that values orientation is most effective, then external and compliance orientation, and protection orientation least effective. Next to a formal programme, a supportive culture is also very important.

A culture change approach should be taken if the organization has problems with ethics management. An organization-wide culture that supports ethical behaviour is the ideal idea. However, culture management is highly difficult and often unsuccessful. A slightly different approach is cultural learning. It focuses on subgroups within the organizational culture and encourages and enables employees to decide themselves on what they find ethical and to act according to that. Management should then identify values that conflict, and then promote moral imagination instead of ideological control (strict rules and regulations). The culture change approach might not result in real change but provides for more control. The cultural learning approach might bring out moral differences which can be damaging.

What is the role of leadership in the whole story of business ethics management? It is a significant one, since leaders set the ‘ethical tone’. Employees are likely to behave in the same way as their leader does. The difference between management and leadership is that management imposes orders (planning, organizing, controlling, budgeting) and that leadership copes with change (set direction/vision, motivate/inspire people, facilitate learning).

If a leader would use the culture change approach, he should articulate and personify the standards and values that the organization desires, and then motivate and inspire subordinates to live up to those. An authors suggests that a reputation of ethical leadership is dependable on two factors, to be perceived as:

• Moral person (individual characteristics like honesty/integrity)
• Moral manager (emphasis organizational ethics/values, establish guiding principles to comply with those)

If a leader would use the cultural learning approach, he is more focused on participation and empowerment to encourage moral imagination and autonomy, so there is more employee control.