The Prologue

Corporate Ethics for Turbulent Markets of Today

"Educating the mind without educating the heart is no education at all" – Aristotle (cited in Wass,
2018)

Corporate Ethics as we understand and define throughout this book is not just a concept or
construct, a category or structure of thought, or even a theory or abstraction, but a concrete challenging
way of life for corporate executives to think and act legally, ethically, morally and spiritually in the
turbulent markets of today.

Market turbulence has also become a way of life today. Every week the media exposes major
corporate organized crimes of deliberate misrepresentation, deception, obfuscation, chicanery, corruption
and bribery, where corporate greed overrides national need, injustice suppresses justice, falsehood infects
truth, and evil dominates good. Despite industry watchdogs, government vigilance and regulation,
organized and institutional crime remains unabated and money-laundering runs wild whereby the rich and
smart get richer, and the poor and marginalized get poorer and powerless. Seemingly, traditional business
management tools and skills, models and strategies are inadequate to detect, avert or prevent corporate
market crimes, as, allegedly, most of these organized business crimes of the last few decades were
conceived, designed and perpetrated by graduates that hailed from the world’s best business and law,
schools and colleges.

The world was surprised with Donald Trump’s decisive election on November 8, 2016. This is an
instance of turbulent market. Will he succeed in recovering sustainable competitive advantage that USA
has been eroding for long? A Wharton graduate trained in global business management, he has been a
successful businessman, and one presumes he will succeed using his business luck, talents and acumen to
make America a booming success again. His political campaign was targeted to bring hope and solace to
much neglected yet very vulnerable Americans of the fifties, sixties and seventies; they voted him in, and
President Trump will presumably work toward their prosperity. Undoubtedly, he will face turbulent
markets in USA and throughout the globe, and all these will pose serious legal, ethical, moral and
spiritual (LEMS) challenges to him, and hopefully he will rise to their demands. This book on corporate
ethics for turbulent markets is an effort in this direction.

The Brexit referendum has been and will be the most defining political event in the UK over the
next few decades. A referendum - a vote in which nearly everyone of voting age took part on Thursday,
23 June 2016 to decide whether the UK should remain in or leave the European Union. “Leave”
European Union (EU) won by a close margin of 52% with “Remain” to 48%. The voter turnout was
71.8%, with more than 30 million people voting. England voted for Brexit by 53.4% to 46.6%, as did
Wales by 52.5% to 47.5%. Scotland (62%) and Northern Ireland (55.8%) voted to Remain. The day after
the referendum, in the UK, there was a sharp increase in Google searches asking exactly what the EU is
and what leaving it would trigger. This clearly suggests that many Britons voted first and did their
homework second. A careful ethical perspective of Brexit results tells us how different communities used
different sets of ethics and morals in voting to remain or leave EU. This is another instance of market
turbulence for the rest of the world. Corporate executives must function in this world.

As expected, Angela Merkel, Chancellor of Germany, has been nominated by Time the person of
the year, 2015. The year 2015 also marks the start of Merkel’s 10th anniversary as Chancellor of a united
Germany. She is for all purposes the de facto leader of the European Union, arguably the most
prosperous joint venture on the planet. Deservedly, Time called her the Chancellor of the world. A great
political and corporate executive, Merkel steered the EU enterprise through two existential crises, either
of which could have veritably ended the EU that has kept pace for the last seven decades. The first crisis

1
was thrust upon her when the euro, the currency shared by 19 nations, eroded and together with it
endangered the future of the EU nations, allegedly, all because of the default of a single member, Greece.
The second was late summer 2015, when Merkel’s government decided to throw open Germany’s doors
to a pressing throng of over a million refugees and migrants seeking desperate asylum within her peaceful
and promising borders. It was an audacious corporate decision, act, and strategy that threatened both to
redeem and endanger EU, testing the resilience of the European alliance. For Merkel, the refugee
decision was a galvanizing moment in a career that until then had been defined by caution and avoidance.
This episode is a great instance of effective corporate ethics in a turbulent world.

“As we settle into the twenty-first century with all its unique challenges, it is clear that we can no
longer regard success as a zero-sum game: one group riding only at the expense of the other. In this new
century people worldwide will rise and fall together. Our mission must be to create a global community
of shared responsibilities, shared benefits, and shared values,” said Bill Clinton (see “Foreword” to
Seidman (2011), p. xi]. This is a great goal for a book on Corporate Ethics for Turbulent Markets.

Dov Seidman, a trained moral philosopher, Founder and CEO of LRN (a pioneering organization
since 1994 that has helped hundreds of global companies build winning cultures inspired by principled
performance), argues that in this century, it is no longer what you do or what you know that matters most
in any business or non-business organization. In this networked global economy, it is getting harder for
organizations and individuals to succeed just on the basis of what they know, produce or provide.
Whatever we do can be easily copied by our competition, and even done better. What really matters for
success is HOW we do the things we do, how we differentiate from the rest, personally, professionally,
organizationally, and even nationally. How we choose to be bold, to stand out, to excel, to seek greater
excellence – how we behave; this is a long and tacit process that is hard to copy or duplicate (Seidman,
2011). This is hard to realize without solid commitment to ethical and moral principles. This is a
desirable and achievable mission, vision and goal for a unique experience of Corporate Ethics that this
book explores.

One of the world’s leading business thinkers, Professor Michael Porter of the Harvard Business
School, in a dialogue with social entrepreneurs and government innovators of the world, recently
confessed thus: The last 50 years have been dominated by the idea that economic growth is the most
direct route to better our lives for the world’s expanding population. But the signs are everywhere -
environmental destruction, inequality, injustice - that is, economic development alone is not enough.
What is a framework for the next 50 years? We must create a new paradigm in which economic
development is the servant of social progress, not vice versa.i Students, readers and practitioners of
corporate ethics should note this paradigm shift: economic development alone is not enough; it should be
the servant of social progress. Economic development without social progress breeds economic
inequality, social injustice, and popular unrest. This book assumes this paradigm shift and strives to
generate awareness and skills in readers to respond to this paradigm shift.

David Orr, an environmental educator and the founder of the Meadow Creek Project, an
environmental education center in Fox, Arkansas, USA, in his Commencement Address to the graduating
class of 1990 at Arkansas College, said: The plain fact is that the planet does not need more "successful"
people. But it does desperately need more peacemakers, healers, restorers, storytellers, and lovers of
every shape and form. It needs people who live well in their places. It needs people of moral courage
willing to join the fight to make the world habitable and humane. And these needs have little to do with
success as our cultures have defined it (Orr, 1990). This book on corporate ethics is not written for
achieving success. All success is short-lived, fleeting and transient. This book is for business students
and corporate executives who chose to be peacemakers, healers, and restorers.

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Corporate Statesmen
More than 100 years ago, Henry Ford manufactured the model T as an affordable car for all
Americans in 1907, and then campaigned for world peace. Andrew Carnegie advocated universal
education. The CEO statesman is not content with just accepting a job in the private or public sector.
Nor does he simply lobby behind the scenes. He is an evangelist, out to persuade the world of the
righteousness of his chosen causes. Ford and Carnegie were CEO statesmen by choice. In the 1908s and
1990s, the CEO celebrity was more prominently typified by Alfred Sloan of GM, Jack Welsh of GE or
Lou Gerstner of IBM, such figures penned books on their management philosophies and posed for
magazine covers.

John Mackey, Co-CEO of Whole Foods Market, wrote: “The world urgently needs a richer, more
holistic, and more humanistic philosophy and narrative about business than the one we have encountered
in economic textbooks, in business school teachings, and even from the mouths and pens of many
prominent business leaders (see Mackey & Sisodia (2014), Conscious Capitalism, p. 7-8). The tapestry
of human behavior is so diverse, so rich and so global that it presents a rare opportunity, the opportunity
to out-behave the competition and create enduring value. This is ethics for corporate sustainable
advantage. This is what this book is all about. In the long run, corporate ethics has to generate sustainable
competitive advantage. In this process, lie our greatness, success and our future. This book is about
HOW of doing business - the economic, social, ethical, moral and spiritual values we bring with our
business venture, and how thereby we impact the world.

Currently, the business world is still not 100% eco-friendly or environment-friendly. In many
countries, especially the rural areas, environmental degradation goes on unabated. Students of business
and related studies, the corporate leaders of tomorrow, have therefore an extremely important role to play
in building a more sustainable society (Robinson, 2014). Hence, almost all courses in the business
curriculum must train students to understand, be sensitive to, the environmental lens of sustainability, not
only in terms of sustainability knowledge, but also in terms of skills and models for formulating,
designing and implementing sustainability solutions in every department and division of the company
(e.g., see Molthan-Hill, 2014). This Book on Corporate Ethics seeks to take a lead role in this
transformational process of corporate statesmanship. Wherever possible, we integrate ecology,
sustainability, cosmic spirituality, world harmony and peace into ethics, business ethics, managerial ethics
and especially, corporate executive ethics.

Critical Importance of Corporate Ethics Today

Several multinational and global companies were involved in accounting irregularities. Enron
(October 2001) led the gang, followed by Quest Communications (February 2002), Global Crossing
(March 2002), World.com (March 2002), Adelphia Communications (April 2002), CMS Energy (May
2002), Dynergy (May 2002), El Paso (May 2002), Halliburton (May 2002), Peregrine Systems (May
2002), AOL Time Warner (July 2002), Bristol-Myers Squibb (July 2002), Duke Energy (July 2002), and
in India, Satyam (2009), 2G-3G (2010-2013), CWG (2011), Coalgate (2012), to name a few. More recent
accounting scandals were associated with onetime respectable companies such as Arthur Anderson, Ernst
& Young, KPMG, JP Morgan, Merrill Lynch, Morgan Stanley, Citigroup, Salomon Smith Barney, Marsh
& McLennan, Credit Suisse First Boston, and even the New York Stock Exchange (NYSE) itself. Most of
these failed companies represented bad business decisions and ethical failures. Most of the top executives
involved in such accounting scandals and financial irregularities were business graduates of some of the
topmost business schools of the United States. It was a massive failure in business ethics, managerial
ethics, corporate executive ethics and corporate governance.

People we normally trusted let us down, filling us with doubts about the structure of our values and
beliefs. Then the World Trade Center towers came down, ushering in a series of global attacks against

3
civilians – Madrid, London, Bali, Mumbai, and others (Seidman, 2011, p. 45). This was followed by the
mighty collapse of Lehman Brothers, AIG, Washington Mutual, Merrill Lynch, Morgan Stanley,
Wachovia, and a host of other gigantic investment institutions in September-October 2008. Then, some
destructive regional wars in the Middle East and the Crimea with wanton economic sanctions have left us
all destabilized, uneasy, and unsafe. All these were bad, wrong, unethical and immoral, national and
corporate decisions and choices. Complex invasive security procedures now intrude even our day-to-day
lives. The world needs healing. The world needs restoration of hope. A book on Corporate Ethics can
jump-start this movement for global wholeness and integrity, corporate transparency and honesty.

In the very turbulent world markets of today, in the wake and grip of these scandals and systematic
accounting and financial irregularities, a recapture of a strong sense of business and corporate ethics is
urgently imperative in every business school curriculum and corporation conduct. The massive
consequences of unethical executive behavior and unethical business institutions cannot be ignored. The
seventeen mega global investment banks that lost close to a trillion dollars in market capitalization during
September-October 2008 financial crisis and the subsequent federal bailouts that sought to rescue them
that cost the US taxpayers more than a trillion dollars were not market failures – they were man-made
market turbulences schemed and contrived by MBAs and finance (CFAs) graduates from prestigious
business schools. Recent consumer boycotts of hitherto industrial icons such as Levi-Strauss, Gap, Home
Depot, McDonald’s, Nike, Kmart, Wal-Mart, and Shell Oil are moral wake-up calls for all corporations
and their executives to renew their moral commitment to society. We need strong corporate ethics at all
levels.

Adam Smith wrote The Wealth of Nations way back in 1776. This was not a book on economics as a
source of wealth. It spoke about moral principles as a source of wealth. Adam Smith was a British moral
philosopher; he was not trained as an economist. He spoke about ethics as a way of life for corporate
advantage. According to the Ethics Resource Center, Washington DC, companies that are dedicated to
doing the right thing, have a written commitment to social responsibility, and act on it as a way of life, are
consistently more profitable than those who do not. If your company is ethical and socially responsible, it
automatically cannot make you rich and successful, but it will definitely pave the way for you to become
successful. Ethics + competence = success is a winning equation. This is the equation of ethics for
corporate advantage. On the other hand, companies that continually attempt to test the edge of ethics
inevitably go over the edge. Shortcuts, deception, cheating and cutting corners test the edge of ethics and
never pay off in the long run. In the long term, people and organizations always lose when they live
without ethics and guiding moral principles.

In 2002, the U. S. Congress passed the Sarbanes-Oxley Act (popularly known as the SOX Act) to
address the increasing wave of corporate accounting and financial scandals. Section 406 of this Act
mandates that corporations should have a code of ethics for senior officers that must include standards
that promote: a) honest and ethical conduct, especially in handling actual or apparent conflicts of interests
between personal and professional relationships; b) that all public financial statements of corporations
should be full, fair, accurate, timely and understandable, and authenticated by the CEO and CFO of each
firm, who will be held responsible for errors, and c) compliance with applicable government rules and
regulations. Despite this Act, corporate scandals have not significantly abated in the USA or in the
Western developed world. A solid course in Business Ethics, Managerial Ethics, or Corporate Ethics for
all MBA students and corporate executives could reinforce the importance of and empower compliance to
the SOX Act of 2002.

Corporate Ethics through Real Current Business Cases

I have developed over forty real-time, current business and corporate cases from current market
behavior to illustrate and exemplify concepts, theories and paradigms of ethical theories and moral
principles. Almost all cases reflect market problems and behavioral responses during 2013-2016 that

4
happened as I was teaching managerial ethics to graduate students. Some of these cases are distributed
throughout the book and introduce chapters that best fit the ethical theories and principles covered in that
chapter. The case-study method is a highly and most commonly recommended method that encourages
and enables interactive and experiential form of learning (Coyne, Massey, & Thibodeau, 2005;
Dellaportas, 2006; Loeb & Ostas, 1997). Also, each of the cases follows the Ignatian Pedagogical
Paradigm (IPP) of Context, Experience, Action, Reflection, and Evaluation, even though not categorized
in that structure.ii

Each case provides a fairly detailed context as and when it happened and how it progressively
unfolded during 2013-2016, how it was experienced by the various subjects or actors involved, and what
action or actions followed. The reader is then invited (through a series of ethical and moral questions that
append the Case) to reflect on this context-experience-action sequence, and thus imagine what decisions
they would make in such a context, and evaluate them from ethical and moral principles learnt in that
chapter. Case studies in general utilize an interactive decision-making model that fosters higher-order
thinking and reflective and experiential evaluation – it is “active learning” (Bonwell & Eison, 1991). We
freely use contemporary moral “heroes” as role models (e.g., Mandela, Sherron Watkins, Amar Bose,
Lakshmi Sahgal) as well as problematic struggling fallen heroes (e.g., Andrew Fastow of Enron, Rajat
Gupta of Goldman Sachs, and Ramalinga Raju of Satyam) as warning examples to illustrate the cases.
The corporate readers are welcome to this learning method.

The Structure of this Book

Following systems thinking, we assume that all business problems and the solution alternatives they
command, and business and corporate ethical deliberations, explanations and decisions that follow, imply
at least three constituents:

❖ Business ethical inputs primarily represented by corporate executive moral agents,

❖ Business ethical processes and procedures normally designed, enforced and monitored by
corporate executive moral agencies, acts and actions, and
❖ Business ethical outputs mostly reflected in the good and bad consequences of corporate
executive inputs, and processes of decisions and strategies.

In a morally perplexed world wrought with market turbulence, economic chaos, global financial
crisis, corporate fraud, organized lobby and bribery, and gross income inequalities, this book of corporate
ethics seeks to examine the general ethical imperatives of business management as a governance system
of CEOs as moral agents. A later sequel will cover Strategies of Corporate Ethics, in terms of moral
agencies as processes of corporate deliberations, moral reasoning and explanations, moral choices,
decisions and implementation, and moral consequences as outputs. Global and domestic business cases
of current ethical market problems, challenges and moral imperatives will be proposed and discussed
throughout the book in each chapter.

Concretely, the planned two-volume Book on Corporate Ethics for Turbulent Markets of
Today is designed as follows:iii
Volume I: Corporate Ethics for Turbulent Markets: The Market Context of Corporate Ethical Decisions
and Choices

❖ Prologue: Corporate Ethics for Turbulent Markets of Today.

❖ Chapter 01: Characterizing Market Turbulence Today as a Source of Market Opportunity.
❖ Chapter 02: The Domain and Context of Corporate Ethics - Introducing Concepts and Directions.
❖ Chapter 03: A Systems-Thinking Approach to Understand the Challenge of Corporate Ethics in the
Turbulent Markets of Today.

5
 ❖ Chapter 04: The Success of Free Enterprise Capitalist System (FECS) when Designed and Deployed
Rightly.
❖ Chapter 05: The Destruction of Free Enterprise Capitalist System when Infected by Fraud, Corruption and
Bribery.
❖ Chapter 06: The Turbulent Market of Modern Debt-Overleveraged and Promoter Dominated Corporation.
❖ Chapter 07: Artificial Intelligence and the Emergent Turbulent Markets - New Challenges to Corporate
Ethics Today.
❖ Chapter 08: The Ethics of Reinventing the Morally Embattled Corporation.
❖ Epilogue to Volume I - The 21st Century Legal, Ethical, Moral and Spiritual (LEMS) Challenges of
Corporate Governance

Volume II: Corporate Ethics for Turbulent Markets: The Human Context of Corporate Ethical Decisions
and Choices

❖ Prologue: Corporate Ethical Response to Turbulent Markets of Today

❖ Chapter 09: The Ethics of Dignity of the Human Person
❖ Chapter 10: The Ethics of Executive Cardinal Virtues
❖ Chapter 11: The Ethics of Executive Trusting Relations for Building Corporate Communities
❖ Chapter 12: The Ethics of Corporate Critical Thinking for Corporate Effectiveness
❖ Chapter 13: The Ethics of Corporate Ethical and Moral Charismatic Leadership
❖ Chapter 14: The Ethics of Corporate Stakeholder Rights and Duties
❖ Chapter 15: The Ethics of Corporate Moral Reasoning, Moral Judgment, and Moral Justification
❖ Chapter 16: The Ethics of Corporate Legal, Ethical, Moral and Spiritual (LEMS) Responsibility.
❖ Epilogue to Volume II: Corporate Cosmic Executive Spirituality Today

The Target Audience

Organized thus, this Two-Volume Corpus is uniquely designed for corporate executive leaders and
boards of directors, business scholars and business practitioners alike, and high potential business
students. Both volumes enable and empower corporate executives and business entrepreneurs to engage
in corporate-wide decisions and strategies that demand creative, imaginative, intuitive and innovative
business management skills that are optimally economic and legal, and at the same time highly ethical,
moral and spiritual. In the typical MBA program, this book could be useful for courses in Corporate
Ethics, Business Ethics, Managerial Ethics, Executive Ethics, Business and Society, and Ethics of
Strategy, particularly at the graduate level.

Chapters of this book could be successfully streamlined for conducting management development
programs (MDP) and in-company ethics training programs in various critical areas such as strategic
ethical and moral choices amidst market turbulence, ethics of business turnaround management, ethics of
revenue generation, ethics of cost containment, ethics of organizational downsizing, corporate critical and
moral thinking, identifying and resolving corporate moral dilemma, executive moral reasoning and
decision making, exercising responsible judgment calls and choices, corporate boardroom ethics and
morals, exercising ethical and moral charismatic corporate leadership, identifying, defining, formulating,
and resolving ethical and moral problems of the marketplace, problem solution-alternatives and trade-off
analysis, designing and developing organizational ethics cultures, and ethics of equality for humanize the
planet.

The Uniqueness of This Book

There are several books on ethics, on business ethics, on managerial ethics, presumably on executive
ethics, but hardly any on corporate ethics. A significant percentage of current MBA or PGDBM/HRM
students from prestigious B-schools will very soon be corporate executives who will make decisions that
will impact the whole company and the industry, its stakeholders, its divisions, peoples, products, brands
and services. Such corporate-wide, industry-wide and nations-wide decisions need to be preceded by

6
proper training in moral reasoning, explanation and justification, ethical scanning and understanding of
competition and markets, moral deliberation and choices, prediction and control of high profit products
and markets such that corporate decision makers can foresee the consequences, and assume responsibility
for their intended and unintended consequences. Corporate ethics empowers corporate executives to
journey through the business cycle of market-scanning, understanding market niches, designing new
product for the niches, deliberation and choice, decision and strategy, implementation and monitoring,
prediction and control process, market launching and customer feedback - all business cycle stages with
ethical, moral and spiritual challenges - with assurance and clarity. The content and structure of both
volumes is geared to realize this corporate objective.

