Applied Ethics: Perspective on Business Ethics GEC 108

Normative theories of business ethics

The stockholder theory

 Business are merely arrangements by which one group of people, the stockholders, advance
capital to another group, the managers, to be used to realize specified ends and for which the
stockholders receive an ownership interest in the venture
 In this theory, it is the people who invested the money in the company that serve as the
main source of business decisions
 Managers act as agents that serve at the pleasure of investors. They are not allowed to
divert the funds away from the business plan that have been expressly approved by the
stockholders
 The stockholder theory holds that managers pursue their bottom line by legal and non-
deceptive means.
 Far from asserting that there are no ethical constraints on the manager’s obligation to
increase profits, the stockholder theory contends that the ethical constraints society has
embodied in its laws plus the general ethical tenet in favor of honest dealing constitute
the ethical boundaries within which managers must pursue increased profitability
 It is the society’s responsibility to restrict businesses from dealing unethically
 If managers spend the stockholder’s money to accomplish social goals without the prior
approval of the stockholders, then they are in violation of the agreement because they
are effectively spending other people’s money without their consent
 One’s duty is to honor one’s contractual agreements overrides one duty to promote the
happiness of the greatest number

The stakeholder theory

 The management’s fundamental obligation is not to maximize the firm’s financial access but to
ensure its survival by balancing the conflicting claims of multiple stakeholders
 Stakeholder is defined as any group or individual that stands to benefit or suffer from
decisions made by a corporation

Two principle of stakeholder management

Principle of corporate legitimacy

 The corporation should be managed for the benefit of its stakeholders: its customers,
supplier, owners, employees, and the local communities. The right of this group must be
 ensured, and further, the group must participate, in some sense, in decisions that
substantially affect their welfare

Stakeholder fiduciary principles

 Management bears a fiduciary relationship to stakeholders and to the corporation as an

abstract entity. It must act in the interest of the stakeholders as their agent, and it must
act in the interest of the corporation to ensure the survival of the firm safeguarding the
long-term stakes of each group

 These principles seek to ensure that all interest related to the firm are given a voice, especially
in decisions that have potentially injurious effects on those that have a stake in the firm
 Business performance is rated in relation to how it maximizes the gain and minimizes he
losses of all stakeholders
 These principles may be derived from the Kantian principle of treating people not
merely as mean but as ends as well. To treat the stakeholder as an end is to recognize
his/her right to not just be treated as a means for accumulating funds, extracting labor,
and raw material from.
 Stakeholder’s interests must be properly presented in business decisions. Each stakeholder must
be afforded a fair say in company policies and decisions. In other words, the management’s task
is to manage the business such that various interest are balanced in an optimal way

The social contract theory

 All business are ethically obligated to enhance the welfare of society by satisfying consumer and
employee interests without violating any general canon of justice
 It posits an implicit agreement between business and society that the latter only
tolerates the existence and operation of the former under the supposition that it can
benefit from it
 The term of agreement is the canon upon which the specific obligations are drawn from
it
 The social contract theory imagines a scenario where there are no formed businesses, but only
individual producers, and then proceeds to ask what conditions must be met before businesses
are allowed to be formed
 When business are legally recognized as agents, society authorizes them to own and use
land and natural resources and to hire members of society as employees
 The price of being given access to these privilege is the mandate to improve the welfare
of the community
 J. Hasnas enumerates how businesses may enhance the welfare of society from the perspective of the
social contract theory:

 Benefit consumers by increasing economic efficiency, stabilize level of outputs and channels of
distribution, and increasing liability resources
 Benefit employees by increasing their income potential, diffusing their personal liability, and
facilitating their income allocation
 Minimizing pollution and depletion of natural resources, the destruction of personal
accountability, the misuse of political power, as well as worker alienation, lack of control over
working conditions, and dehumanization

Stages of organizational moral development

 The five stages illustrate how corporations vary in their understanding and appreciation of
ethics and its relation to the profit motive
 As firms progress up the stages, ethics becomes more integrated in their operations. The stages
help one understand how different companies try to inculcate ethical behavior in their various
dealings with various stakeholders
 As the profit motive becomes more balanced with the obligation with the obligation to be
ethical, a company is shown to be less concerned with itself and, therefore, more attentive to
its societal obligations

Stage 1: The amoral organization

 This type of organization is defined by a winning at any cost attitude

 Ethics is the least of its concerns. It is an enterprise completely absorbed in productivity
and profitability
 For this type of organization, the only social responsibility of a business is to make a
profit
 Top management rules by power and authority and employees respond by acquiescing to that
authority and power through a reward system which supports a go along type of behavior
 Those who obey the rules without question are rewarded, while those who dare to
question management are ultimately punished by expulsion form the organization
 Employees are treated as mere means for productivity and profit for the enterprise

Stage 2: The legalistic corporation

 Firms exhibit compliance with the letter of the law as opposed to the spirit of the law. An
organization in this state of moral development exhibits a respect for laws, codes and
regulations.
 The firm is concern with the following state rules, placing a premium on the legality of
an action over the morality of it
 It places a great deal of responsibility on its legal team to make sure that corporate
policies are executed in accordance with the law of the state. So as to avoid any legal
complication
 From this perspective, what is legal corresponds to what is right
Stage 3: The responsive corporation

 Firms have it in their interest to do right, but it considers more as an expediency rather than an
end in itself. In other words, these types of corporations are inclined to give in to societal
demands and, therefore, realize that business has an obligation to operate with society in mind
 They have a code of ethics that seeks to align corporate goals with societal demands
 Concern for other stakeholders begins to manifest itself as managements begin to realize the
importance of employees and the community in which they operate
 This nascent concern is not motivated by doing right for right’s sakes but rather is a
recognition of the organization’s greater social role

Stage 4: The emergent ethical organization

 This type of organization active seeks the greater balance between profit and ethics.
 It recognizes the existence of a social contract between business and society. The ethical
consequences of any corporate decision are given weight along with its potentiality for
profitability.
 Various instruments are designed to make sure that the firm and its various agents conduct
business ethically.
 There are handbooks, policy statements, committees, ombudsmen, and ethics program
directors that seek to manage and ethically account for the conduct of the organization
with respect to its various responsibilities to different stakeholders
 While responsive corporations begin to develop ethical mechanism to increase the probability of
ethical behavior, these organizations are not yet fully comfortable with their implementation.
Top management recognizes the importance and value of this type of behavior but lacks the
experience and expertise to make it work effectively
 Stage four firms recognize the value of ethics, they lack the necessary proficiency in
administering and maximizing the potential of ethical mechanism.

Stage 5: The ethical organization

 Stage five behavior is characterized by an organization-wide acceptance of a common set of

ethical values that permeates the organization’s culture. These core values guide the everyday
behavior of an individual’s actions. Decisions are made based on the inherent justness and
fairness of the decision as well as the profitability of the decision. In this sense, there is a
balance between concern for profits and ethics.
 At this stage, normative moral theories are used as guides for designing various organizational
activities. There is also a continuing ethical training program that is integrated with the
employee’s technical training program
 The job is evaluated from the moral standpoint, highlighting dimensions that pertains to
social responsibility, fairness and justice
 The main difference between stage four and stage five is the level of dedication to company
exhibits in funneling its resources toward the goal of making the firm truly ethical in all aspect.
 Stage four heavily relies on the ethical mechanism to enforce ethical behavior, while
stage five has already imbibed ethics in its corporate culture
 Stage five, there is perfect harmony of the correct action and the ethical action