The content of each chapter is best learnt and internalized against real-time “live” cases of current
market turbulent problems, episodes, “disruptive changes” (Christensen et al., 2000, 2002; Collins, 1999)
and “market busting” strategies (McGrath & MacMillan, 2005) as they unfold in the current domestic,
international and global marketplaces. This is best done by challenging corporate executives and
professionals, scholars and students with structured and unstructured, complex and “wicked” (Rittel &
Webber, 1973) problems in the marketplace as they unfold and unravel through the chaos of risk,
uncertainty and ambiguity of current domestic and global markets. These “real market” problems invite
team learning in ethical or moral problem identification, problem characterization, problem formulation,
problem specification, and exploration of solution-alternatives and assessment of the final choice
alternative in the actual real-time field of contemporary business and market transactions.

To make the content of each chapter relevant and exciting, each chapter is energized by several
contemporary business cases that reflect global, international, national and local real-time market
problems and cases as the latter emerge and develop, capitalize or exploit current market opportunities.
Each case is followed by a set of pertinent ethical questions and moral challenges, and the ethical
concepts, theories, paradigms and models that follow (in Volume Two) are designed to empower the
reader to address these questions with ethical and moral solutions.

There is no closure to this book. The content of each chapter is continuously evolving and emerging.
Hence, a book that captures the real-time ethical and moral process of forming strategic leaders of
corporate transformation experience and accomplishment must be a “work in progress” that needs
constant updates, upgrades, revisions and restatements. In other words, this book is not about immutable
and frozen conceptualizations and theories, paradigms, models and strategies of past centuries. It feeds
and expands on the real, day-to-day corporate world of ethical and moral business management.

Endnotes
i Skoll World Forum on Social Entrepreneurship Published on April 16, 2015; http://www.skollworldforum.org.
iiThe Ignatian Pedagogical Paradigm (IPP), a 460-year old approach to education pioneered by St. Ignatius and implemented by
the Jesuits, is based on the Spiritual Exercises of St. Ignatius of Loyola, but detailed in the Ratio Studiorum (Latin for “Plan of
Studies”) completed and promulgated in 1599. While the Ratio does not describe the IPP as such, it includes its structure, and is
considered the basis for Jesuit education (Hise & Massey, 2010, p. 453, 462). (See also Moberg & Calkins, 2001).

iiiThere are other approaches to ethical and moral analysis that are quite laudable. From the viewpoint of ethical and moral
leadership, we could divide the content of ethical analysis into 1) The Ethics of the Means – what do leaders use to motivate
followers to obtain their goals; 2) The Ethics of Person: What are the virtues and personal ethics of the leaders? Are they
motivated by self-interest or altruism? 3) The Ethics of the Ends: What is the ethical value of the leader’s accomplishments? Did
they serve the greater good of the greatest number? [See Ciulla (2004, p. xvi)]. In this book we follow the suggested structured
framework of Volumes One and Two, as it better fits the ethical, moral and spiritual analysis of the current business paradigm.

7
 Managerial Ethics:
Contemporary Challenges and Imperatives
Course Syllabus: PGDBM 2019-2021
October - December 2019 – XLRI, Jamshedpur

Instructors:
Fr. Oswald (Ozzie) Mascarenhas S.J., Ph.D.
JRD Tata Chair Professor of Business Ethics, XLRI Jamshedpur
Prof. John G. Chiramel, Ph.D. Visiting Faculty, XLRI
October 21, 2019

Course Outline & Structural Objectives:

In a morally perplexed world of today wrought with market turbulence, economic chaos and
ambiguity coupled with global financial crisis of 2008, corporate fraud, corruption and bribery that
happen every day resulting in gross income, social and opportunity inequalities among the billions, this
course in managerial, business or corporate ethics invites and challenges business students and executives
to examine their own business values and career ambitions, and redefine their moral principles and
convictions that can change and reform the world for the better. Part One explores the current general
market context of ethical and moral challenges, imperatives and executive decisions. Part Two covers
major ethical theories and moral principles for designing and planning strategic corporate responses to the
turbulent marketing challenges presented in Part One. Specifically, Part Two will focus on corporates as
moral agents and their moral agencies as processes of corporate discernment and deliberations, moral
reasoning and justification, moral choices, decisions and implementation, and taking moral responsibility
for foreseen and unforeseen consequences of their strategic choices and decisions. Contemporary global
and domestic real-time business cases and market problems will be analyzed for their legal, ethical, moral
and spiritual (LEMS) content, challenges and imperatives.

The Structure of this Course

Following systems thinking, we assume that all business problems and the solution alternatives they
command, and business and corporate ethical deliberations, explanations and decisions that follow, imply
at least three constituents:

❖ Business ethical inputs primarily represented by corporate executive moral agents,

❖ Business ethical processes and procedures normally designed, enforced and monitored by
corporate executive moral agencies, acts and actions, and
❖ Business ethical outputs mostly reflected in the good and bad consequences of corporate
executive inputs, and processes of decisions and strategies.

This course examines these inputs, processes and outputs in four executive learning modules as
follows:

Part I: Corporate Ethics for Turbulent Markets: The Market Context of Corporate Ethical Decisions and
Choices
Module 01: The Triumph of Market Capitalism
❖ Prologue: Corporate Ethics for Turbulent Markets of Today.
❖ Chapter 01: Characterizing Market Turbulence Today as a Source of Market Opportunity.
❖ Chapter 02: The Domain and Context of Corporate Ethics - Introducing Concepts and Directions.

1
 ❖ Chapter 03: A Systems-Thinking Approach to Understand the Challenge of Corporate Ethics in the
Turbulent Markets of Today.
❖ Chapter 04: The Success of Free Enterprise Capitalist System (FECS) when Designed and Deployed
Rightly.

Module 02: The Failure of Market Capitalism

❖ Chapter 05: The Destruction of Free Enterprise Capitalist System when Infected by Fraud, Corruption and
Bribery.
❖ Chapter 06: The Turbulent Market of Modern Debt-Overleveraged and Promoter Dominated Corporation.
❖ Chapter 07: Artificial Intelligence and the Emergent Turbulent Markets - New Challenges to Corporate
Ethics Today.
❖ Chapter 08: Reinventing the Morally Embattled Corporation.
❖ Epilogue to Part I - The 21 Century Legal, Ethical, Moral and Spiritual (LEMS) Challenges of Corporate
Governance

Part II: Corporate Ethics for Turbulent Markets: The Human Context of Corporate Ethical Decisions and
Choices
Module 03: Ethical Responses of Market Capitalism
❖ Prologue: Corporate Ethical Response to Turbulent Markets of Today
❖ Chapter 09: The Ethics of Dignity of the Human Person
❖ Chapter 10: The Ethics of Executive Cardinal Virtues
❖ Chapter 11: The Ethics of Executive Trusting Relations for Building Corporate Communities
❖ Chapter 12: The Ethics of Corporate Ethical and Moral Charismatic Leadership

Module 04: Moral Responses of Market Capitalism

❖ Chapter 13: The Ethics of Corporate Critical Thinking for Corporate Effectiveness
❖ Chapter 14: The Ethics of Corporate Stakeholder Rights and Duties
❖ Chapter 15: The Ethics of Corporate Moral Reasoning, Moral Judgment, and Moral Justification
❖ Chapter 16: The Theory of Corporate Moral Responsibility, as individuals and as corporations.
❖ The Ethics of Corporate Legal, Ethical, Moral and Spiritual (LEMS) Responsibility.
❖ Epilogue to Part II: Corporate Cosmic Executive Spirituality Today

For a structure of actual delivery of Managerial Ethics: Contemporary Challenges and Imperatives by
Course Structure & Schedule, Sessions and Content, see Appendix 1 (p. 11).

Assurance of Learning: Objectives of this Course:

Specifically, this Course focuses on student learning of ethical and moral principled corporate
executive behavior based on specific ethical skills such as:

Module 01:
1. Understanding turbulent markets of today and characterizing market turbulence as a source of
market opportunity (Prologue and Chapter 01).
2. Understanding the domain and context of corporate ethics and morals: concepts, constructs,
theories and paradigm to study the turbulent markets of today (Chapter 02).
3. Systems-Thinking skills to understand the dynamics of the turbulent markets of today (Chapter 03).
4. Exploring and appreciating the Success of Free Enterprise Capitalism System [FECS] today
(Chapter 04).

2
Module 02:
5. Investigating and forearming oneself against the abuses of FECS in the form of fraud, corruption,
bribery and money laundering (Chapter 05).
6. Understanding the nature, causes and dynamics of current turbulent markets in the form of modern
debt-overleveraged and promoter dominated corporations (Chapter 06).
7. Understanding and appreciating the social, ethical, moral and spiritual impact of Artificial
Intelligence in the turbulent markets of today (Chapter 07).
8. Exploring the Ethics and Challenges of Reinventing the Morally Embattled Corporation of Today
(Chapter 08 and Epilogue to Part I).

Module 03:
9. Understanding and professing the inalienable dignity of human personhood (Chapter 09).
10. Understanding and exercising the power of corporate executive virtues (Chapter 10).
11. Cultivating and fostering reciprocal trusting human relations for building organizations
(Chapter 11).
12. Understanding the ethics and morals of Servant, Covenantal and Charismatic Leadership for
turbulent markets of today (Chapter 12).

Module 04:
13. Building one’s ethical thinking and deliberating via Corporate Critical Thinking (Chapter 13).
14. Identifying, respecting and honoring legal, ethical and moral rights and duties of stakeholders in
Turbulent Markets of Today (Chapter 14);
15. Developing one’s skills for moral reasoning, moral judgment calls and moral justification in the
turbulent markets of today (Chapter 15);
16. Empowering one’s corporate, social, moral and spiritual responsibility for the consequences of our
executive decisions, choices and actions, especially related to turbulence to planet ecology and
cosmic sustainability (Chapter 16 and Epilogue).

Course Pedagogy for Assurance of Learning

Even as research method and methodology are determined by the specific subject matter of inquiry,
so also our course method, methodology and pedagogy are dependent upon the specific subject matter of
managerial, business, executive or corporate ethics: Human persons and free enterprise capital markets as
subjects, objects, events and properties (SOPE). We will be using a pedagogy that is specific to
Managerial Ethics that enables built-in assurance of learning (AOL) models, opportunities and challenges.
We propose seven Assurance of Learning models: AOL1, AOL2, AOL3, AOL4, AOL5, AOL6, and
AOL7.

All seven AOL models deal with the domain of defining and resolving current, relevant and critical
management problems that have legal, ethical, moral and spiritual (LEMS) content, but deploy different
approaches for formulating and resolving the given problem. All seven models are premised on and
enabled by a systems-thinking approach: that is, all problems are considered to be “systems at unrest”
(Ackoff and Emery 1972) that have specific inputs, specific processes, and hence, specific outcomes as
integrated solutions.

❖ AOL1 explores a current market problem (e.g., USA-China Trade War, the Brexit Impasse,
Volkswagen Emissions Scandal, Millions of Global Asylum-seeking immigrants, the debacle
of Uber, Jet Airways and Air India, Vedanta Sterlite Copper Massacre in Tuticorin, and the
like) from its constituent variables that are either controllable (X) or uncontrollable (Y) to

3
 the company. The problem phenomenon is studied by applying the 11 Laws of Systems-
thinking (from Chapter 03).
❖ AOL2 explores the same AOL1 problem by applying newly created Laws that your Group
discovers, formulates, defends and applies (e.g., Laws 12, Law 13) for further
understanding of the given problem.

❖ AOL3 explores the same problem by applying 10 Systems-thinking Archetypes (from

Chapter 03). Since archetypes reveal structures of human and market behavior, AOL3
seeks to understand the undergirding structures that create and compound market
problems.

❖ AOL4: Given Chapters 2 and 15 on Ethical Theories, Moral Reasoning and Moral
Judgments, AOL4 is an exercise in making a judgment call on the chosen problem
investigated under AOL1 to AOL3. The moral judgment seeks to determine who was
legally, ethically, morally and spiritually right, or wrong, just or unjust, good or evil. In
general, any moral justification of one's corporate judgment and decision involves five
supporting sets of beliefs and values held by a particular person in one or more of the
following hierarchical series of moral values:

A. A set of normative ethical theories;

B. A set of moral principles derived from set A;
C. A set of moral standards derived from sets A and B;
D. A set of moral rules derived from set C, and Set
E. A set of moral judgments resulting from applying sets A, B, C or D while assessing
concrete actions.

One can arrive at moral judgments using two approaches: 1) Forward Moral Reasoning and
Justification following steps ABCDE. 2) Reverse Moral Reasoning and Justification following
steps EDCBA.

❖ AOL5: Based on Chapter 2 and Chapter 15 and Tables 15.4A and 15.4B on Ethics of Moral
Justification, the same problem studied under AOL1 to AOL4 is now examined under the
lens and Rules of Justice using deontological reasoning (Rules 1-9), teleological reasoning
(Rules 10-12), and distributive justice reasoning (Rules 13-28).

❖ AOL6: Given your approach in AOL1 to AOL5, and based on Chapters 2, 9, 10, 11, 12 and
15, you frame at least five ethical and moral questions regarding the market problem not
covered hitherto under AOL 1-5, and address them. For illustrations on types of questions,
see under Cases in Chapter 15.

❖ AOL7: Given your approach in AOL1 to AOL6, you now synthesize your findings applying
the LEMS approach using Chapter 16.

All seven AOL models are based on specific business cases suggested in the First and Second take-
home exams. They have different learning domains, possibilities and challenges that students must
explore and appropriate together. They are global, international or national in scope.

4
Measurement of Assurance of Learning
In general, learning refers to listening, understanding, mastering, applying and retaining knowledge
(e.g., concepts, theories, models, paradigms, experiences, practices, history, cases) and skills (e.g., rightly
understanding and explaining, interpreting, applying, strategizing, decision-making) derived from
materials taught or read, heard or observed. In general, “learning goals” refer to “discovering and
mastering the requisite strategies, processes or procedures for performing effectively as opposed to
relying on the knowledge and skill that one already possesses.” In addition, it is assumed “that
performance goals activate lower cognitive functions such as attention, memory, and comprehension,
while learning goals activate higher functions such as thinking, analysis, evaluation, planning, and auto-
determination and self-monitoring.”

Using the “directives” received from AACSB and as institutionalized by XLRI business curriculum
we identify six “learning goals,” and two “learning outcomes” as measures for assessing assurance of
learning (AOL 1-7) as follows:

Learning Goals Operational Definitions of Learning Goals or Outcomes

Communication
Stakeholder Sensitivity
Global Perspective
Decision Making
Quest for Excellence
Functional Knowledge
Learning Outcomes
Behavioral change in “self”
Behavioral change in “self”
Ability effectively to listen, inform, persuade through this medium;
Ability to understand and factor in the perspectives of all stakeholders as persons,
groups and organizations;
Ability to identify, define, formulate and analyze business problems from a global
perspective;
Ability to generate alternative solutions to a problem and then take an integrated
approach to seek an optimum solution;
Ability to raise the bar in quest for higher standards in learning and living, and
Ability to effectively identify and apply conceptual frameworks while dealing with
business problems.
Operational Definition of Learning Outcomes
The kind of integrity between self and behavior under “learner control conditions.”
The kind of integrity between self and behavior under “project control conditions.”

• Learner controlled conditions: We assume these conditions are controlled by the student, such as
homework, class-preparation, use of Google and Internet, punctuality, class attendance, serious reading
and analysis habits, enthusiasm for learning, curiosity for learning, intrinsic motivation versus extrinsic
motivation for learning, use of social media such as Face Book, YouTube, WhatsApp, and the like.

• Project Controlled Conditions: We assume these conditions are controlled by the teacher throughout the
course (project) using different teaching pedagogies and tools such as lectures, classroom dynamics of
dialog and discussions, tutorials, management labs, take home exams, field projects, student assignments,
class participation models, individual or group student viva, course handouts, class presentation PPTs,
use of media such as movies and YouTube to support lectures, student assessment, and the like.

Assurance of Learning (AOL) Assessment Technique

We assume that “learning” like anything is a system with its own specific inputs, processes, and
outputs. Our AOL assessment tool is a simple one: students will rate (on a scale of 0-10) what learning
they have experienced from each AOL1 to AOL7 when viewed against the above stated six learning goals
and two learning outcomes, and in absorbing and internalizing the content of each of the fourteen
chapters, the Prologue and the Epilogue, and the many current business cases proposed in Chapter 1-16.
Appendix 1 provides a framework for such assessment.

5
Student Evaluation:
Class Participation = 25% broken as follows:

• 10% for class attendance and class participation: Content Review, Current Market Events Review,
Readings Review, raising relevant issues and questions, or responding to those challenged by the teacher;
• 15% Student Viva: Case Analysis and presentation cum intergroup debate: that is, each group (of 5) will
be called to make 5-7 minute presentations on the salient highlights of their findings from Take-Home
Exams One and Two given during the Semester.

Assignments and Final Exam Evaluation:

• First Group Take Home Exercise in Managerial Ethics for 20%: (Prologue, Chapters 01-08; Sessions 1-5)
– delivered within two weeks from First Take-home exam-announcement and delivery.
• Second Group Take Home Exercise in Managerial Ethics for 20%: (Chapter 09-16, Epilogue; Sessions 6-
10), delivered within two weeks from Second Take-home exam- announcement and delivery.
• End of the Course Final MCQ Exam (Individual) for 35%: (Chapters 00-16; Sessions 1-10); Date and
time to be announced (TBA).

Office Hours:
Monday through Friday: 9:00 am – 5:00 pm when not teaching or at lunch-break.
For other times call or contact via:
Office Landline 3125 (Prof. N. Mukherjee Bldg.; Ground Floor, Room #3) parallel to the XLRI
Library
Tome Jesuit Residence: Room 57, Landline: 3357
Cell Phone: 7070-5959-02; Email: ozzie@xlri.ac.in

Required Readings:
Mascarenhas, Oswald A. J. (2018-19):
Volume I: Corporate Ethics for Turbulent Markets: The Market Context of Corporate Ethical
Decisions and Choices [Emerald Publishing, UK, April 2018]
Volume II: Corporate Ethics for Turbulent Markets: The Human Context of Corporate Ethical
Decisions and Choices [Emerald Publishing, UK, March 2019]. [Monograph Chapters of Volumes I
and II will be distributed in class]

Supplementary (optional) Textbooks:

Baggett, David and Jerry L. Walls (2016), God and Cosmos: Moral Truth and Human Meaning, Oxford
University Press.

Clarke, Steve, Julian Savulescu, CAJ Coady, Alberto Giubilini, and Sagar Sanyal, (Eds.) (2016), The Ethics of
Human Enhancement: Understanding the Debate, Oxford University Press.

Covey, Stephen R. (2004), the 8th Habit: From Effectiveness to Greatness. New York: Free Press.

Das, Gurcharan (2012), The Difficulty of Being Good: On the Subtle Art of Dharma, Penguin Books.

Dhiman, Satinder and Joan Marques (Eds.) (2016), Spirituality and Sustainability: New Horizons and
Exemplary Approaches 1st edition. Springer.

6
Gor, Nitesh (2012), The Dharma of Capitalism: A Guide to Mindful Decision Making in the Business of Life,
UK: Kogan Page Ltd.

Mackey, John and Raj Sisodia (2014), Conscious Capitalism: Liberating the Heroic Spirit of Business, Boston,
MA: Harvard Business Review Press.

Mascarenhas, Oswald A. J. (2008), Responsible Marketing: Concepts, Theories, Models, Strategies and Cases,
North Richland Hills, Texas: Rival Publishing Company.

Mascarenhas, Oswald A. J. (2011), Business Transformation Strategies: Concepts, Theories, Models, Strategies
and Cases, New Delhi: India, Sage Publications.

Molthan-Hill, Petra ed. (2014), The Business Student’s Guide to Sustainable Management: Principles and
Practice, Greenleaf Publishing Ltd, UK.

Pattanaik, Devdutt (2013), Business Sutra: A Very Indian Approach to Management, New Delhi: Aleph Book
Company.

Rajan, Raghuram G. and Luigi Zingales (2003/2014), Saving Capitalism from the Capitalists: Unleashing the
Power of Financial Markets to Create Wealth and Spread Opportunity, Harper-Collins Publishers, New Delhi:
India.

Seidman, Dov (2007/2012), HOW: Why How We Do Anything Means Everything, Expanded Edition, New
Delhi: Wiley India Pvt. Ltd.

Senge, Peter M. (2006), The Fifth Discipline: The Art and Practice of the Learning Organization, Revised
edition, New York, Currency: Doubleday.

Zsolnai, László (ed) (2015), The Spiritual Dimension of Business Ethics and Sustainability Management,
Springer Cham Heidelberg, New York and London.

Suggested recent Journal Articles on Ethics of Business Strategies:

1. Amabile, Teresa M. and Steven J. Kramer (2007), “Inner Work Life: Understanding the Subtext of Business
Performance,” Harvard Business Review, (May), 72-83.
2. Anderson, James C., James A. Narus and Wouter van Rossum (2006), “Customer Value Propositions in Business
Markets,” Harvard Business Review, (March), 90-99.
3. Arruñada, Benito and Xosé H. Vázquez (2006), “When your Contract Manufacturer becomes your Competitor,”
Harvard Business Review, (September), 135-145.
4. Bazerman, Max H. and Dolly Chugh (2006), “Decisions without Binders,” Harvard Business Review (January),
88-97.
5. Beer, Michael and Nitin Nohria (2000), “Cracking the Code for Change,” Harvard Business Review (May-
June); see also HBR on Turnarounds, pp. 1-23.
6. Beer, Michael and Russell A. Eisenstat (2004), “How to have an Honest Conversation about your Business
Strategy,” Harvard Business Review (February), 82:2 (February), 82-89.
7. Bodrock, Phil (2005), “The Shakedown,” Harvard Business Review, (March), 31-43.
8. Bremmer, Ian (2005), “Managing Risk in an Unstable World,” Harvard Business Review, (June), 51-62.
9. Bradach, Jeffery L., Thomas J. Tierney and Nan Stone (2008), “Delivering on the Promise of Nonprofits,”
Harvard Business Review, (December), 88-97.
10. Buckingham, Marcus (2005), “What Great Managers do,” Harvard Business Review, (March), 70-80.
11. Charan, Ram (2006), “Conquering a Culture of Indecision,” Harvard Business Review (January), 108-117.
12. Camillus, John C. (2008), “Strategy as a Wicked Problem,” Harvard Business Review, (May), 98-106.
13. Donaldson, Thomas (2012), “The Epistemic Fault Line in Corporate Governance,” Academy of Management
Review, 37:2, 256-271.

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14. Fehr, Ryan, Kai Chi (Sam) Yam, and Carolyn Dang (2015), “Moralized Leadership: The Construction and
Consequences of Ethical Leadership Perceptions, Academy of Management Review, 40:2,182-209.
15. Fleming, John H., Curt Coffman and James K. Harter (2005), “Manage Your Human Sigma,” Harvard Business
Review, (July-August), 106-114.
16. Garvin, David A. (2006), “All the Wrong Moves,” Harvard Business Review (January), 18-32.
17. Garvin, David A. Michael A. Roberto (2005), “Change Through Persuasion,” Harvard Business Review
(February), 104-112.
18. Godemann, J., C. Herzig and J. Moon (2011), “Approaches to Changing the Curriculum,” Paper presented at
the ISIBS Workshop: Session II, University of Nottingham, UK, October, pp. 20-21.
19. Gottfredson, Mark and Keith Aspinall (2005), “Innovation versus Complexity: What is too much of a Good
Thing?” Harvard Business Review, (November), 62-73.
20. Guiltinan, Joseph P. and Gregory T. Gundlach (1996), "Aggressive and Predatory Pricing," Journal of
Marketing 60:3 (July), 87-102.
21. Hammond, John S., Ralph L. Keeney and Howard Raiffa (2006), “The Hidden Traps in Decision Making,”
Harvard Business Review (January), 118-126.
22. Herzberg, Frederick (1998), “One More Time: How do you Motivate your Employees,” in Business Classics:
Fifteen Key Concepts for Managerial Success, Harvard Business School Publishing, pp. 42-53.
23. Iansiti, Marco and Roy Levien (2004), “Strategy as Ecology,” Harvard Business Review, (March), 69-78.
24. Jackman, Jay M. and Myra H. Strober (2003), “Fear of Feedback,” Harvard Business Review (April), 101-9.
25. Jones, Thomas M., Will Felps and Gregory A. Bigley (2007), “Ethical Theory and Stakeholder Related
Decisions: The Role of Stakeholder Culture,” Academy of Management Review, Vol. 32:1, 137-155.
26. Joni, Saj-nicole, A. (2004), “The Geography of Trust,” Harvard Business Review, (March), 82-89.
27. Kesavan, Anand, Oswald A. J. Mascarenhas, and Ram Kesavan (2009), “Government Bailouts, Financial Sector
Turnarounds, and Wicked Problems,” Journal of business, society and government, Midwest Business
Administration Association, 56-78.
28. Kesavan, Ram, Mascarenhas, Oswald A. J., Trevor Crick, Anand Kesavan,” (2009), “The Global Financial
Crisis as a Wicked Problem”Presented at the Business, Society and Government Consortium, Chicago, March
2009.
29. Kesavan, Anand, Oswald A. J. Mascarenhas, and Ram Kesavan (2010), “On Developing Sustainable Strategic
Policy for Financial Market Turnarounds,” 2010 MBAA Conference in Chicago, in the Business, Society and
Government Track.
30. Kesavan, Ram, Michael D. Bernacchi, and Oswald A. J. Mascarenhas (2013), “Word of Mouse: CSR
Communications and the Social Media,” International Management Review, 9:1, 59-67.
31. Lacayo Richard and Amanda Ripley (2003), “Persons of the Year: The Whistle Blowers,” Time, Cover Story,
December 30, 2002 - January 6, 2003, pp. 30-40.
32. Lavoisier, Cardozo, Nelia M. Afonso, A. N. F. Aranha, S. S. Egly, Oswald A. J. Mascarenhas, and R. S.
Robertson (1999), “The Ethics of Information Disclosure in HIV Disease and Cancer: A Study of Medical
Residents’ Attitudes. “Patient Education and Counseling, Elsevier, 36: 75-80.
33. Mascarenhas, Oswald A. J. (1990a), "An Empirical Methodology for the Ethical Assessment of Marketing
Phenomena such as Casino Gambling," Journal of the Academy of Marketing Science, 18 (Summer 1990),
209- 220.
34. Mascarenhas, Oswald A. J. (1990b), "Towards a Macromarketing Analysis of Buyer-Seller Value Exchanges
“Detroit Business Journal, 1:1, December 1989, 56-78.
35. Mascarenhas, Oswald A. J. (1991), "Spousal Ethical Justifications of Casino Gambling," Journal of Consumer
Affairs, 25:1, (Summer), 122-143.
36. Mascarenhas, Oswald A. J. (1995), "Exonerating Unethical Marketing Executive Behaviors: A Diagnostic
Approach," Journal of Marketing, 59:2 (April), 43-57.
37. Mascarenhas, Oswald A. J. (2019), “Legal, Ethical, Moral and Spiritual (LEMS) Challenges of Business
Management in the 21st Century,” Keynote Address at Annual Assembly sponsored by the Indo-German
Chamber of Commerce (IGCC), Friedrich Ebert Stiftung (FES) and XLRI, Indo-German Training Centre, Veer
Nariman Road, Churchgate, Mumbai.
38. Mascarenhas, Oswald A. J., Ram Kesavan, and Michael D. Bernacchi (2003a), “Co-Managing Online Privacy –
A Call for Joint Ownership.” The Journal of Consumer Marketing; 20:7, pp. 686-702.
39. Mascarenhas, Oswald A. J., Ram Kesavan, and Michael D. Bernacchi (2003b), “Ethics of Casino Gambling: A
Hofeldian Analysis,” Brown Bag Lecture to the Business School Faculty, University of Detroit Mercy, School
of Business Administration, Detroit, Michigan, April 14, 2003.

8
40. Mascarenhas, Oswald A. J., Jeanne David and Eugene Swinnerton (2003a), “Recent Corporate Accounting
Irregularities: A Distributive Justice Based Ethical Analysis” Proceedings of the American Academy of
Accounting and Finance, 10th Annual Meeting, Chicago, (December 10-13).
41. Mascarenhas, Oswald A. J., Jeanne David and Eugene Swinnerton (2003b), “An Ethical Analysis of
Accounting Frauds and Security Scams,” Brown Bag Lecture to the Business School Faculty, University of
Detroit Mercy, School of Business Administration, Detroit, Michigan, January 23.
42. Mascarenhas, Oswald A. J., David Jeanne, and Eugene Swinnerton (2004), “Recent Corporate Securities
Irregularities: A Distributive Justice-Based Ethical Analysis?” Proceedings, Midwest Finance Conference
(March 17-19; Chicago).
43. Mascarenhas, Oswald A. J., Ram Kesavan, and Michael D. Bernacchi (2005a), “Governmental and Corporate
Role in Diffusing Development Technologies: Ethical Macromarketing Perspectives,” The Journal of Nonprofit
and Public Sector Marketing, Volume 13: Nos. 1&2, 271-292.
44. Mascarenhas, Oswald A. J., Ram Kesavan, and Michael D. Bernacchi (2005b), “Progressive Reduction of
Economic Inequality as a Macromarketing Task: A Rejoinder,” The Journal of Nonprofit and Public Sector
Marketing, Volume 13: Nos. 1&2, 313-318.
45. Mascarenhas, Oswald A. J., Ram Kesavan, and Michael D. Bernacchi, (2005c) “Global Marketing of
Lifesaving Drugs: An Analogical Model,” The Journal of Consumer Marketing; 22:7, 404-411.
46. Mascarenhas, Oswald A. J., Lavoisier J Cardozo, Nelia M Afonso, Mohamed Siddique, Joel Steinberg,
Marybeth Lepczyk, and Anil NF Aranha (2006), “Hypothesized Predictors of Patient–Physician Trust and
Distrust in the Elderly: Implications for Health and Disease Management.” Clinical Interventions in Aging 1:
(2), 175-188.
47. Mascarenhas, Oswald A. J., Ram Kesavan and Michael D. Bernacchi (2008), “Buyer-Seller Information
Asymmetry: Challenges to Distributive and Corrective Justice,” Journal of Macromarketing 28:3, (January),
68-84.
48. Mascarenhas, Oswald A.J., Ram Kesavan, Anand Kesavan, and Michael Bernacchi (2009) “Ethics of
Turnaround Marketing Strategy: A Wicked Problem Approach,” Proceedings of The Marketing Management
Association, 2009; Editor: John Fraedrich.
49. Mascarenhas, Oswald A. J., Michael Bernacchi, Ram Kesavan” (2009), “Is Government Bail Out of the
Financial Markets a Quick-Fix Solution with Long-term Dire Consequences?”Presented at the MBAAI Annual
Meeting, Chicago, and March2009.
50. Mascarenhas, Oswald A.J., Ram Kesavan, and Michael Bernacchi (2010) “A Joint Advertiser-Viewer
Responsibility Paradigm,” Proceedings: NASMEI: (North American Society for Marketing Education in India),
December 23-24, 2010.
51. Mascarenhas, Oswald A. J., Ram Kesavan and Michael Bernacchi (2011), “The Ethics of Global Marketing: An
Evolutionary Approach.” Asian Forum on Business Education Journal, Vol. 5, Issue 10, 151-178.
52. Mascarenhas, Oswald A.J., Ram Kesavan and Michael D. Bernacchi (2012), “Is Trust a Cardinal Virtue?”
Presented at the DSI-2012 Annual General Meeting at San Francisco, USA, (November), DSI-2012
Proceedings.
53. Mascarenhas, Oswald A. J. (2013), “Ethical versus Moral Leadership: Challenges and Imperatives,”
Proceedings of the National Conference on Effective Leadership: Organizational Change Management,
(January), AIMIT, pp. 6-34.
54. Mascarenhas, Oswald A. J., Ram Kesavan and Michael D. Bernacchi (2013a), “Catalytic Social
Entrepreneurship to Eliminate Desperate Poverty: A Systems Approach,” International Journal of Management
Studies, Volume 20:1, (June).
55. Mascarenhas, Oswald A. J., Ram Kesavan and Michael D. Bernacchi (2013b), “Advertiser-Consumer Joint
Responsibility for Information Asymmetry Reduction,” Aloysian Journal of Management and Research, 1:1,
(June), AIMIT, 1-35.
56. Mascarenhas, Oswald A. (2014a), “Theory-Building versus Theory Testing Approaches to Joint Ethics
Collaborative Research,” Presented to Tata-Hitachi Executives, December 28, 2014.
57. Mascarenhas, Oswald A. (2014b), “Constructing Research Instrument for Measuring ‘Ethics for Corporate
Advantage’,” Presentation to Tata-Hitachi Executives, December 9, 2014.

9
58. Mascarenhas, Oswald A. (2014c), On Assurance of Learning in Managerial Ethics: Measurement and
Assessment of Learning,” Presentation to XLRI FPM Students, September 25, 2014, XLRI, Jamshedpur.
59. Mascarenhas, Oswald A. (2014d), On Assurance of Learning in Managerial Ethics: Applying Critical Thinking
and Critical Pedagogy,” Presentation to XLRI FPM Students, September 23, 2014, XLRI, Jamshedpur.
60. Mascarenhas, Oswald A. (2014e), “Critical Thinking and Critical Pedagogy,” Presentation to XLRI FPM
Students – September 20, 2014, XLRI, Jamshedpur.
61. Mascarenhas, Oswald A. (2014f), “Ethics for Corporate Strategic Advantage,” Module 01: Session 01:
XLRI/XLBang Ethics Conference, Hotel Atria, Bangalore, September 5.
62. Mascarenhas, Oswald A. (2014g), “Ethics of Capitalism for Corporate Advantage,” Module 02: XLRI/XLBang
Ethics Conference, September 5, 2014, The Atria Hotel, Bangalore.
63. Mascarenhas, Oswald A. (2015a), “Relevance of Business Ethics: Moving beyond Compliance to a Way of
Life, “Session 01: XLRI/XL Mumbai Second Ethics Conference, ITC Grand Central, Mumbai, April 17, 2015.
64. Mascarenhas, Oswald A. (2015b), “Shades of Gray: Failures of Ethics in Organizations, and Remediation
Points from Policy, Organization and Behavioral Angles,” Session 02: XLRI/XL Mumbai Second Ethics
Conference, ITC Grand Central, Mumbai, April 17, 2015.
65. Mascarenhas, Oswald A. (2015c), “Future of Corporate Ethics: Building an Implementable Framework for
Organizations through Corporate Entrepreneurship,” Session 05: XLRI/XL Mumbai Second Ethics Conference,
ITC Grand Central, Mumbai, April 17, 2015.
66. Mascarenhas, Oswald A. J., Doris D’Souza, and Anabel Benjamin Bara (2016), “Characterizing Organizational
Ergonomic Ethics Culture: An Exploratory Study,” Paper Presentation at Queensland University of Technology
(QUT), Garden Points Campus, Brisbane, Australia, December 7, 2016
67. Mascarenhas, Oswald A. J., Anabel Benjamin Bara, Jerome Cutinha, and Doris D’Souza (2016), “A Systems
Framework for Ethically Analyzing Good Versus Bad Corporations,” Paper Presentation at Griffith
University, Southbank, Brisbane, Australia, December 5-6, 2016
68. Doris D’Souza, Anabel Benjamin Bara, Jerome Cutinha, and Mascarenhas, Oswald A. J., (2016), “Empowering
Women for Employability through Community Development Programs: A system Approach to Poverty
Alleviation,” Paper Presentation at Griffith University, Southbank, Brisbane, Australia, December 5-6, 2016
69. Mascarenhas, Oswald A. J., Anabel Benjamin Bara, Doris D’Souza and Jerome Cutinha (2016), “An Ethics
Framework for Integrated Global Sustainability Development (IGSD) via Cosmic Spirituality,” Paper
Presentation at Griffith University, Southbank, Brisbane, Australia, December 5-6, 2016
70. Mascarenhas, Oswald A. (2016a), “Ethical Leadership: Public Health Management in India,” Industry Training
Workshop, Public Health Management, India, January 11, 2016 International Centre, XLRI.
71. Mascarenhas, Oswald A. (2016b), “Ethics of E-Waste Management: An Inputs, Process, and Output
Approach,” National Seminar on E-Waste, January 13-15, FACES, XLRI [See also Management and Labour
Studies, Volume 41, Number 1, February, pp. 1-18.
72. Mascarenhas, Oswald A. J., Rowena Wright, and Rajani Suresh (2017a), “Exploring MAFI potential as a
multidisciplinary research and Integrated business management paradigm,” Aloysius Journal of Management
and Research, 5 (1), 30-57, ISSN: 2321-8797.
73. Mascarenhas, Oswald A. J., Rowena Wright, and Rajani Suresh (2017b), “Multidisciplinary business Research -
The New Driver of Business Innovation,” Aloysius Journal of Management and Research, 5 (1), 1-13, ISSN:
2321-8797.
74. Mascarenhas, Oswald A. J., R Balaraju, and Rayan D’Souza (2018), “Moral Judgment on Demonetization:
Forward and Backward Moral Justification Processes,” Aloysius Journal of Management and Research, 6 (1),
1-11, ISSN: 2321-8797.
75. Mascarenhas, Oswald A. J., Doris D’Souza, and Nelson D’Silva (2018), “Towards a Theology of Work based
on the Bible and Social Teachings of the Church,” Chapter in the book Perspectives on Neoliberalism, Labour
and Globalization in India Essays in Honour of Lalit K. Deshpande, Edited by K.R. Shyam Sundar, Palgrave
Macmillan, Singapore, pp. 145-174.
76. Mascarenhas, Oswald (2018). Ignatian Spirituality for Redesigning Human Resources Management as Human
Dignity Empowerment,” Ignis, 47(4), pp. 39-56, Anand, Gujarat, India: Ignatian Spirituality in South Asia,
Gujarat Sahitya Prakash Society.
77. Mascarenhas, Oswald, Nelson D’Silva and Raja Ratna Reddy (2019), “Ignatian Spirituality of Seeking and
Finding God in All Things for Restoring Human Dignity, Ecological Sanctity and Cosmic Sustainability,” Paper
Presented at Global Jesuit Business Ethics Conference, July 11-13, Santa Clara University, Silicon Valley,
California, pp. 1-18.
78. O’Brien, Louise (2004), “Eliot Spitzer: How to Restore the Fiduciary Relationship,” The HBR Interview,
Harvard Business Review (May), 70-78.
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79. Porter, Michael E. and Mark R. Kramer (2006), “Strategy and Society: The Link between Competitive
Advantage and Corporate Social Responsibility,” Harvard Business Review, (December), 78-92.
80. Sawhney, Mohanbir and Jeff Zabin (2002), “Managing and Measuring Relational Equity in the Network
Economy,” Journal of the Academy of Marketing Science, 30: (Special Issue: Fall), 313-32).
81. Schoemaker, Paul J. H. and Robert E. Gunther (2006), “The Wisdom of Deliberate Mistakes,” Harvard
Business Review, (June), 108-116.
82. Silverstein, Michael J. and Neil Fiske (2003), “Luxury for the Masses,” Harvard Business Review (April), 48-
58.
83. Sirdeshmukh, Deepak, Jagdip Singh, and Barry Sabol (2002), “Consumer Trust, Value, and Loyalty in
Relational Exchanges,” Journal of Marketing, 66 (January), 15-37.
84. Sull, Donald N. and Charles Spinosa (2007), “Promised-Based Management: The Essence of Execution,”
Harvard Business Review, (April), 78-86.
85. Van Buren Mark E. and Todd Safferstone (2009), “The Quick Wins Paradox,” Harvard Business Review,
(January), 54-61.
86. Wagner, Stephen and Lee Dittmar (2006), “The Unexpected Benefits of Sarbanes-Oxley,” Harvard Business
Review (April), 133-140.
87. Weiss, Jeff and Jonathan Hughes (2005), “Want Collaboration? Accept – and actively Manage Conflict,”
Harvard Business Review, (March), 92-101.

11
 Appendix 1:
Managerial Ethics: Contemporary Challenges and Imperatives
Course Structure & Schedule: Sessions and Content

Part Sub-Part Chapter and Topic Session Day/Time

Prologue, Syllabus; 1 Monday, October 21,
Chapter 1: Characterizing Market Turbulence 2019
Module One: Today as a Source of Market Opportunity
Current General Chapter 2: The Domain and Context of 1 Monday, October 21,
Market Challenges Corporate Ethics - Introducing Concepts and 2019
and Imperatives of Directions.
Corporate Ethics Chapter 3: A Systems-Thinking Approach to 2 Wednesday, October
Understand the Challenge of Corporate Ethics 23, 2019
in the Turbulent Markets of Today.
Part One: Chapter 4: The Success of Free Enterprise 3 Friday, October 25,
Capitalist System (FECS) when Designed and 2019
Market Deployed Rightly.
Context of Chapter 5: The Destruction of Free Enterprise 4 Monday October 28,
Corporate Capitalist System when Infected by Fraud, 2019
Corruption and Bribery.
Executive Chapter 6: The Turbulent Market of Modern 5 Monday, November
Ethics (CEE) Module Two: Debt-Overleveraged and Promoter Dominated 4, 2019
Current Specific Corporation.
Market Challenges Chapter 7: Artificial Intelligence and the 5 Monday, November
and Imperatives of Emergent Turbulent Markets - New Challenges 4, 2019
Corporate Ethics to Corporate Ethics Today
Chapter 8: The Ethics of Reinventing the 6 Wednesday,
Morally Embattled Corporation November 6, 2019

Module Three: Chapter 9: The Ethics of Dignity of the 7 Friday, November 8,

General Ethical Human Person 2019
and Moral Theories Chapter 10: The Ethics of Executive Cardinal 8 Monday, November
Part Two: and Principles to Virtues 11, 2019
Chapter 11: The Ethics of Executive Trusting 8 Monday, November
The Moral Respond to
Current Market Relations for Building Corporate Communities 11, 2019
Response of Challenges and Chapter 12: The Ethics of Corporate Ethical 9 Monday, November
CEE to Imperatives and Moral Charismatic Leadership 11, 2019
Current Module Four: Chapter 13: The Ethics of Corporate Critical 10 Friday, November 15,
Specific Ethical and Thinking for Corporate Effectiveness 2019
Market Moral Theories, Chapter 14: The Ethics of Corporate 11 Monday, November
Challenges Rules and Stakeholder Rights and Duties 18, 2019
and Standards to Chapter 15: The Ethics of Corporate Moral 11 Friday, November 22,
Respond to Reasoning, Moral Judgment, and Moral 2019
Imperatives Current Market Justification
Challenges and Chapter 16: The Theory of Corporate Moral 12 Monday, November
Imperatives Responsibility, as individuals and as 25, 2019
corporations.
The Ethics of Corporate Legal, Ethical, Moral
and Spiritual (LEMS) Responsibility
Group Presentation of First and Second 13 Friday, November 29,
2019
Take Home Assignment*
* Session 13 is student-group presentations on the First & Second Take-Home Assignment based on Chapters 1-16 and
Sessions 1-12.

12
 Appendix II: AOL Measurement Instrument based on AOL1 to AOL7
In order to reduce the “halo Effects” of desirability, all response sheets would be given to us
via respective class representatives (CRs) without any name or registration identity and in the form
of 8 x 7 matrix representing learning goals and outcomes achieved using AOL1 to AOL7. In the
matrix instrument that follows, please indicate ONE number between 0 (= no learning) and ten (=
maximum learning) that represents your considered objective perception of learning goals or outcomes
for each cell.

Exhibit 1: AOL Assessment Instrument: Managerial Ethics, XLRI, 2019

Learning Operational AOL1 AOL2 AOL3 AOL4 AOL5 AOL6 AOL7
Goals Definition Studies a Studies a Studies a Studies a Studies a Studies the Studies the
problem problem problem problem via problem problem by problem by
applying applying applying 10 moral from Rules framing and framing and
11 Laws new Laws Archetypes judgments of addressing at addressing at
of of Systems of Systems of forward deontological least 5 ethical least 5 ethical
Systems Thinking Thinking and reverse , teleological and moral and moral
Thinking you justification. and questions questions
formulated distributive based on based on moral
justice moral assessment
reasoning. using justice
rules.
Communi- Ability to effectively [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
cation listen, inform,
persuade through
this medium
Stake-holder Ability to understand [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
Sensitivity and factor in the
perspectives of all
persons, groups and
organizations
Global Pers- Ability to analyze [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
pective business problems
from a global
perspective
Decision Ability to generate [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
Making alternative solutions
to a problem and
then take an
integrated approach
to seek an optimum
solution
Quest for Ability to raise the [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
Excellence bar in quest for
higher standards
Functional Ability to effectively [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
Knowledge identify and apply
conceptual
frameworks while
dealing with business
problems
Learning The kind of integrity [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
Outcome 1: between self and
Behavioral behavior under
“learner control
change in
conditions.”
“self”
Learning The kind of integrity [0-10] [0-10] [0-10] [0-10] [0-10] [0-10] [0-10]
Outcome 2: between self and
Behavioral behavior under
“project control
change in
conditions.”
“self”

13
 Chapter 01
Characterizing Market Turbulence Today as a Source of
Market Opportunity
Executive Summary

The stable and predictable agricultural, infrastructure, manufacturing and energy economies of
hard products have been followed by economies that offer softer products such as services,
information, knowledge, healthcare, digitization, networking, globalization, entertainment,
sustainability, and currently, wellbeing and happiness. Such soft market products are loaded with
buyer-seller information asymmetries that create market risk, market uncertainty, market chaos and
ambiguity – all of which are specific types of market turbulence. In this context, this Chapter
investigates the phenomena of turbulence, specifically environmental turbulence whose major subsets
are technological turbulence and market turbulence. We cite several recent geopolitical variables and
events that have aggravated market turbulence such as Chinese Economic invasion of global markets,
Global Climate Change, Brexit, international asylum-seeking migrations, Artificial Intelligence, and
Demonetization. We also define market turbulence as varied forms of buyer-seller information
asymmetries (BSIA) for which both marketers and consumers must appropriate joint responsibility.
Additionally, we focus on ethical and moral marketing responsibilities for reducing BSIA under each
type of turbulence.

Introduction
The stable and predictable agricultural, infrastructure and manufacturing economies of hard products
are long gone. They have been followed by other less stable and more turbulent economies that offer
softer products such as services, information, knowledge, healthcare, Internet and online business,
entertainment, and currently, sustainability. Additionally, the world of computers has brought us high-
speed computing, low-cost storing, high-speed distribution, digitization, networking, outsourcing and
globalization – all these are milder forms of market turbulence. Such soft market products are loaded
with buyer-seller information asymmetries that create market risk, market uncertainty, market chaos and
ambiguity – all of which are specific types of market turbulences and challenges that corporate executives
must confront and capitalize upon (See Collins & Hansen, 2011; Venkatesan, 2013).

This Chapter defines and investigates market turbulence as generated by geo-political variables such
as Chinese economic invasion, climate change, Brexit, civil wars that force international asylum-seeking
migrations, Artificial Intelligence and its threat to massive global unemployment, and explores specific
ethical and moral marketing responsibilities for reducing buyer-seller information asymmetries under
each. Managerial implications are that doing so in a timely and effective manner may unfold hitherto
untapped market, revenue and growth potential in turbulent markets that, in turn, can generate sustainable
competitive advantage (SCA) to one’s organization.

What is Market Turbulence?

In general, market turbulence mainly arises out of an unstable economic climate, constantly evolving
consumer needs and up-and-coming technology.i The primary driving force in this new marketplace is
the consumer while the driving factor is innovative technology. The world as we know it is undergoing a
change; customers demand products and services that are newer, imaginative, exciting, innovative and

1
saving on time and efforts, products with increased variety and availability, shorter lead-times and
increased differentiation at the same or lesser price!

From a marketing point of view, market turbulence is the rate of change in the composition of
customers and their preferences (Jaworski & Kohli, 1993). This rate of change is one critical element of
the environment that theoretically has an influence on the relationships embedded in market turbulence
(Dess & Beard, 1984).ii Market uncertainty shapes strategic choice and decision making (Child, 1972;
Duncan, 1972; Lawrence & Lorsch, 1967). Similarly, Sharfman and Dean (1991: 682) state that 'the
environment is those parts of the external information flow that the firm enacts through attention and
belief.' One logical extension is that environmental perceptions and beliefs shape culture and behavior
(Dutton & Jackson, 1987). Organizational memory is dependent on the conditions in which the firm
operates (Cyert & March, 1963; Levitt & March, 1988). Thompson (1967: 159) considered dealing with
uncertainty to be the 'essence of the administrative process.'

Accordingly, supply chains are likely to realize a positive influence of market turbulence on the
knowledge development-cycle time relationship given the dynamic nature of the behaviors involved in
KD. Indeed, applying the concept of requisite variety, (Ashby, 1956) suggests that, as the environment's
pace of change increases, a premium on developing knowledge emerges. Requisite variety means that
organizational entities, such as supply chains, must match the environment's complexity with their own
internal strategies and activities. A supply chain management skill at developing knowledge possesses a
greater arsenal of wisdom for overcoming the complexities created by rapid change than do other supply
chains.

Thus Market turbulence has a positive influence on the relationship between knowledge development
and cycle time performance (Hult, Ketchen, & Arrfelt, 2007). Further, as Aldrich (1979: 69) stresses, a
high level of turbulence ‘leads to externally induced changes ... that are obscure to administrators and
difficult to plan for.’ Weiss and Heide (1993) also note that rapid change in the marketplace can be
destructive and detrimental to already-existing cultural competencies (e.g., a culture of competitiveness)
that are deeply ingrained and embedded in the values and belief system of supply chain members. Thus,
while greater market turbulence increases the supply chain's knowledge development requirements
(Levinthal & March, 1981), greater turbulence in the marketplace also serves as a detriment to a culture
of competitiveness. Thus, Market turbulence has a negative influence on the relationship between a
culture of competitiveness and cycle time performance (Hult, Ketchen, & Arrfelt, 2007).

Tracking the Emergence of Economies, their market Turbulence and

Opportunity
Following this literature on market turbulence, Table 1.1 tracks ten emerging economies, each
in terms of its major industries, products, turbulence of market regulation, and corporate growth
opportunities that result from market turbulence. All entries in Table 1.1 are suggestive; some could be
added or deleted. Some economies overlap, and their precise origin and duration cannot be easily
determined. Each economy has its specific production, distribution and consumption processes and
technologies. Each economy is defined by its highest contribution to global GDP, global employment
and global buying power during its duration.

But in responding to these changes the pace, space, and impact of business education and
curriculum, business research method and methodologies, journals and books publications have been
either slow, unfocused and therefore, mostly irrelevant. That is, education industry response has been
primarily reactive than proactive, descriptive than creative. That is, at each stage of the ten economies,

2
education and universities have more followed the markets than create knowledge and skills that
determine and control markets as the original purpose of a university was.

[Table 1.1 about here]

Political regulation and watchdog control has been scarce and ineffective. Hence the problems of
fraud, corruption and bribery in almost every economy and the industries it has spawned. Hence global
problems of poverty, destitution and squalor continue to shame and embarrass us, world pandemics of
hunger, malnutrition and disease keep decimating millions every year, and problems of worker safety,
security and job-loss anxiety and households’ lack of space and privacy keep us haunting. During the
past few decades the only thing that is growing is corporate fraud, institutional corruption and organized
lobbying and bribery, money-laundering, cheating, deception, and racketeering, tax evasion and black
money – all these grow unabated and unchecked.

An economy is a market system with an environment. All products and services offered in that
market economy are systems. A business corporation or organization that offers such products and
services is a system. A market that absorbs these products and services is a social or economic system.
Hence, fraud, corruption and bribery are system failures of bad human decisions and interventions.

Any of these systems could be at unrest or in a turbulent state at a given time. That is, these are
economic, market, business or environmental problems. Governments, politics, laws and legislatures,
economy, culture, religion, civilization, historical eras and epochs are systems in the world. When they
are at unrest, there are problems; they are turbulent markets; they can be growth and distribution
opportunities.

A business system at unrest or in turbulence, accordingly, may be unclear in its vision and mission,
its goals and objectives, its policies and procedures, in its strategies and tactics, and, hence, may fail to
realize expected goals and objectives. This is a business problem. This is the root cause of fraud and
corruption.

Current Market Turbulence and Economic Chaos

We are currently witnessing high turbulence in large and small corporations, and in large and small
market economies. Bigger companies, in particular, are failing more frequently and with gigantic losses.
Of the 20 largest U. S. bankruptcies in the two decades, 1985-2005, ten occurred in 2001-2002. During
the September-October 2008 collapse of the financial markets, about eighteen mega investment banks of
the world suffered a loss of a trillion dollars in market capitalization within the space of eleven months
(See New York Times, Thursday, September 17, 2008, A1). Most stock market indices and corporate
earnings have been erratic since the 2008 financial crisis. Even perennially successful companies are
finding it more difficult to deliver consistently superior returns. Companies like Disney, Ford, General
Motors, Daimler-Chrysler, Hewlett-Packard, Motorola, Nordstrom, and Sony – one time “built to last”
companies (Collins & Porras, 1997; Collins, 2001) – are performing just around the Dow Jones Industrial
Average (Hamel & Välikangas, 2003).

High CEO turnover in large corporations is becoming commonplace (e.g., Delphi, Ford, GM,
Hewlett-Packard, Nokia, Merrill Lynch, Gateway, and K-Mart). With imminent threats of junk bond
ratings, leveraged buyouts (LBO) or hostile takeovers, the Wall Street financial analysts and investor
sharks are exerting all-time high pressure on corporate executives to perform. The big global promoter
investors now own and control over 70 percent of the stock markets of the world, and have, accordingly,
penetrated corporate boardrooms and started exerting undue pressure on CEO’s to perform. Corporate

3
boards and shareholders are increasingly demanding higher financial returns on investment (ROI), on
equity (ROE), on assets (ROA), net worth (NW) and higher earnings per share (EPS) and price-earnings
(P/E) ratios. The corporation as it has existed for the last 125 years is an endangered species. We must
reinvent the corporation if we must survive and revive the corporate world (See The Economist, October
24, 2015 for lead articles on this subject). This is the challenge of corporate ethics (see Chapter 08).

Possibly yielding to such Wall Street pressures, corporations have been regularly indulging in unusual
business practices such as creative or aggressive accounting, creative cash flow reporting, earnings
management or income smoothing via overstating earnings and understating debt, and, in general,
fraudulent accounting and financial reporting. Under whatever name, these unusual activities are a
financial numbers game (Mulford & Comiskey, 2002) or financial shenanigans (Schilit, 2002) with a
singular ultimate objective – creating an altered impression of the firm’s business performance. Fortune
(2002) featured twenty five such large corporate accounting frauds and security scandals, a research
conducted during 2001 in conjunction with the School of Business, University of Chicago. Great
industrial icons such as Enron, World.com, Parmalat, and Hollinger International became among the least
trusted corporations, according to a study conducted by Harris Interactive and the New York Institute for
Reputation.

Also, early 2000 marked the beginning of some of the worst corporate security irregularities in
history. Rapidly rising stock prices and the market collapse that followed led corporate executives to
unusual activities and accounting manipulations that were both morally questionable and reprehensible, or
just outright violations of the law. Forbes (2002) listed another set of twenty five massive securities
irregularities among top management executives, involving a corporate haul of over $23 billion,
averaging to over $923 million per company and in excess of $257 million ill-gotten gains per top
executive.

Some of the largest scams recently uncovered were in the utility business. Several wholesale power
traders revealed that they participated in the so called “round trip” or “wash trading.” For instance, wash-
trading practices among some energy companies created false congestion and generated industry and
household perceptions of an energy shortage in the troubled California energy market in 2001-2002.
Some would even argue that this practice contributed to the bankruptcy of the two largest California
electric utilities and forced subsequent government support to keep power flowing there. The price of
electricity skyrocketed and, in the end, it was the consumers who had to pay the price for corporate
accounting and financial irregularities or frauds, and even their bailouts.

Recent Major Factors that Generated Market Turbulence

Several geo-political variables and global events can cause market turbulence in many subtle ways.
We investigate a few of such recent variables and events.

Chinese Invasion of Global Markets

In the past three decades or so, the world has witnessed an unexpected phenomenon. No one had
imagined that China would grow at such an unprecedented rate and take on the world by surprise. It
happened not through accident but through careful and deliberate planning and expansion of the Chinese
economy. The world has changed with remarkable speed. It did not expect that China would ever
surpass traditional giants like USA, UK and Japan. The Chinese economy has been growing at ten
percent and even over for the last thirty years. The law of compounding is very powerful indeed and it is
verified in China. If we look at the projection for 2050, various futurist agencies project that the Chinese
economy will be twice the size of the American economy, and the Indian economy will be almost the

4
same size as the American economy. Such projections might not be very accurate but at least they show
what financial analysts and macroeconomists think about the future of the world. Also, there was a report
from Peregrine (2002) stating that eventually China will have an economy larger than US. Initially,
Goldman Sachs had a projection for China to overtake US in 2027 but after the subprime crisis it was
changed to 2020. However, given the recent slowdown in the Chinese economy and the crisis of Yuan,
the projections have again been pushed back.

The most important political value for the Chinese is unity; it has maintained one Chinese nation, one
Chinese civilization for more than two millennia. In 1898, UK culled Honk Kong out of it that severed
China’s political unity for centuries until its sovereignty over Hong Kong was restored in 1997.
However, it was deemed necessary to have a separate set of rules for mainland China as well as for the
new recovered territory though it was later seen that it was just a formality.

China has developed high-speed railways-network so extensively that currently it is one of the largest
high-speed networks of trains in the world. China has also shown much progress in other transportation
sectors like airlines, buses, cars and ships. Meanwhile, Chinese exports are surging far exceeding imports;
its ships generally are fully loaded when they leave the ports of Shanghai while the ships are empty in
their return journey. Their ports are the most sophisticated ones in the world.

Manufacturing subsidies by the Chinese government have led to proliferation of every manufacturing
industry in China. Currently, almost every big brand does its assembly work in China to take the cost
advantage. This has almost wiped out the competing country’s factories and jobs. As Donald Trump said
"Thousands of factories have been stolen from our country," and he also added that hundreds of
thousands of jobs have been lost in this process. This raises the question of the end of the American
prosperity [Hartcher, 2017].

China was a socialist country with a majority of the population into agriculture. A few decades ago,
China was not considered as a threat to the traditional superpowers such as USA, UK, or Japan. In fact,
the indicators of human development and livelihood in China were so low that it was considered in the
category of Less Developed Countries (LDCs). In the period 1960-78, the annual growth rate of the GDP
was around 5.3% in China. This relatively slow growth, however, changed after the government
introduced new reforms in 1979 – China’s GDP growth started to rise at a much faster rate, sometimes
crossing into double digits. It was around 14.2% in 2007 which dropped to 9.6% after the recession. It is
still a very respectable figure hovering around 10.7% in 2010. [CIA, 2017]

With the rising growth rate, China’s global impact began to escalate - a phenomenon affecting the
lives of billions of people worldwide. The phenomenal scale of the impact of the economic invasion of
the Global Markets was intriguing in the beginning, and now begins to threaten the developed world. This
scale of things was something that inspired scholars to study this phenomenon. It unseated many
economies like Japan and UK and eventually US from top positions. This phenomenon began to change
the way people buy items, based out of cheap materials.

The country deployed means to understand that the world would need massive production capacity
and it could fulfill that need. The government initiates production subsidies so that Chinese products and
services enjoy competitive cost advantage. China soon resurrected from its phoenix ashes and is now
commanding world markets along several industrial (e.g., steel and steel alloys) and household (e.g.,
FMCG) product lines and brands. It has powers to hunt down satellites and has cache of artillery and
weapons that is rivaled only by the US. This mega entry into the world markets has caused some
significant market turbulence in the world. For instance, about 35% of the over 30,000 products and
brands retailed by Wal-Mart throughout the world are from China. Now everyone sees China as an Asian

5
tiger whose existence and growth are phenomenal. It is pulling almost half a million people out of poverty
every year - that is a big number in itself.iii

Global Climate Change and Policies

A major source of market turbulence is the looming issue of climate change and high levels of
pollution in the environment. Governments around the world are gradually beginning to understand the
need for innovative policies to save the environment and maintain it for future generations. All such
sustainability policies will affect the business world, corporations in particular, thus adding to corporate
market turbulence. In this context, the firms’ desire to outplay their competitors by competing in terms of
innovation and ‘clean and green’ products also serves as a driving force for turbulence in the goods and
services market around the world.

Corporate sustainability considers every dimension of business operation from supply chain to
marketing in environmental, ethical, economic, social and cultural spheres. It creates long term values for
all the involved stakeholders of that business activity such as employees, clients, owners, community,
consumers etc. It helps in developing strategies to build a company which adopts ethical and sustainable
practices to create a positive impact on the environment and society.

The Brundtland Commission's Report, Our Common Future, described sustainable development as
“development that meets the needs of the present without compromising the ability of future generations
to meet their own needs.”

The Paris Committee of Climate Change represented by 195 countries ended on December 12, 2015.
The participating countries agreed on the goal of keeping the increase in the global average temperature to
“well below 2oC above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5oC
above pre-industrial levels.” They will also pursue a goal of zero net carbon emissions – removing as
much greenhouse gas from the atmosphere as is being added to it by 2050. In all, 187 countries vowed to
make “intended nationally determined contributions” (INDCs). Their pledges are lodged with the
Secretariat of the UN Framework Convention on Climate Change (UNFCCC), which convened the Paris
talks. The main sticking points were deciding who should do what, and who should pay (Newsroom,
UNCC, 2015).

Most recently, USA backed out of the Paris Climate Change agreement with the help of its own
institutional body – Environmental Protection Agency (EPA). This entire situation has been analyzed by
legal bodies and since there is no legal binding, the UN is left powerless against the Trump administration
and its move.

Currently, firms face high levels of market or customer scrutiny and checks regarding the
environmental and social aspects of their operations. Even major investment funds across the globe have
added a social or environmental impact factor in their assessment of possible investment opportunities.

The UNFCCC, which dates from the 1992 Rio Earth Summit, calls on nations to “act in accordance
with their common but differentiated responsibilities.” The world’s biggest carbon emitters China
followed by USA will also be held to their differentiated responsibilities. The new agreement requires a
flow of $100 billion from the developed countries to developing nations by 2020 much of it earmarked
for meeting the climate change goals.

The UNFCCC framework also lays out how to ensure that countries are doing what they pledged to
do. It is typical that in a zero-sum game all players will want others to do more while they do less.

6
Having countries sign up only to what they think they can do made the Paris agreement possible, but
thereby, weak. For instance, the pledges from China and India to double the world’s wind and solar
capacity within 15 years will be great INDC once realized.

Currently India generates 71% of its electricity from coal. Its INDC makes no commitment to cut
total emissions; its pledge to install 100 Giga-watt (GW) of solar power capacity by 2022, up from just
5GW now, would require serious reforms to its energy sector that currently stretch credulity.

Meanwhile, the Paris Summit Agreement may inspire leaders of cities and companies to redouble
their ecology and sustainability efforts. Firms including Apple, Google and Unilever are taking steps
towards cutting their emissions by large amounts, as are some cities like Hong Kong, London and Rio de
Janeiro.

The planet earth is a shared common resource which we have borrowed from our future generations.
We therefore have no right to exploit the natural resources to meet our ever-increasing greed. Adopting
sustainable development is not something that has to be mandated through laws; it is the ethical choice
which each one of us should make. It is the right thing to do – an ethical call! It is the right thing to do
rightly – a moral summons! It is the right thing to do rightly for the right reasons – a spiritual quest!

Brexit and Global Market Turbulence

Brexit refers to Britain’s exit from the European Union. Britain has been trying to exit the European
Union since 1975, when the Referendum on the European Community (Common Market) took place on
5th of June 1975. About 67 percent of the votes were in favor of staying as a part of the European Union
(then European Economic Committee).

A referendum was held in UK on June 23, 2016 invoking the Article 50 of the Treaty of Lisbon.iv The
referendum turnout was 71.8%, out of which 51.9% voted to leave the EU while 48.1% voted to stay.
About 30 million people participated in the voting. England and Wales voted in favor of Leave while
Scotland and Northern Ireland voted in favor of Remain.

The move has triggered a lot of uncertainty in the global environment. In this scenario, the market
turbulence can be characterized objectively (determined by factors of political governance) as this is
essentially a political statement that the UK has made after its long association with the European Union.
This turbulent market can be considered evolutionary as this is a new step on part of the UK after a
thorough retrospective examination of its association with the EU in the past. Another fact that makes this
market turbulence challenging is that thus far there was no case of a nation actually deciding to leave the
EU. The other nations of the EU have accepted it as a prominent part of their identity and are satisfied
with this centralized approach of brotherhood. The United Kingdom, however, has pioneered the
movement towards building its own identity after a long relationship with the EU.

The impact of the Brexit shock is expected to continue thereafter for at least one generation to come.
After the announcement of Britain's exit from the European Union, the pound collapsed and lost a tenth of
its value against the dollar, as the markets acted irregularly and reacted to the market phenomenon of this
system. The political clashes were not simple. Prime Minister David Cameron, who supported the
"permanence" campaign, had to resign. A no-confidence vote was cast against Jeremy. A close fight was
on the cards, but still extremely few were prepared for a Brexit win. The prophecies, predictions and
analysis of all pundits and political commentators failed to anticipate the result.

7
Immigrant Populations and Global Refugee Crisis
The Geneva-based International Organization for Migration (IOM) estimates that by the end of 2015,
the death toll from refugees trying to reach Europe by the Mediterranean route may reach 30,000 –
making it by far the worst year on record – 10 times the death toll for the previous record year in 2014.
The scale of loss led to an emergency summit of European Union heads of government on April 23, 2015.
Most illegal border crossings to the EU by sea come from Syria, Eritrea, Afghanistan, Mali, Gambia,
Nigeria, Somalia, Palestine, and Senegal, and now, from Myanmar. Most seek asylum in Germany (had a
refugee per 1,000 population of 2.4 in 2014), Sweden (12.2), Italy (1.3), Switzerland (7.4), France (3.8),
Britain (2.0), Belgium (2.7) and Denmark (2.4), reported The Economist, (April 25, 2014, p. 20).
Hundreds of thousands of migrants – 275,000 in 2014 estimated by Italian authorities - who are lucky
enough to survive the journey to mainland Europe, land first on the so-called frontline states of Spain,
Italy, Malta and Greece, and from there, they travel on to other EU members.v

As Europe confronts a rapidly escalating migration crisis driven by war, persecution and poverty in
an arc of strife from West Africa to Afghanistan, even high-level European officials are beginning to
admit the obvious. This phenomenon that affects economic, labor, commodity and money markets of the
world, has provoked reactive strategies such as Brexit and severe economic sanctions, and thus affected
corporate choices and decisions. Corporate Ethics for Turbulent Markets should explore a human,
harmonizing and humanizing systems-solution to this massive pandemic phenomenon – a daunting
challenge to corporate political ethics and morals - seemingly, a case of International Population
Dumping!

The lives of millions of Syrian civilians hang in the balance as the Presidents of Russia and the USA
prepare to meet on the side lines of the G20 summit in Germany on 7 July 2017, to discuss counter-
terrorism initiatives and a political resolution to Syria’s war, said Amnesty International.vi “For civilians
in Syria decisions made by President Trump and President Putin are a matter of life and death. A
continuation of present policies would have disastrous consequences for the people of Syria, who have
endured unimaginable suffering for more than six years,” said Samah Hadid, Middle East Director of
Campaigns at Amnesty International. “The USA and Russia must publicly commit to protecting civilians
in Syria and to ending violations by their own forces as well as by the warring parties on the ground. Both
countries and their allies are responsible for the deaths and injuries of hundreds of thousands of men,
women and children. It is time to end the bloodshed.”

Migration is fundamentally the story of the human race from its origins to the present. Migration is an
integral aspect of life on this planet. People move to survive. They move in search of food. They move
away from danger and death. They move towards opportunities for life. Migration is tied to the human
spirit, which seeks adventure, pursues dreams, and finds reasons to hope even in the most adverse
circumstances. Such movement affects the communities migrants leave and the communities that receive
these migrants. This movement also impacts communities along the route of transit.

Globalization is frequently viewed in economic and environmental terms. Goods and services move
easily across regions and national boundaries. With this growing economic interdependence, some would
argue that it is only natural that people (labor) follow the capital, wherever that might take them.
Similarly, some argue that people should not have to move for jobs, but instead governments should
encourage capital to remain in the nation and should protect jobs for citizens. Global warming and
resource depletion have no boundaries. Some feel that these environmental issues cannot be addressed by
nations acting individually. Thus, they might argue that the movement of people around the globe
becomes the province of the world, not that of individual nations. Others believe that in order for
countries to protect their environment they need to restrict immigration.

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 The growing interdependence of economies regionally and globally is a good predictor that migration
will not be stagnant and that it will follow increasingly more complex patterns. Some might argue that
this trend is a positive one. Others might disagree and would urge the use of national resources to stem the
tide of globalization in order to protect the integrity of nation states, their boundaries, and their
economies. Some might posit that globalization is occurring in spite of nation-states, while others would
argue that globalization is the product of decisions and actions taken by nation-states. If changes in the
movement of goods and services mean the movement of people will also change, are leaders and policy
makers prepared to periodically re-assess their assumptions and theories in order for policy to keep pace
with shifting migration patterns?

This market turbulence of international immigrations raises several ethical and moral issues:

1. Does the rest of the world have an ethical and/or moral duty to welcome, shelter and help
international asylum-seeking immigrants (or refugees) seek some hope in life? If so, based on what
ethical and moral theories, and how could you enforce such a duty?
2. According to an old UN convention, refugees are the responsibility of the country they land, while
they can refuse shelter to the economic migrants. This may be neat theory. But in practice how does
one distinguish between refugees and economic migrants in the midst of massive crises, and how does
one discriminate between them on human grounds?
3. Sheltering the refugees and economic migrants cannot be justified or mandated by utilitarian and
deontological theories. But could you invoke the ethical theories of distributive justice and corrective
justice to safeguard the natural rights of refugees and economic migrants? How do you execute this
humanitarian move?
4. In the end, the ethical theories of virtue, especially that of compassion, can best defend the rights of
the migrants and the duties of the richer nations to accept and nurture them. Does this appeal to
you?
5. In a globalized and highly networked world, what would be a holistic and radical (i.e., strike at the
root causes) solution to resolve the refugee and economic migration problem in a humane, ethical
and moral way, and with what lasting effect?
6. How can the world take stock of the persecuted people of the world, and pre-emptively save them
from mass genocide?

Artificial Intelligence and Market Turbulence

Artificial intelligence, as the name suggests, is the intelligence displayed by computerized machines
in order to learn from experience, adjust to the inputs given, and perform human like tasks that display
intelligence. According to father of Artificial Intelligence, John McCarthy, it is the science and
engineering of making intelligent machines, especially intelligent computer programs. It is a way of
making a computer-controlled robot think and behave as intelligent humans do. Most AI examples like
self-driving cars, chess playing computers and others rely heavily on deep learning, machine thinking and
natural language processing. Using these advanced technologies, computers can be trained to perform
specific tasks by processing huge chunks of data and recognizing patterns present in them. Many
companies are using AI in order to increase their design, productivity, sales and market share. Robots are
being installed in factories for doing work. Driverless cars – which seemed to be a distant dream in the
past – have already got into our roads and expressways.

Artificial Intelligence or commonly known as AI can be defined as a branch of computer science

dealing with the simulation of intelligent behavior in computers or the capability of a machine to learn
and imitate intelligent human behavior.

Artificial intelligence (AI, also known as Machine Intelligence, MI) is the intelligence displayed
by machines, in contrast with the natural intelligence (NI) displayed by humans and other animals.

9
Colloquially, the term “artificial intelligence” is applied when a machine mimics “cognitive” functions
that humans associate with other human minds, such as “thinking,” “learning” and “problem solving.” In
fact, the term machine intelligence is used because a machine mimics the cognitive functions that humans
associate with human ability such as logical reasoning, learning and problem solving.

Although mostly people use artificial Intelligence and, robotics and automation interchangeably,
both of them are very different. While robotics and automation use sensors and manual programming for
its functioning, AI mostly – but not always – uses an algorithm by which it is able to learn a process on its
own. Artificial Intelligence is a much more advanced form of technology that might not require any form
of coding for its functioning and could be taught or trained to perform the specific functions as per
requirement.

The likes of Stephen Hawking, Elon Musk, Bill Gates, Steve Wozniak, and many other big names in
the field of technology have recently expressed concern about the risks posed by AI. Chatbots, Personal
assistants, Robo-advisors, Machine learning, Cognitive computing and so much more – these are major
versions of AI today. From voice recognition tools in our mobile devices to various self-driving cars,
artificial intelligence (AI) is progressing very rapidly.

The first AI program was created by Arthur Samuel to enable a computer to play Checkers in 1952.
This technology has leaped several light-years forward in the 65 years since with today’s sophisticated AI
bots are able to do just about anything from having fluent conversations with people to controlling
driverless cars. In fact, most online spaces are populated with AI bots that communicate with humans
through chat rooms without anyone being the wiser. Just last month, the humanoid robot Sophia,
developed by Hanson Robotics was given citizenship by Saudi Arabia. This development is a true
landmark of the coming of age of sophisticated, advanced Artificial Intelligence.

In the 1960s, US Department of Defense started research on training computers to mimic basic
human reasoning. In the 1970’s, the Defense Advances Research Projects Agency (DARPA) successfully
completed their street mapping projects. In the 1980s, Machine learning began to flourish. This period
was also marked by the commercial success of expert systems. This is a form of AI program that
stimulates the knowledge and analytical skills of human experts. In the late 1990s, AI started to be used
in the fields of data mining, logistics management, medical diagnosis etc. Advanced statistical learning
known as Deep Learning coupled with faster computers and large data processing to enable advances in
machine learning. The Era of 2000 saw the usage of AI in almost all fields. By the mid 2010s, machine
learning applications were used throughout the globe. This was no big surprise when IBM’s question
answering system, Watson, defeated two greatest jeopardy champions.

The year 2015 was marked as the landmark year for AI since the number of AI projects increased
rapidly. This was mainly due to an increase in the neural networks brought about by development in
research tools and datasets and advanced cloud computing structures. A neural network is made up of
interconnected units that process information between each unit.

About 200 years ago, the Industrial Revolution remolded our society completely. As of today, another
revolution is underway with further serious reaching consequences. Artificial Intelligence is totally going
to change the way we produce, develop, deliver and manufacture. Every major company is investing
heavily in AI-oriented technology. Not only repetitive tasks but many skilled jobs done by humans can be
replaced by computers in the near future. The McKinsey Global Institute has suggested that AI is
‘happening ten times faster and at 300 times the scale, or about 3000 times the impact of industrial
revolution. Not only routine work but also the knowledge work is now automated largely. Manufacturers
have begun to incorporate machine learning into their industrial equipment with a view to improve the
performance of production processes.

10
 By 2025, Artificial Intelligence is expected to spread in every walk of life. It has been predicted that
by 2040, artificial intelligence will become unstoppable and humans losing both faith and control and
being taken out of decision making processes. Machine learning capabilities have advanced so much in
these days that it is difficult now to determine the possible changes in future. There are speculations that
this AI is going to be the cause of third world war. The fear hovering over AI is in a similar vein to the
debate over nuclear power: it can be used for massive destruction. But it also has the ability to power
cities all over the globe. The technology in itself is not destructive; however, human tendency to design
technology in order to harm other humans is massively destructive.

Demonetization in India and Market Turbulence

It was the evening of 8 November, 2016 when Prime Minister Narendra Modi decided to surprise the
nation with an unscheduled live telecast. In store for a population of over a billion people was the
demonetization of existing Rs 500 and Rs 1000 notes to be effective from the midnight of the same day.
The demonetized currency was around 86% (Rs 15.4 trillion) of the total monetary base in a country that
by many estimates is close to 90% reliant on cash. Among the many reasons cited for the act, the most
quoted and harped was the weeding out of black money from the economy which would consequentially
uproot corruption. The immediate reactions varied from euphoria to paranoia as confusion reigned
supreme over the fate of the cash people possessed in the outlawed denominations.

The initial narrative on striking a death blow to the black money in India was followed by the power
of the move to address concerns of counterfeit currency which the people were told was running the
terrorist networks. The Governor of the Reserve Bank of India, Urjit Patel explained in a press conference
that one purpose of the action was to fight terrorism funded by counterfeit notes. The supply of Rs 500
and Rs 1,000 banknotes had increased by 76 percent and 109 percent, respectively, owing to forgery. Not
surprisingly, the RBI governor told that he was aware of the move since six months and that the printing
of the new notes had already begun.

The move was a lightning bolt delivered from clear skies and upheaval was definitely on the cards.
The move led to speculation, resentment, trade outflows, massive queues in banks and ATMs but even
worse was the hit taken by the unorganized sector, by the lower strata of the society not accustomed to
digital transactions or having the luxury of card payments. Small and Medium enterprises, daily wagers,
transportation, health facilities, groceries and everything that entailed the use of currency was severely
hit. It was a horrendous experience for people to wait in queues in the day and a permanent black spot on
the execution of the plan that people had to lose their lives in an attempt to manage their hard earned
money, solely due to a government decision. On a macroeconomic scale, the ramifications were huge and
are still unfolding.

Demonetization caused an economic and social upheaval like no other policy decision in recent times.
Market turbulence, in its most literal form was the consequence of this policy decision. Supply chains
were affected, inventories piled up, the automobile sales plummeted in the festive season, labor migrated
back to their home states for lack of payment by contractors. Real estate business slumped, stocks fell by
an average 6% the very next day as crores of wealth was wiped away in the day’s trade. For the direct
relation demonetization shared with the Indian economy, we have chosen the impact of demonetization
on the Indian economy as our unit of analysis.

In a study conducted by the All India Manufacturer’s Organization, a group representing over 3 lakh
MSME and large scale industries, within the first month of the announcement, employment fell by 34%
and revenues were down by 50%.vii The biggest hit was taken by small players in industries like textiles,

11
marble etc. and by export-oriented businesses. The reasons were attributable to staff absenteeism,
depreciation of rupee, zero cash inflows hampering the ability of the employer to pay the employees.

The cash shortage that erupted after the announcement was a testimony to the monumental failure of
the agencies in planning the execution of the policy. The daily limit for withdrawal of cash was soon set
at Rs 2000, while the only new denomination available was Rs 2000. There were cases aplenty where
after waiting in the queue for hours, one would get a single Rs 2000 note that all shops practically refused
to accept coz they could not provide balance change after a transaction. Most of the ATMs exhausted
their reserves in a few hours. Even three months after the announcement, a quarter of the ATMs were still
short of cash. The situation was much worse in the rural hinterlands where the ATM network is not robust
and where understaffed banks were overwhelmed with people queuing up for depositing old
denominations and withdrawing cash.

The decision also caused immense turbulence in all businesses related to weddings. It was the
wedding and festive season at the time of the demonetization. Caterers, wedding planners, decorators,
myriad garment shops and even the petty florists everyone struggled in the whirlpool of turbulence as the
Indian wedding function is built upon managing countless errands paid for largely in cash. There were
numerous instances of weddings being cancelled or people having to endure unimaginable hardships to
make the event possible. The government was taking knee jerk measures to reported incidents of public
outrage and humiliation but reactive decisions only added to the confusion regarding daily cash
withdrawal limits, documentation required and so on.

Transport sector was severely hit as gas filling stations and toll plazas refused to accept old
denominations despite the government directions for hospitals and some utility services to continue
accepting the old legal tender. Following demonetization, estimates put the number of trucks that were
stranded on highways and toll plazas at 400000. Logistics and supply chains drive industry and in with
stranded trucks the markets were soon reeling under huge supply demand deficit. Perishable goods worth
millions were lost as FMCG companies grappled with the induced turbulence in the market. There was no
way that businesses could have predicted the measure that was banking upon the element of surprise for
its effectiveness. Subsequently, the government announced that toll tax will not be collected until
December 2, 2016; but most of the damage had already been done.

Structure of Market Turbulence

Management literature often speaks of two types of turbulences that a firm must respond to
constantly: market turbulence and environmental turbulence. Strategic choice theorists have long
suggested that firms actively manage and control their strategy such that they can adapt to environmental
forces and remain competitive in the market. This stream of research places emphasis on a firm's ability
to cope with the direct challenges of competitive forces (Porter, 1991). In particular, the literature
suggests that market and technological environments are two profound forces influencing MNCs (e.g.,
Lee et al., 2008).

Several ethics models refer to the environment as a factor that impacts ethical decision making.
Morris et al. (1996) found that environmental turbulence had an impact on professional ethics. Higher
levels of turbulence were associated with stronger personal values, lower standards in terms of informal
norms and greater belief in the efficacy of ethical codes. Morris et al. (1996) also assert that
environmental turbulence has implications for codes of ethics. They posit that, under conditions of
environmental stability, codes are likely to be more applicable to the nature of typical ethical dilemmas or
expected ethical problems. Well-defined company codes can be a guide for behavior in non-turbulent
times; employees are able to rely on codes to assist them in their response to ethical issues. Turbulence,

12
on the other hand, can lead to uncertainty regarding ethical standards and increased variability in ethical
judgments as codes provide less of a guide in times of uncertainty. In their model, turbulence is
positioned as an exogenous variable. So, too, are personal variables. Both turbulence and personal
variables are posited to impact ethical perceptions.

A positive relationship between perceived environmental uncertainty and role conflict and role
ambiguity has been reported (Lysonski et al., 1988). Often, such role conflicts and ambiguities can lead to
ethical dilemmas and unethical behaviors (e.g. Carroll, 1992; Ferrell & Gresham, 1985). Indeed, most
uncertainties translate to ethical dilemmas (Dubinsky & Levy, 1985; Gifford & Norris, 1987). This is
particularly true as many marketers have little formal training regarding the management of ethical
problems (Mascarenhas, 1995). The above literature leads to the specification of the following
hypotheses: Ethics code awareness decreases as business turbulence increases. Ethics code usefulness
decreases as business turbulence increases (Chonko, Wotruba, & Loe, 2003, p. 239).

Relevance of Corporate Ethics under Market Turbulence Today

Market turbulence refers to the rate of change in customer preferences and competitive actions in a
host country (Cui et al., 2006; Lee et al., 2008). It determines how foreign firms interpret local market
information and knowledge generated from their major competitors and customers and then act on and
exploit any opportunities presented in such unpredictable environmental changes. In the presence of a
turbulent market environment, such as more intensive competition and more fluctuated demand, it is
important that the foreign firm can sense its own host market and take actions faster than its rival firms in
response to different and subtle changes in its local market (Grein, Craig, & Takada, 2001; Luo, 2001).
Longer delays in responding to host market conditions may cause the foreign firm to lose its local market
position (Grein, Craig, & Takada, 2001). As such, market responsiveness is a desirable strategy because it
requires the foreign firm to apply its existing knowledge to react to changing local market conditions
(Lee, Chen, & Lu, 2009). When market turbulence increases, the foreign firm is more likely to increase its
market responsiveness accordingly.

Similar to market turbulence, technological turbulence may call for equal attention to foreign firms
(Lee et al., 2008). Technological turbulence refers to the rate of change in new products and processes as
a result of proliferating technology in a given host country market (Jaworski & Kohli, 1993; Tushman &
Anderson, 1986). When the foreign firm faces a high level of volatility, change, and unpredictability
related to the technology of its host country, market responsiveness that emphasizes timely response to
local competitors and customers through the use of existing knowledge could be an attractive marketing
strategy (Lee, Chen, & Lu, 2009). Frequent changes in technology can make a firm's product obsolete
faster. However, by exploiting alternative markets for its existing products faster than its counterparts, the
foreign firm can extend its product life cycle to the untapped markets in its host country. Despite being
more reactive, this strategy provides a more cost-effective and speedy means for the foreign firm to
overcome the challenges associated with frequent updates of new technology in its local market.

Market Turbulence as Market Certainty, Risk, Uncertainty and Chaos

Market problems create market turbulence, and vice versa. Primary source of market turbulence are
market problems created by objective economic factors (e.g., uncontrollable world trade, globalization,
outsourcing, currency fluctuations, inflation, competition, over-regulation) and subjective personality and
behavioral factors (e.g., greed, currency manipulations, fraud, corruption, bribery, money-laundering,
chicanery, deception, racketeering, cartelization, price collusions, and the like).

13
 A problem is a “system at unrest” (Ackoff & Emery, 1972), and unrest (or turbulence) is caused by its
constituting variables and their interactive relationships. Any problem can be stated as P = f(X, Y), where
X is a vector of controllable variables for the firm, and Y is a corresponding vector of uncontrollable
variables for the firm in question. The set of uncontrollable variables defines one’s environment of
constraints and threats, regulation and overregulation, especially one’s competition. The set of one’s
controllable variables is one’s resources of skills and competencies, patents and technologies, core
products and services, core target markets and customer loyalties, and core suppliers and support systems.
Two sources of turbulence can be distinguished: a) ignorance about variables; b) ignorance about
relationships between variables. Hence, one way of characterizing market turbulence is presented in
Table 1.2.
[Table 1.2 about here]

Given this problem characterization, we can distinguish four states of market knowledge and
challenge:

• “Certainty” is when you know both controllable and uncontrollable variables and the relationships
between these variables – this situation generates “simple” solvable problems (e.g., costing, pricing,
purchasing, and ISO 9000 quality assessment in a deterministic world of agro-economic markets).
In the older worlds of agricultural and manufacturing industries, there was more certainty about
weather and seasons, natural and mineral resources, manufacturing processes and intended
outcomes, and hence, about produce and products, markets and demand.

• “Risk”: The world of “risk” arises when you know your controllable and uncontrollable variables,
but do not fully understand their interrelationships that clue and generate outcomes. This is the
world of “complex” problems where you know how to formulate problems but do not know their
solutions. That is, the solutions are stochastic in nature but with known or estimable probability
distributions. Hence, you experiment with different “solutions” and estimate the probability
distributions of their outcomes, calculate the tradeoffs of costs and benefits under each solution, and
act accordingly. This is the typical world of auto and life insurance markets, labor and recruitment
markets, health and healthcare markets.

• “Uncertainty” arises when you do not fully know or identify the controllable and uncontrollable
variables, but you can estimate their interrelationships in a given marketplace, and accordingly,
frame problem resolutions. This is the world of “unstructured” problems since the structuring
variables are unknown. That is, the problems themselves are stochastic in nature, often with
unknown probability distributions. For instance, in dealing with cancer we still do not know all the
controllable and uncontrollable variables, but keep trying out various experimental solutions such
as chemotherapy, implant radiation, platelet reinforcement, surgery and the like. In dealing with
recent financial crises and the collapse of world financial markets (say, September-October 2008),
we still do not know the exact variables that caused such disasters, but we try different rescue
solutions such as federal bailout, tax subsidies and havens, and forced corporate buyouts. Possibly
these financial debacles were man-made, but then we must do some serious soul-searching in terms
of our inherent vices of greed, avarice and jealousy.

• “Ambiguity”: Fourthly, “chaos” and “ambiguity” occur when we do not know the controllable and
uncontrollable variables in a given problem nor their interrelationships. These are often designated
as “wicked problems.” Here both the problems and their solutions are stochastic in nature with
unknown probability distributions. Typical examples are floods, tsunami, earthquakes, plagues,
epidemics, and other natural disasters. Most man-made problems of recession, collusion, oil and
drug cartels, mafia, terrorism, and wars probably belong to this category. Here we cannot
formulate the problems clearly and neither do we know the solutions. We have to “tame” the
problems by circumscribing them with narrower domains and boundaries before addressing them.

14
 Rittel and Webber (1973) were the first to introduce the notion of “wicked” in social problems as
opposed to “ordinary” problems. Most natural disasters (e.g., Tsunami, Katrina, Gustav, earthquakes) are
wicked problems on the geo-physical level. Some wicked problems are human-made such as labor
strikes, sabotage, vandalism, gangsterism, terrorism, 9/11, consumer boycotts, and corporate fraud. Some
socio-economic problems are also wicked in nature (e.g., recession, depression, inflation, unemployment,
organizational decline, massive layoffs, plant shutdowns, and personal or corporate bankruptcy). Some
wicked problems arise because of hyper growth (e.g., Wal-Mart still wanting to grow bigger and faster
despite saturated retail markets; Ford, GMC, Toyota and the other automakers still want to sell more
millions of vehicles when the current North American markets are saturated, polluted and recessionary).
Thus, one could link the wicked problem of terrorism to some nations seeking superpower over others;
the wicked problem of healthcare in the U. S. or India may be linked to the inordinate profit seeking goals
of healthcare systems such as designer brand hospitals and diagnostic systems, certain pharmaceutical
companies, health insurance companies, and in general, the cost of medical and legal educational
professions. Most public issues in the world today (e.g., poverty, income inequality, social inequality,
economic inequality, genocide, wars, and global climate change) stem from and create wicked problems
of avarice, greed and exploitation.

Currently the marketplace in any industry, country or at the global level is riddled with risk and
uncertainty, chaos and ambiguity. The world of certainty and clear-cut truth is either shrinking or
ignored. The world of market certainty has almost disappeared in the last few decades.

Please note that corporate “value ethics” is present and challenged in every quadrant; it gets
aggravated as we move from certainty to risk to uncertainty to ambiguity. One must respect and expect
the fact that in the field of business management we have certainty and uncertainty, risk and ambiguity, of
different levels of severity and consequences. Hence, many erstwhile assumptions and generalizations do
not hold any more, and our problems and markets need to be reformulated, our corporations and
institutions need to be reinvented, our governments and regulations need to be re-designed and
experimented to overcome this market confusion. In such a turbulent world, every value is not just black
and white, right or wrong, good or evil, just or unjust, fair or unfair, truth or falsehood, sin and grace.
There has arisen, instead, a large grey area where we encounter different shades of legal and illegal, truth
and untruth, good and evil, right or wrong, justice or injustice, ethical and unethical, moral and immoral
contexts and situations.

Corporate value ethics must confront these challenges and act accordingly. Organizational ethics
cultures must live with these risks and uncertainties, chaos and ambiguities of the marketplace and make
sense out of them. Creative and innovative companies thrive in this world of turbulence and chaos. Jim
Collins and Morten Hansen in their book Great by Choice (2011) studied Fortune 500 companies that did
just that and won market success and triumph.

All of us need the right moral change in the right direction, at the right time, and with the right
people. The corporations should lead this ethical and moral change. We have excellent examples of such
change documented by David Bollier (1997), Jim Collins (1998, 2002), Jim Collins and Morten Hansen
(2011), Stephen Covey (1989, 1994, 2004), Patrick Lencioni (1998), Thomas Peters, Robert Waterman
and Ian Jones (1982) and Thomas Peters and Nancy Austin (1985), to name a few.

This book on person-centered corporate ethics is all about the process of generating ethical and
moral change and convictions in corporations and their executives.

Market Turbulence as Buyer-Seller Information Asymmetry

15
 Based on Mascarenhas (1988) and Mascarenhas, Kesavan and Bernacchi (2008), we suggest that one
effective way of characterizing market turbulence from a moral responsibility perspective is by defining it
as buyer-seller information asymmetry (BSIA). BSIA is spread through all markets and in all countries.
In some markets it is so pronounced that it can trigger fraud, corruption, bribery and other money-
laundering scams. Understanding market turbulence as BSIA identifies all the stakeholders who create
BSIA and who often thrive in it. Understanding market turbulence as BSIA spreads marketing
responsibility across all actors – it is a joint moral responsibility for reducing BSIA between all buyers
and sellers, and thus for reducing harmful forms of market turbulence (see also Mascarenhas, Kesavan, &
Bernacchi, 2004, 2006).

Nature of Buyer-Seller Information Asymmetry

Information refers to “knowledge at a particular time of the values of different variables” that influence
decisions (Rasmusen, 1994: 11). Buyers and sellers in a marketplace have different amounts of relevant
information about the quality of the goods and services exchanged. The fact that consumers are not fully
aware or informed about the unobservable quality of certain products or services (particularly in relation
to their functionalities, costs, and benefits) illustrates the day-to-day reality of BSIA in the marketplace.

The difference of quality as perceived by the firm regarding its products and as perceived by the
prospective consumers is a measure of IA in relation to quality (Parker, 1995, p. 292). Certain products
and services belong to low IA environments, such as lawn care, dry cleaning, and package delivery (UPS,
FedEx), and customers can readily ascertain the quality underlying the service and make fairly objective
comparative judgments on competing services (Nayyar, 1993).

The critical importance of Information Asymmetry (IA) in general and Buyer-Seller Information
Asymmetry (BSIA) in particular was highlighted by the works of three Nobel Laureates in economics in
2001—George Akerlof (1970), Michael Spence (1973, 1974), and Joseph Stiglitz (1977, 2000). Akerlof
(1970), who coined the term IA, was the first to describe and model BSIA in relation to lemons (a bad
used car) and plums (a good used car). Akerlof (1970) proved that IA adversely affects both the volume
and quality of used cars traded in the market. Spence (1973, 1974) studied IA in relation to job markets
where highly skilled workers are often indistinguishable from low-skilled manual workers. Stiglitz (1977,
2000) investigated IA in the insurance market, where monopolistic insurance carriers can impose high
premiums, while those needing insurance coverage may not be prepared to reveal all their vulnerabilities
to carriers lest their premiums should escalate. Akerlof (1970), Spence (1973), and Stiglitz (1977) also
proved that under IA there would eventually be market failures. Hence, reduction of IA is not an option
but an economic and social obligation if markets should survive and expand around the globe. Thus, the
Federal Trade Commission (FTC) noted in its 1979 report, “Information remedies have the direct benefit
of improving the free flow of truthful commercial information. Informed consumer decisions then give
sellers an economic incentive to improve the quality and selection of their marketplace offerings” (p. 14).

Under Table 1.3, we trace and list the sources of Local, National and Global Spread of Market
Turbulence. Each source of market turbulence as BSIA can be traced to a) objective economic factors; b)
a mix of objective and subjective factors, and c) a set of subjective (man-made) factors.

[Table 1.3 about here]

Consider also some technology/capital intensive services that are low BSIA environments, such as the
travel industry, including airlines, railroads, buses, and dinner cruises. In general, customers are aware of
quality attributes such as prompt arrival and departure times, duration, ticketing and reservations, seating,
and the like such that customers can assess competitive offerings and make accurate

16
cost/quality/convenience trade-offs before undertaking purchase decisions.

When BSIA is high, however, in certain professional knowledge-intensive service industries (e.g.,
management consulting, legal counsel, health care service, and psychiatric counseling), the ability of the
customer to objectively assess competitive offerings is considerably reduced (Nayyar, 1993). In such
cases, high BSIA may constrain customers from identifying, differentiating, and patronizing superior
services (Lowendahl, 2000) and from undertaking accurate cost/quality exchanges (Nayyar & Templeton,
1994).

IA is a problem primarily for “experience” products (and services)—that is, products whose quality is
unobservable prior to purchase but is observable after purchase and use— but not for “search” products,
whose quality is observable prior to purchase (e.g., low-cost goods such as produce, poultry). In tangible
products, the problem of asymmetry occurs in relation to experience products whose quality is
unobservable. For products whose quality is not a mystery, the building of reputation, brand name,
cobranding, seeking a brand ally, or offering of warranties and guarantees may still prove useful in
reducing asymmetry (Rao & Ruckert, 1994).

As opposed to search goods and experience goods, economists distinguish a third class known as
“credence goods.” These are goods whose utility impact or quality level is difficult or impossible for the
consumers to ascertain. These are called “credence” goods because customers take it on faith (credere in
Latin = to believe) that the suppliers are honest and reliable and that they would give them what they need
and no more, no less. Credence characteristics are those product features that buyers normally evaluate
indirectly by referring to the seller’s credentials (e.g., brand equity, company reputation, and
manufacturer or product certification). In credence goods, therefore, buyers’ decision making is
dominated by concerns about credentials of seller/manufacturer or service provider. A major area of
communications in marketing relates to signaling unobservable quality of products and services via
advertising and promotions.

Quality signals can be transmitted in many forms, including brand name, price, warranty, and
advertising expenditures. The traditional view on price-quality signaling assumed that cognitively lazy
customers used cue signals (especially, price and brand name) as shortcuts or surrogates for assessing
quality. Currently, however, quality-sensitive, high-tech-sensitive, and well-informed consumers are
assumed “rational.” That is, they expect a firm to honor the implicit commitment conveyed through a
signal; if they fail to do so, then as rational consumers, they will not repurchase the product or service
(Kirmani & Rao, 2000). Under both views, BSIA reduction would empower buyers to assess quality
better via price and brand name signals. Additionally, under the second view, high-tech quality sensitive
buyers assume that marketers reduce BSIA of high-tech products and knowledge-intensive services via
signaling through premium prices, brand name, trademarks, and attractive warranties or guarantees.
Sellers of low-quality products using high-quality signals such as brand names and warranties will suffer
when consumers discovering low quality will claim warranties and refrain from repeat buying such
products (Kirmani & Rao, 2000).

The concept of IA is primarily based on the intangibility of products. As an initial rule: the more
intangible the firm’s outputs, their attributes and features, the greater the potential for BSIA (Norman,
1986). From this intangibility perspective, BSIA, par excellence, characterizes the world of aggressive
promotional marketing, deceptive advertising, creative accounting practices, and insider trading
irregularities.

Tangible products, however, despite their visibility, tactility, and physicality, can also have intangible
and, therefore, IA aspects. The more unobservable attributes (e.g., quality, brand equity) certain physical
products (e.g., computers, cars, DVD systems, and iPods) have, their manufacturers and sellers,

17
presumably, have great informational advantages. Product complexity, however, may often be irrelevant
as long as it produces the output that it is meant to produce. For instance, regardless of the complexity of
products such as aircrafts, computers, and cell phones, what matters is that prospective consumers
perceive they are safe, efficient, and cost effective. As long as these features are testable, verifiable, and
comparable across competing products, consumers can make informed judgments about their quality, and
hence, the scope of IA is reduced.

Furthermore, even though the outputs of manufacturing firms may have some intangible aspects (e.g.,
brand value, company reputation, psychological benefits of owning the products, and total customer
experience), yet their core outputs are visible, physical, testable, and hence tangibly comparable with
competing brands. Services are intangible and therefore require direct interaction between buyers and
sellers (Shostack, 1987). Furthermore, buyers may not be able to assess quality of services even after use,
and thus, they are prone to buyer–seller information disparities (Nayyar, 1990; Nayyar & Templeton,
1994).

Moreover, certain service industries (e.g., legal, medical, consulting) are both intangible and opaque,
with often chaotic characters (e.g., low security, low privacy, hacking, corporate fraud) that they generate
much IA. Under such circumstances, BSIA may be so high that customers will find it difficult to compare
competing services to determine their real benefits (Lowendahl, 2000) and to make accurate cost/quality
comparisons (Nayyar & Templeton, 1994). Strangely, this phenomenon can also reduce the ability of a
firm in differentiating its expert services from those of competitors (Mills, 1986) and thus not provide
competitive advantage.

BSIA is especially common among environments of service firms. For example, in knowledge-
intensive industries such as professional services (e.g., legal, health care, securities trading), BSIA is high
and customers and clients may not obtain accurate assessment of service quality and expertise, thereby
reducing their ability to make informed comparative judgments on competing services (Nayyar, 1990,
1993). Buyers may perceive similar levels of difficulty, especially when, in fact, quality differences
between service firms do exist (Nayyar & Templeton, 1994). Furthermore, for service providers, a mere
possessing of valuable, inimitable, and rare resources may not generate sustainable competitive
advantage, as the high IA environments may disable prospective customers from perceiving and
appraising those resources (Skaggs & Snow, 2004).

Summarizing our discussions thus far, we notice that some industries are low knowledge intensive
and others are high knowledge intensive. The former involve low levels of critical information, whereas
the latter involve high levels of critical information in buyer–seller interactions. Each of these industries
involves both tangible or intangible products and services. Among the tangible or intangible products and
services, there are areas where buyers may have more information than sellers, whereas in the highly
advanced domains of the same areas, sellers may have more critical information than buyers.
Accordingly, Table 1.4 is a 2 × 2 × 2 characterization of BSIA market domain as a potential source of
distributive injustice. Each cell includes a suggestive list of industries, areas in which consumers possess
more information than sellers do, and advance areas in which sellers command more critical information
than buyers do.
[Table 1.4 about here]

Concluding Remarks: Managerial Implications

Drawing on the resource-based view and theory from the organizational learning and information-
processing literatures, Hult, Ketchen and Arrfelt (2007) examined the influence of a culture of
competitiveness and knowledge development on supply chain performance in varied market turbulence

18
conditions. They found that synergies exist between a culture of competitiveness and knowledge
development: their interaction has a positive association with performance. In addition, based on
behavioral and contingency theories, they found that market turbulence moderates these relationships,
having a positive influence on the knowledge development-performance link and a negative influence on
the culture of competitiveness-performance link. Managers who are confident about the level of market
turbulence they will face can use this sense to decide whether to emphasize developing either a culture of
competitiveness or knowledge development in their supply chains. For those firms whose managers are
unlikely to be able to predict the degree of turbulence they will face over time, a focus on both a culture
of competitiveness and knowledge development is critical to ensuring success.

Market Turbulence as a Source of Corporate Growth

The tapestry of human behavior in the marketplace today is so turbulent, unpredictable, and chaotic,
yet so diverse, rich and global that it presents a rare ethical and moral opportunity and challenge to
corporate executive leadership to out-behave competition and create enduring value. In this process, lie
our greatness, success and our future. This is corporate ethics for corporate advantage. It is about HOW
of doing business executive leadership – the economic, social, ethical, moral and spiritual values we bring
with our business venture - and how thereby we impact the world. It targets moral reawakening among
business executives challenging them with moral issues/dilemma identification, ethical and moral
reasoning, ethical and moral deliberation, ethical and moral judgment, and ethical and moral justification
of business planning, decisions, actions and their consequences.

As understood and espoused throughout this book, we study corporate ethics and morals as lived,
experienced and shared dynamic systems of socially accepted, morally universal, values and principles,
standards and rules that can spiritually empower our life and society, our markets and our world. While
ethics deals with shared social values, and business ethics studies lived and shared values in buyer-seller
exchanges, corporate executive ethics centers on values and principles that power corporate decisions and
choices, strategies and implementation processes that have corporate-wide consequences, and industry-
nation-wide ramifications. Accordingly, this book explores and analyzes corporate decisions and choices,
especially in the context of current turbulent markets ridden with risk, uncertainty, chaos and ambiguity,
which when infested with buyer-seller information asymmetries, lead to corporate fraud, corruption, and
bribery and money-laundering.

Such socially violent market conditions constantly challenge corporate executives and business
practitioners, academicians and students of business today and this Book provides a systematic approach
to this challenge. It trains and empowers them to brave this turbulent yet opportunity-laden world with
sound moral principles, standards and rules drawn from major ethical theories of deontology, teleology,
distributive justice, corrective justice, ethics of human dignity, compassion, virtue, trust, critical thinking,
rights and duties, moral reasoning, judgment and justification, and ethics of corporate moral and social
responsibility.

Corporates these days lay major emphasis on corporate sustainability practices and reporting. They
tend to derive competitive advantage from these practices which would help them in gaining profitability
while they are helping society. If we take it one level above, countries as a whole are moving leaps and
bounds in the direction of environmental sustainability. Take, for example, the case of Germany.
Germany imports about two thirds of its energy from across the globe. Renewables and energy efficiency
help reduce imports significantly, thereby increasing Germany’s energy security. The energy transition
boosts green innovations, creates jobs, and helps Germany position itself as an exporter of green
technologies.

19
 For instance, in Germany, hundreds of energy cooperatives have come about - citizens come together
to collectively invest in energy renewables, increasingly, in energy efficiency. In addition to numerous
power plant projects, local power grids are also purchased from large grid operators so that communities
can have more control of their own grids. German regions and municipalities are discovering the
economic opportunities in renewables and energy efficiency, especially for communities that produce
more energy than they consume over a year.

Major Ethical Concerns

1. If current market turbulence is man-made, then is it ethical or unethical in origin, and why?
2. If current market turbulence is man-made, then is it moral or immoral in origin, and why?
3. When is market turbulence natural or driven by objective economic factors, and hence, good for
society and business? Explain.
4. As a corporate executive how can you combat market turbulence to save your company, and why?
5. On the contrary, is market turbulence good, and as a corporate executive how can you capitalize
market turbulence for the good of your company, and why?
6. How can state and national governments regulate or tame market turbulence?
7. How can international agencies (e.g., IBRD, WTO, UNCTAD, and UNIDO) control market
turbulence?
8. When can market turbulence be banned, and under what regulatory form, and why?

20
 Table 1.1: Tracking Emerging Economies, their Market Turbulence and
Growth Opportunity
Emerging Related Industries and Business Industry Geo-Political Market Business Growth
Economies Landscape Turbulence Opportunity

Agriculture Hunting, farming, mud and brick housing, timber Over-hunting; overgrazing, over- Reforestation; irrigation;
and roofing, boats and fishing, poultry, cattle, farming; over-fishing; land/soil development;
livestock, milk and dairy products, slaughter houses deforestation, drug and commodity river/water development;
and meats, , fruits and vegetables, flowers, gardens cartels; mafia; droughts and animal husbandry; dairy
and orchards, cotton and textiles, clothing and famine; river dams and villages cooperatives; credit cooperative
apparel, silk and linens, precious metals and jewelry. displacement; various protective unions; rural and urban
legislations education
Infra- Steam engines, railroads, motor roads, cement and Steam engine revolution (1784); Railroad networks, high speed
reinforced concrete for road and bridge Invention of electricity (1870); roads networks, shipping and
structure construction; shipping and docks; paper and Industrial revolution; harbor development;
printing, land mining, deep sea and deep land Coal-fired engine revolution; Engineering education in
mining, drilling and boring wells, offshore drilling; locomotive demand; manufacturing, civil
schools and colleges; land grant universities. over-mining; land-degradation; construction, metallurgy,
mining and minerals legislations. mining,
Manufac- Energy, oil and gas, electricity and electricity grids, Demand exceeds supply for energy, Energy, oil and gas pipelines;
cement, concrete, steel long products for commercial oil and gas, electricity, steel, autos, electricity grids and
turing construction, heavy earth movers, boats, trawlers, commercial vehicles, airports and switchyards; mechanization of
cargo and passenger ships, steel and steel products, aircraft, rail engines, cars, railway agriculture; Engineering
autos, buses, trucks, airports, aircraft, fertilizers, lines and railway stations; price education in automotive,
telegraph, typewriters, semiconductors, processors, and wage inflation; automation aeronautics, electronics, …
computers and mechanization of labor.
Knowledge Education via kindergartens, middle and high Centrally administered Mass education; control
schools, colleges and universities, curricula and universities, aided faculty, boards; degrees, teachers and
pedagogy, courses and disciplines, philosophy, controlling degrees via curricula, school discipline. Reward-
theology, sciences; specializations and departments, examinations and evaluations punishment based high
certificates, diplomas and degrees. extrinsic motivation.
Services Various market outlets: banks and banking, Market regulations; banking Courses in banking, insurance
insurance, healthcare, hospitals, hotels, motels, regulation; healthcare regulation; management, hotel
restaurants, processed foods, fast foods, storage, processed foods regulations; management, hospitality,
warehouses, travel, tourism, worship houses organized religions; law & order. theology
Information Information software technology (IT): storage, World information technology MIS, MCA, informatics,
retrieval. processing and distribution of data, facts, (1969); commercialization of the bioinformatics, Data Analytics,
figures, inferences, statistics, vital statistics, census, Internet (1993); data privacy Search Engines (Google);
news, media, telecommunication industries, mobile regulation, social security and pan centralization of IT-based
phones, smart phones, cards; new lifestyles, changes in distributed social welfare;
demographics, ergo-graphics, …
Online Internet, www, e-commerce, e-business, e- No strong regulation on online Online marketing, e-marketing,
marketing, e-advertising, e-recruiting, e-supplies businesses, online taxes, e-advertising, e-governance, e-
Businesses chain management, e-computing, e-companies transparency, cyber-security, auctions, e-courses, e-schools, e-
amazon.com, eBay; e-books, e-music, e-albums, e- hacking and counterfeiting, colleges, e-universities; e-
movies, e-films, e-banks, e-payments, smart cities, merchant and consumer cyber courses (Coursera, MOOCs)
… fraud
Healthcare Medical biometrics, diagnostic bio tests, prosthesis, No strong regulation to curb High quality medical schools
chemotherapy, implant radiation, emergency medical inflation, over-testing, and research, post graduate
Engineering medicine, ultrasound, MRI, FMRI, laser technology, expensive treatments to prolong courses; medical diagnostics
stents, pace makers, transplants, computerized life, pain management, euthanasia, and surgery products and
cancer and Alzheimer diagnostics, e-medicine, e- abortion; lack of national medical services; medical insurance
diagnostics, artificial intelligence plans that all can afford. services, medical tourism.
Entertain- Cricket Sports (IPL, 20 or 50 overs), football (ISL), Sports Club scandals and Major sports leagues, IPL, 20-
golf, basketball, hockey, tennis, squash, kabadi for regulations and vigilance; game- 20; ISL; TV talks shows; soap
ment men and women, movies, social media, Facebook, fixing; ball tampering; anabolic operas; comedy, drama,
What’sApp, comedy, TV, radio, … steroid-based pumping; theatre, movie houses, films;
dance schools, courses in sports
marketing, social media, …
Sustai- Carbon neutralizing, carbon-emissions reduction, Challenging regulation on Courses & schools on ecology,
pollution elimination, ecological friendly products, pollution controls, carbon sustainability, alternative
nability conservation, renewable energies, alternative energy emissions, ecology standards, energy sources such as solar
sources, satellite debris cleansing, planetary excessive use of non-renewable and wind energy; responsible
ecological ethics, cosmos-centric sustainability, energies; encouraging alternative production-distribution-
cosmic moral responsibility, partnership with nature energy sources consumption, CSR, responsible
luxury.

21
 Table 1.2: Characterizing the Structure of Market Turbulence
Do you know the Do you know
controllable (X) and The Relationships between X and Y?
Uncontrollable
Variables (Y) of
Yes No
your problem or
your firm?
The Domain of Market The Domain of Market
Certainty: Risk:
Simple Problems Complex Problems:
Yes
Agricultural economy Services economy
Manufacturing economy Information economy
Energy economy Globalization economy
Transportation economy Digitization economy

The Domain of Market The Domain of Market

Uncertainty;
Unstructured Problems:
No
Knowledge and skills economy
Healthcare economy
Entertainment economy
Happiness economy
Chaos & Ambiguity:
Wicked Problems:
Political economy
Monetary and fiscal economies
Defense economy
Terrorist economy
War economy

22
 Table 1.3: Sources of Local, National and Global Spread of Market
Turbulence
Domain of Sources of Market Turbulence
Market Objective Economic
Turbulence Factors
Unfulfilled human needs
Poverty/disease/illiteracy
Wasteful products and distribution
Local/state ecology damages
Local/State taxes
Shortages (e.g., drought-based)
Competition
Group/Local/
Labor Problems
State Gangs/Slums/Ethnic Ghettos
Under-development (rural)
Over-regulation, tolls, licenses
Overpopulation and control policies
Overcrowded cities and roads
Lack of healthcare & insurance
Economic and geographic crises
National Fiscal Policies
National Money-supply Policies
Under-education & unemployment
Trade Laws & Policies
FDI Policies
National Inflation/deflation
Regulation/deregulation
National mining/river rights
National Property rights
Multi-party politics
Uninformed/illiterate democracy
Weak International Institutions (e.g.,
UNO, IBRD, IMF, WHO, …);
International Trade Pacts (WTO)
Globalization factors and policies
Currency Fluctuations/ For-Ex crises
International/ Capital markets and policies
Commodity cartels
Global
Economic Immigrants
Student international immigration
Technology power dominance
Defense production
Nuclear energy production
Global warming & climate change
Objective/Subjective
Factors-Mix
Unfulfilled human wants
Welfare/education/housing problems
Force-changed consumer lifestyles
Local/state sustainability problems
Local/state tax avoidance loopholes
Under-supply of groceries/apparel
Cut-throat competition
Labor Unions
Ghost cities/ethnic enclaves
Over-development (urban)
Ambiguous laws and licenses
Over-population growth rates
Overcrowded houses and vehicles
Medical/healthcare inflation
Economic systems-breakdown
National Fiscal ambiguity
De-Monetization
National Unemployment problems
National Trade Deficits
NRI/FII manipulations
Stag-inflation, price-inflation
Over-regulation/deregulation
Inter-state river/mining dams
Privatization or over-nationalization
Political alliances and conflict
Under-informed democracy
Destabilized international structures
and institutions’
WTO/NAFTA/LAFTA ambiguity
Global outsourcing & mobility
Currency depreciation & shortages
Capital Markets forced constraints
Oil and drug cartels
Civil war immigrants/genocide
Student talent and brain drain
Technology/market superpowers
War production/economy
Nuclear weapons-proliferation
Global/cosmic unsustainability
23
Man-Made Subjective
Factors
Unfulfilled human desires/dreams
Increasing Social inequality
Wasteful conspicuous consumption
Local/state eco-degradation
Local/state tax evasion
Artificial market shortages
Market-entry barriers
Labor unrest, boycott, strikes
Gangsters, fundamentalism, Xenophobia
Anti-development (vote banks)
Fraud, corruption, bribery
Uncontrolled overpopulation
Overcrowded traffic and road-accidents
Health-abuse, eating/drinking addictions
Economic-geographic man-made crises
National Fiscal abuse/avoidance
Black Money & money-laundering
National school and college dropouts
National Excessive imports
Underground capital economy
Labor and wage-inflation
Overregulation non-compliance
National/state/local mining activists
Opposing Doctrine of Eminent Domain
Political mercenary crossovers
Paid or Moghul media interference
Fraudulent and corrupt international
institutional hierarchies;
WTO/NAFTA/LAFTA Violations
Globalization abuse and wars
Currency manipulation & hoarding
International capital market abuses
Drug, Oil and OPEC Mafia
Religious persecution immigrants
Student immigrant visa/jobs abuse
Technology/market embargoes/enclaves
Preemptive wars and destruction
Nuclear wars and global threats
Global/cosmic destabilizers
 Table 1.4: Buyer–Seller Information Asymmetry (BSIA)
[Source: Mascarenhas, Kesavan, and Bernacchi 2008, p. 72]

BSIA Nature of Buyers have Much More Sellers have More Critical
Situations Products/ Critical Information than Information than Buyers
Services Sellers
Home-grown products sold Commercial canned and processed
foods
Home-based services (e.g., Commercial fast foods and
Tangibles meals, sewing, laundry, mowing) restaurants
sold Formal and designer apparel
Garage or block sale Commercial dry cleaning and
winterization
Telemarketing and catalog-based
Low knowledge– buying
intensive
industries Domestic mail and package International mail and package
delivery delivery
Local newspapers National and international media
Local cultural traditions and Seasonal fashions and trendy goods
Intangibles fashion goods
Consumer feedback and Producer/distributor redress
complaints
Consumer social ecology Industrial ecology and EPA systems

Homemade brews and wines Commercial beer, wines, and spirits

Routine car maintenance Auto mechanics and technician
services services
Tangibles Consumer home remedies Commercial drugs and medicine
Owner selling home/estate Commercial homes and estates
Donating or selling one’s organs Commercial transplant organs and
High– prostheses
knowledge–
intensive Local gangs and gangsterism National and global terrorist systems
industries Consumer theft and fraud Merchant and corporate fraud
Home-based safety and Legal liability recovery services
Intangibles protection
Home-based medical diagnostics Hospital and medical diagnostics care
Home school educational Community colleges and universities
services

NOTE: EPA = Environmental Protection Agency

End Notes
i
Management literature describes turbulence as competitive intensity (Cui, Griffith, & Cavusgil, 2005; Hadjikhani & Johanson,
1996), high technology markets (Weiss & Heide, 1993), environmental uncertainty (DeSarbo, Di Benedetto, Song, & Sinha,
2005; Duncan, 1972), environmental changes (Kobrin, 1980), political instability (Kobrin, 1978), environmental jolts (Meyer,
1982), state-gate controls (Sethi & Iqbal, 2008), and technology- and market- based breakthrough innovations (Zhou, Yim, & Tse
2005).

ii
Various studies have linked environmental turbulence (normally distinguished as technological turbulence and/or market
turbulence), with market orientation (Atuahene-Gima, 1996; Jaworski, & Kohli, 1993; Kumar, Jones, Venkatesan, & Leone,
2011; Slater & Narver, 1994; Powpaka, 1998), product quality orientation (Lin & Germain, 2003), market responsiveness (Grein,
Craig, & Takada, 2001; Kobrin, 1982; Lee, 2010; Lee, Chen, & Lu, 2009; Luo, 2001), absorptive capacities (Lichtenthaler, 2009;

24
Zahra & George, 2002), organizational learning (March, 1991), organizational memory (Moorman & Miner, 1997), new product
introductions (Lee & Chen, 2009); new product outcomes (Lee, Chen, Kim, & Johnson, 2008), supply chain management (Hult,
Ketchen, & Arrfelt, 2007), risk management (Kritzman, 2010), knowledge development and cycle time performance (Hult,
Kretchen and Arrfelt 2007), and ethical compliance (Chonko, Wortruba, & Loe, 2003; Morris et al., 1996).

iii
References on Chinese Invasion of global markets may be found in: CIA, 2017, retrieved from:
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html on April 10, 2017; World Bank, 2017, retrieved from
https://data.worldbank.org/country/china; Retrieved from https://en.wikipedia.org/wiki/When_China_Rules_the_World in April,
2017; Other sources are: Culler, Jonathan (1981). The Pursuit of Signs: Semiotics, Literature, Deconstruction; Ansen, Dibell
(1999). Plot. Elements of Fiction Writing. Writer's Digest Books; The rise of China, Martin Jacques, TED, 2010; Hartcher, Peter
(2017, April 4). China brought it’s dominance…. Sydney Morning Herald.

iv
The origin of EU can be traced back to the formation of European Coal and Steel Community as a result of Treaty of Paris
(1951) and European Economic Community by Treaty of Rome (1957). These steps were followed to give shape to a ‘European
brotherhood’ as an aftermath of World War II to ensure a stronger, united front in case the future happened to give them a sense
of déjà vu. Over time EU became the central body to preside over not just economic but legal and other matters of the member
states and evolved into a center of power. The EU now stands as an economic and political partnership of 28 European countries.
It follows a single market strategy where the member states allow goods and people to move around as if it were a single entity. It
has its own currency – the euro, its own parliament and now sets regulations for an array of issues. Article 50, Treaty of Lisbon,
was drawn up as a part of the Treaty of Lisbon in 2009 after all the member states of the EU signed the agreement. This article is
the basis of the mechanism employed if a country decides to leave the EU. According to this article, the member state which
wants to withdraw its membership must notify the European Council and negotiate its terms of withdrawal, the time available for
which is a maximum of three years.

v For additional information on international asylum immigration crisis, see Dixit, Neha (2015, April 25-May 1). Europe’s Boat
People. The Economist, 9, 18-21; Cunningham, Finian (2015, April 24). EU Allies Pay for America’s Global Conflict and
Refugees. Global Truth, Saturday, May 9, 2015; “The Hard Journey: Europe’s Plan to Cope with Maritime refugees needs to go
further,” (2015, May 16), The Economist, 10; “Thanks to a Crackdown in Thailand, Thousands of Boat People are left out at
Sea,” (2015, May 16), The Economist, 19-20; “Rohingyas: Apartheid on the Andaman Sea,” (2015, June 13), The Economist, 14;
“The most persecuted People on Earth?” (2015, June 13), The Economist, 24; Cook, Martin (1996). Immigration and Ethics.
Markkula Center for Applied Ethics, 7(2); Bhutani, Suruchi. The Ethics of Immigration. Markkula Center for Applied Ethics;
Morton, Dr. Adam (2005-06). The Ethics of Immigration Law: Are Controls on Who Can Live & Work in Canada Justifiable?
Philosophers' Café.

vi
G20 summit: Trump-Putin meeting, a matter of life and death for the people of Syria. (2017, 7 July), 10:34 UTC, Syria,
Amnesty International. Retrieved from https://www.amnesty.org.nz/g20-summit-trump-putin-meeting-matter-life-and-death-
people-syria

vii
Demonetisation impact: AIMO report says note ban caused 35% job loss, 50% dip in revenue. (2017, January 9). Financial
Express, New Delhi. Retrieved from http://www.financialexpress.com/india-news/demonetisation-impact-aimo-report-says-note-
ban-caused-35-job-loss-50-dip-in-revenue/501424/

25
 Chapter 02
The Domain and Context of Corporate Ethics -
Introducing Concepts and Directions
Executive Summary
This Chapter covers basic concepts, ethical theories and moral paradigms of corporate ethics for identifying,
understanding and responding to the turbulent market challenges of today. The concept, nature and domain of
ethics, business ethics, managerial ethics, and corporate executive ethics are defined and differentiated for their
significance. The domain, scope and nature of related concepts such as legality, ethicality, morality and executive
spirituality are distinguished and developed. Among normative and descriptive ethical theories that we briefly
review and critique here are: teleology or utilitarianism, deontology or existentialism, distributive justice,
corrective justice, and ethics of malfeasance and beneficence. Other moral theories of ethics such as ethics of
human dignity, ethics of cardinal virtues, ethics of trusting relations, ethics of stakeholder rights and duties,
ethics of moral reasoning and judgment calls, ethics of executive and moral leadership, and ethics of social and
moral responsibility will be treated in Chapters nine to sixteen of Volume II. The thrust of this Book is positive:
despite our not very commendable track record in managing this planet and its resources, our basic questions
are: where are we now? What are we now? Where should we as corporations go, and why? What are the specific
positive mandates and metrics to corporate executives to reach that desired destiny? This Chapter explores
responses to these strategic corporate questions.

Introduction
A typical week in USA: 10 billion shares of America’s 500 largest listed corporations will have
changed hands in frenzied trading; Silicon Valley upstarts will have wittingly or inevitably forced the
downfall of many firms and could have already unsettled some major industries. The corporate
executives of these largest listed firms will have been swamped by a million incoming e-mails and a
torrent of instant data about customers and their rapidly changing values and lifestyles; in five days these
firms will have bought back over $11 billion of their own shares, not far off from what they invested a
week earlier; computers buy and dump shares in the stock markets within milliseconds. With one eye on
their smart phones and the other on their share prices, corporate bosses seem to be the enviable captains
of a hyperactive frenetic capitalism (See “Hyperactive, yet Passive,” The Economist, December 5, 2015,
p. 13).

If today is a typical day on planet Earth, writes David Orr (1990), a celebrated US environmentalist
we cited in the Prologue, we will lose 116 square miles of rainforest, or about an acre a second. We will
lose another 72 square miles to encroaching deserts, as a result of human mismanagement and
overpopulation. We will extinguish 40 to 100 species, and no one knows whether the number is closer to
40 or 100. Today the human population will increase by 250,000. And today we will add 2,700 tons of
chlorofluorocarbons to the atmosphere and 15 million tons of carbon. Tonight the Earth will be a little
hotter, its waters more acidic, and the fabric of life more threadbare.

The truth is that many things on which our future health and prosperity depend are in dire jeopardy:
climate stability, the resilience and productivity of natural systems, the beauty of the natural world, and
biological diversity. It is worth noting, says Orr (1990), that this is not the work of ignorant people. It is,
rather, largely the result of work by people with BAs, BScs, LLBs, MBAs, and PhDs. We must reverse
this trend if this planet should continue to be inhabitable for humankind. A treatise in business and
corporate ethics for turbulent markets of today should provide enough ecological sensitivity and moral
determination to reverse this trend.

1
 Laments Ciulla (2014), a much respected business ethics scholar in the USA: In the 30 years that I
have worked in business ethics, I have been delighted to see how the field grew and developed around the
world. Nonetheless, it pains me that the battle to teach ethics courses in business schools continues, not
with the business community but with business schools. Many of them are still not interested in investing
in business ethics faculty and courses because, despite scandals and the crash of the global financial
system, they still do not think that business ethics is important.

Toward a Strong Positive Approach to Corporate Ethics

Corporate fraud of the scale of Enron and WorldCom will not be eliminated by simply adding ethics
courses to the curriculum. Ethics is only valuable for those who are concerned with doing what is good
and just in the first place. In the absence of a sincere concern for truth and justice, ethics easily
degenerates into a superficial exercise in logical thinking. Technical solutions do not address fundamental
character flaws in human nature.

Given human failure of repeated scandals and systematic accounting and financial irregularities,
corporate fraud, corruption and money laundering, a recapture of a strong sense of business and corporate
ethics is urgently imperative in every business school curriculum and corporation conduct. The massive
consequences of unethical executive behavior and unethical business institutions cannot be ignored.
Recent consumer boycotts of hitherto industrial icons such as Levi-Strauss, Gap, Home Depot,
McDonald’s, Nike, Kmart, Wal-Mart, and Shell Oil are moral wake-up calls for all corporations and their
executives to renew their moral commitment to society.

Students want more than a brain behind the classroom podium, they want someone they can relate to
and share stories and hopes with. If students are entitled to more than a brain behind the podium, so, too,
are we committed to educating full human beings, and to educating minds and hearts that can change the
world?

The reality is that most college students of business, as well as other chosen disciplines, will become
economically privileged. With this privilege comes responsibility of working to bring equity and
opportunity to others. Working for equity and justice requires us to teach not only the technical aspects of
business, but also to give students the tools and experience they need to respond to circumstances of life
that go beyond the mere technical aspects. Our goal must be to have our students see the larger social
picture and understand what impact their decisions have on others. There is need for an education of
hearts.

How does such training play out in the life of a business professional? Leaders with educated hearts
make business decisions based not only on profit margins and their own private interest but also on the
needs of society and of all their employees.

We need strong corporate ethics at all levels. Luk Bouckaert (2015) forcefully argues that a spiritual
approach to business ethics is badly needed.i Without a sense of greater intrinsic motivation, business
ethics will be reduced to an instrument for reputation and risk management while any genuine moral
commitment will be lost. It seems obvious that business gurus, students, academics and managers benefit
so greatly from feeding at the trough of corporate management education that they rarely lift their snouts
far enough to see what working life is like in the call center, burger bar or the export processing zone, and
the slums of big Indian cities. Corporate ethics is an invitation to look up and see the rest of the world in
its stark reality.

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 According to the Ethics Resource Center, Washington DC, companies that are dedicated to doing the
right thing, have a written commitment to social responsibility, and act on it as a way of life, are
consistently more profitable than those who do not. If your company is ethical and socially responsible, it
automatically cannot make you rich and successful, but it will definitely pave the way for you to become
successful. Ethics + competence = success, is a winning equation. This is the equation of ethics for
corporate advantage. On the other hand, companies that continually attempt to test the edge of ethics
inevitably go over the edge. Shortcuts, deception, cheating and cutting corners test the edge of ethics and
never pay off in the long run. In the long term, people and organizations always lose when they live
without ethics and guiding moral principles.

In 2002, the U. S. Congress passed the Sarbanes-Oxley Act (popularly known as the SOX Act) to
address the increasing wave of corporate accounting and financial scandals. Section 406 of this Act
mandates that corporations should have a code of ethics for senior officers that must include standards
that promote: a) honest and ethical conduct, especially in handling actual or apparent conflicts of interests
between personal and professional relationships; b) that all public financial statements of corporations
should be full, fair, accurate, timely and understandable, and authenticated by the CEO and CFO of each
firm, who will be held responsible for errors, and c) compliance with applicable government rules and
regulations. Despite this Act, corporate scandals have not significantly abated in the USA or in the
Western developed world. A solid course in Business Ethics, Managerial Ethics, or Corporate Ethics for
all MBA students and corporate executives could reinforce the importance of and empower compliance to
the SOX Act of 2002.

Conceptual vs. Operational Definitions

In this chapter we define introductory concepts such as ethics, morality, business ethics, managerial
ethics, executive ethics and corporate ethics. In order to do that, we need a “definition of definition” to
start with. The term “definition” comes from two Latin words [the noun finis (= limit or end) and its verb
form finire (= to finish to terminate)]. Definitions define limits or boundaries within which you include
the domain of the concept or practice you are defining. There are two basic types of definitions:

• Conceptual definition: this tells what the thing you want to define IS; that is, it tells “what it is.” For
example, man is a rational animal; an animal is a sentient being; a business is a buyer-seller exchange;
the corporation is a listed company, and the like, are conceptual definitions.

• Operational definition: this tells you what the thing you intend to define DOES; it tells “what it does.”
For example: An man as an adult family member is a husband, father and a bread-winner; an animal
is a multi-legged mobile creature that hunts for its living; a business is where buyers and sellers meet to
exchange goods and services; a corporation serves the public as it lives by its capital and resources, and
the like, are operational definitions.

While we need both types of definitions, our emphasis is along operational definitions given, as we
shall see later, that the practical domain, nature and challenge of corporate ethics is to explore and
determine what “it does” to a corporation and its stakeholders. In order to critique and assess the current
troublesome business phenomena of home mortgage crisis in the USA, global financial crisis of 2008,
ecological degradation, lack of ethical sensitivity, and current questionable behaviors of free enterprise
capitalism everywhere in the world, we need a strong conceptual and theoretical, practical and imperative
background of ethics and morality. We need to understand relevant concepts, models and theories,
paradigms, strategies and cases of ethics and morality in general, and of business and corporate ethics, in
particular. In the following sections we define, distinguish and discuss, in their historic order of
appearance, four related notions of Corporate Ethics for Turbulent Markets: Spirituality, Morality,
Ethicality and Legality.

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What is Spirituality?
We start with the notion of spirituality. Numerous qualities are essential to leading effectively in an
age of market turbulence and uncertainty. Depending on which qualities one chooses to focus upon, a
leadership development offering could take on many different pedagogical frameworks, objectives, and
measures. Currently, a new wave of literature called the mindfulness practice of leadership is emerging.
Brendel et al. (2016) look specifically at mindfulness practice and tenets grounded in Buddhist tradition,
which often refers to an individual’s way of being – that cuts across all experience – as Dharma (Purser &
Milillo, 2015). Based off of an extensive literature review, which compared research and theory in the
fields of leadership development with mindfulness practice, Brendel et al. (2016) uncovered five personal
qualities that are consistent between them. These include: creativity, resilience, tolerance for ambiguity,
dealing with stress, and quelling anxiety. Collectively, the qualities described above comprise what they
call “leadership Dharma” (Brendel et al., 2016, p.1057).

Spirituality dawns with mankind. It is the bonding and binding spirit that held our first ancestors
together as pioneers on this planet. It is a primordial spiritual instinct of caring and sharing, giving and
forgiving, protecting one another from harm, and doing good to one another that characterized our proto-
genitors. As a phenomenon, accordingly, spirituality antedates morality, ethics or legality. It is beyond
legality, beyond ethics, beyond morals, beyond any ethical theory or paradigm. Spirituality is beyond any
exercise, regime, program, regimen, project, or enterprise. It is something internal and intrinsic to
humankind arising from being created in the “image and likeness of God.” It is a gift from God by which
we participate in the love and holiness of God. Spirituality is native, inborn in us, but also cultivated by
wisdom and virtue, renunciation (tyaga) and service (seva), integrity and holiness.

In the Indian tradition, spirituality is dharma. “Dharma is a code of conduct supported by the general
conscience of the people. It is not subjective in the sense that the conscience of the individual imposes it,
nor external in the sense that the law enforces it. Dharma does not force men into virtue, but trains them
for it. It is not a fixed code of mechanical rules, but a living spirit which grows and moves in response to
the development of society (Radhakrishnan, S. (1936). The Heart of Hinduism. Madras, p. 16-17).

Dharmashastra, laws of spirituality that is manifested in transcendence and immanence, are perhaps
the oldest form of Puranashastras, while Arthshastras, laws of economics and politics, subordinate to
dharmashastras, might have arisen thereafter (Gautam, 2016).ii These civilizations were known for their
spirituality more than for their morality, ethicality and legality.

Kautilya’s Arthashastra (c. 400 BC: Theory of administration or leadership) written as a guide for
Chandragupta I by his mentor Kautilya, who together were founders of the Maurya dynasty and built the
first empire of Bharatvarsha, contains (Book III: ii) some “categorical ‘imperatives” for good conduct of
the wise and kings: have vigilant control over six internal enemies of all humans (shadaripus): lust, anger,
greed, delusion, arrogance, and envy. These are negative approaches to spirituality. A disciplined king
gains true knowledge, becomes wise, and justly treats all his people. Thus he becomes a rajarshi – he is
an organic and intrinsic synthesis of the sage and the emperor. The greatest reward of such a rajarshi is
the loyalty and trust of his people.iii

The Spiritual Exercises of St. Ignatius of Loyola (1491-1556), founder of the Society of Jesus (aka
Jesuits), offer a structured process of spirituality. The Exercises enable the participant (usually called the
“exercitant”) “to conquer oneself and regulate one’s life without determining oneself through any
tendency that is disordered” (Fleming, 1991). The aim of the Exercises is to help the exercitant to attain
greater spiritual freedom. The Exercises do this by challenging the exercitant to look at one’s final end
(telos) and the behavior, habits, and values that lead one toward or away from that final good end.

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 One of the first exercises for spiritual meditation is the “Principle and Foundation” in which the
exercitant considers the overall purpose of human existence and one’s relationship with the transcendent
and immanent God. The Exercises challenge the exercitant to look beyond a narrowly self-interested set
of desires to the overarching reasons for one’s being. In this regard, the exercitant begins to reflect and
scrutinize one’s relationship with God and one’s proper responses to God’s creative designs. The
exercitant is encouraged to reflect upon the movements of the spirit or the soul by the divine Spirit and
the opposite, the devil.

Spirituality is something (like perception, positive attitude, belief, energy and power) deep down
within us that is freeing than constraining, enlightening than darkening, unraveling our conscience than
mere consciousness, seeking truth than untruth, striving for goodness than evil, pursuing grace than sin,
living hope than despair, clarifying than confusing, enriching than impoverishing, empowering than
enslaving, redeeming than burdening, understanding than judgmental, forgiving than condemning,
accepting than rejecting, embracing than resisting, loving than hating, giving than receiving, healing than
wounding, opening than closing, inclusive than exclusive, encouraging than discouraging, welcoming
than closing doors, arriving than departing, liberating than bounding, uniting than dividing, building
bridges than burning them, unleashing happiness than sadness - in short, humanizing than dehumanizing,
sanctifying than corrupting. It is the reign or kingdom of God within us than the kingdom of money,
power, status and popularity. If all of humanity lived this spiritual power within us, humanity would be
blessed with peace and prosperity, integrity and harmony, and heavenly joy and ecstasy.

Spirituality is axiomatic, self-evident and experiential; not provable or falsifiable; needs no proof,
theorem or algorithm. It is human; it is divine. It is immanence and transcendence conditioning our
individuality and sociality. Spirituality is the science of the heart. When we learn to connect with it we
will find that everything is there. Most amazingly we find out that we are all connected to each other
through our hearts. When we tune ourselves to the same frequency, we will be in the same vibratory plane
where we are all one. When we have less resistance in our hearts, we let go and become a part of that
journey. Then we become unified as one single entity, lost in the music. But what is the force behind this
unity? It is obviously love - having no prejudice towards others.

What is Morality?
We next proceed to a discussion on morality, as historically, morality has preceded ethics by centuries
and millennia and has helped to guide and formulate ethics. Morality could be also as old as humanity.
Our first ancestors had the same moral and social objectives as we have today: mutual existence, respect
and peace within a group or community.

Conceptually, morality (from the Latin moralitas) is the value-quality or character of a person,
family, group or society. It is rightness or wrongness, justice or injustice in action of a person, group, or
society. Morality constitutes principles of right or wrong, truth or falsehood, and fairness or unfairness in
human conduct. Thus, operationally defined, morality covers those beliefs and values, practices and
activities of people that are considered right or wrong, good or bad, truthful or untruthful, and fair or
unfair. Morality studies the rules and principles that govern these activities and the values that are
embedded in those activities (De George, 1999, p. 19).

Thus, morality is generally used to describe a sociological phenomenon, namely, the existence of a
society with rules and standards of social behavior. In this sense, moralities are best understood as special
forms of social control (such as corporate governance structures and rules) and special forms of practical
reasoning (Baier, 1965). These are operational definitions of morality. Thus, we speak of the morality of
the Greeks, the morality of the Romans, the morality of 20th century Americans, the morality of 21st

5
Century Asians, the morality of the free enterprise capitalist system, and the like. Accordingly, we do not
usually speak about the ethics of Greeks or the ethics of Romans or Americans or Indians.

As Lincoln Steffensiv aptly said, “morality is moral only when it is voluntary.” Many of us abide by
rules, laws and social sanctions primarily for fear of being caught violating them and publicly exposed
and punished for such violations. Such attitudes and behaviors encourage hypocrisy. Corporate morality
is moral strength when you follow organizational rules because of their intrinsic moral values of justice,
integrity, social legitimacy and common good.

Morality does not die out in the absence of laws and injunctions; it thrives. Moreover, racism and
discrimination based on gender, caste, creed, ethnicity and nationality, can become increasingly vicious
when it is cloaked in pseudo religion-based social and moral sanctions. Thus, morality is moral when it is
intrinsically motivated.

Corporate morality is moral when it is not driven just by law compliance or even by observance of a
code of ethical conduct. Both these behaviors, legal and ethical, should be intrinsically motivated by
one’s moral beliefs, principles and convictions, one’s moral and religious conscience, and by one’s sense
of duty and purpose in life.

What is Ethicality?
Etymologically, the word ethics comes from the Greek word “ethos” which means custom or
convention or disposition. Thus, ethics denotes customary, conventional or dispositional character or
fundamental values peculiar to a specific person, people, culture, organization, or movement.
Conceptually, ethics is a science of values, an art and philosophy of human and societal values.
Operationally, ethics is an action program for the management of values and value-generation systems in
an organization. Thus, from a conceptual viewpoint, ethics are norms, codes, conventions, mores and
other value-based principles of a person, group or society. In this sense, ethics is a theory or system or
science of moral values.

The Dictionary of Business (conceptually) defines ethics as the branch of philosophy that tries to
determine the good and right thing to do, and choices regarding right and wrong. There is a big difference
between what you have a right to do and what is right to do. The former is legal, the latter is moral.
There is a big difference between law compliance, ethical conformance, and moral engagement. The first
is being legal, the second, ethical, and the third, is being moral.

Operationally defined, ethics is the way we live, experience, generate and share values, and the way
we deliberate, judge, choose, act, or behave that reveals our underlying values, norms, principles and
standards. Defined thus, ethics is life, life at home, life in school and college, workplace and marketplace,
and especially in boardrooms and corporations, institutions and governments. Ethics should pervade all
things we think and do, be and become. Ethics is in planning and strategizing, in market and industry
scanning for new market niches, in designing new products and services, in crafting and testing new
products, in price and product bundling, in transportation and logistics, in distribution and retailing, in
pricing, displaying and promoting new brands. There should be strong ethics in customer relations
management (CRM), in employee relationships management (ERM), in supplier chain management
(SCM), in distribution partner relations management (PRM), and ethics in regulation and compliance
management. The more ethical codes and moral principles define and humanize the corporation or
institution, the better are the long-term prospects and sustainable competitive advantage (SCA).

On the other hand, ethics is also derived from the Greek word “ethikos” that generally refers to the

6
rules and norms of specific kinds of conduct or the code of conduct for specialized groups. Thus, we
speak about ethics of doctors, ethics of lawyers, ethics of engineers, ethics of the nursing profession,
ethics of commerce, ethics of the accounting profession, ethics of business executives, ethics of corporate
executives, and so on, rather than morality of doctors, morality of lawyers or accountants or corporate
executives (Boatright, 1993/2003, p. 22-23).

What is Legality?
Perhaps the most known and studied concept and paradigm, legality postdates spirituality, morality
and ethicality. Law, legislature, judicature, and executive law and order systems reflect highly organized
societies and nations.

In general, law is the expression of the mind of the ruler; it is binding when promulgated and
enforced. It presumes that the ruler (e.g., monarchical, oligarchical, feudal, dictatorial, democratic or
benign) is legitimately appointed or elected. It also presumes that the rule is just by various justice
standards. Presumed thus, law can be fundamental, constitutional, relatively absolute, and can provide
citizens with certain claims, privileges, power and immunity.

Corporate executives can obey the law with an allegiance of legality, ethicality, morality and
spirituality as illustrated in Exhibit 2.1.

Exhibit 2.1: The Response of Legality, Ethicality, Morality and Spirituality to Legitimate
Laws

Legality Ethicality Morality Spirituality

Law compliance; Law mindfulness; Law reverence; Imbibe the Spirit of the Law;
Law adherence; Law abidance; Law internalization; Law defiance may be mandatory
Legal game play; Law due update; Law reflection; when the law is unjust;
Law legitimacy check; Law research; Law conscience; Reformulate the law to restore
Law interpretation; Legal Ethics Law morality. and reassure human dignity.
Law manipulation;
Law lobbying (USA).

What are Values?

Values deal with the central Socratic question: How should we live? - A question that is also
reiterated by Williams Bernard (1985). This question deals with human motivation more than mere
normative expectation or mathematical expectation. Ethical deliberations cannot be totally
inconsequential to actual human behavior (Sen, 1990, p. 3-4). v

Values can be identified and discerned at various levels. Thus:

❖ Ideologically, values are meanings, beliefs, convictions and principles we live and share, create and
cultivate, use and diffuse in everyday life.
❖ Philosophically, values are ideas, ideals, ends, means, principles, doctrines, standards, rules, and
judgments that we derive from various schools of thought that we espouse.
❖ Organizationally, values are vision, mission, goals, objectives, money, capital, scarce resources,
talents, skills, knowledge, organizational routines, patents, intellectual property rights, markets and
opportunities, customers, suppliers, and other stakeholders that we consider useful and valuable for
our business.
❖ Legally, values are rights to life, liberty and pursuit of happiness endorsed by the Preamble, the

7
 constitution and its interpretations, governments and bureaucracies, law and order, product safety,
security and privacy, freedom and independence, and freedom from oppression and suppression.
❖ Ethically, values are legacies of behavioral standards and constraints, codes of conduct, ethical
theories, normative and non-normative principled behavior norms, mores and customs derived from
the ethical theories, industry injunctions and benchmarks, and socially value-based best practices.
❖ Morally, values are our beliefs and experiences, meanings and convictions, heritage and traditions
that we have derived from our family and school upbringing, college and university education, and
work and corporate training and challenges.
❖ Spiritually, values are fundamental beliefs about God and the cosmos, society and cultures, nature
and ecology, time and eternity, space and sky, life and destiny that influence and affect our daily lives
and journey.
❖ Human values are those benefits and principles that bring meaning and fulfillment in our lives, both
individually and socially. Such values include honesty, integrity, compassion, authenticity,
transparency, courage, audacity, trust, responsibility, patriotism, respect and fairness.

We are not explicitly including all values in the definition of ethics as such. For some people, values
are very relative and personal: e.g., to obtain a degree, to get a job, to make money, to hoard wealth, to
buy a home, to own an expensive car, to marry, to go abroad, and so on. But ethics is a science of
principled moral values and principled moral behavior. The value and behavior should stem from certain
well established moral principles, standards and rules, or from the moral judgments of people whom we
call wise and honest. That is, values are values when certain universal moral principles back them.
Values derive value from these moral principles, and not vice versa. The power of moral principles is that
they are universal, timeless truths. When we apply them and live by them, we generate values and best
practices. Such principles deal with meaning and truth, honesty and integrity, and not any specific
religion necessarily.

For instance, we value human life because of the moral principle of fundamental human dignity and
the inalienability of the God-given right to life, liberty and the pursuit of happiness. Nobody can take
these God-given or natural rights from us. Nor can we abdicate or abandon this right to life, liberty and
the pursuit of happiness. Similarly, we value honesty because of the fundamental moral principle and
mandate of speaking the truth. On the other hand, all our good works and best practices do not produce
quality of life results in our homes, institutions and corporations, countries and continents, if they are not
based on valid and solid moral principles.

Business Ethics and Managerial Ethics

Business ethics is a subset of ethics. Business ethics is a specialized study of moral right and wrong
in the business arena. It focuses on moral standards and rules as they specifically apply to business
exchanges and behaviors, employers and employees, buyers and sellers, suppliers and creditors,
distributors and retailers, products and services, promotional and pricing strategies and choices, business
policies and rules, business institutions and organizational behavior.

Managerial Ethics is a subset of business ethics. Managerial ethics focuses on transactional moral
values. Managerial ethics assures that all buyer-seller exchange processes, at all levels, create, design and
offer good, safe and healthy, legal, ethical and moral products and services that are profitable and growth-
oriented, but which are also affordably priced, justly distributed, that serve the needs, wants and desires of
the entire human family, and at the same time, support the ecological and sustainable resources of the
planet and the universe. This is a tall order for managerial ethics. That is because the scope of managers
in a chaotic and turbulent market environment is wide and widening.

8
 Where there are people, there is behavior, and where there is behavior there is scope and demand for
ethics. Where there is business there is scope and challenge of business ethics, and there is role and
scope for managerial ethics.

Managerial ethics is stewardship. It is responsibility and accountability to all stakeholders such as

customers, employees, suppliers, vendors and distributors, shareholders and promoter investors, banks
and creditors, governments and the media, the local and national and global communities, the planet and
the universe, and even the competition. Of course, managers should draw the specific boundaries of their
industry and markets, products and services, and hence define and characterize their specific stakeholders;
but the overall scope of ethics and morals is the same within these bounded functionalities.

If business is basically a buyer-seller exchange management process, then business ethics is the
science of social values that enables and empowers buyer-seller exchange management. Operationally,
business ethics is a principled action program of moral values that humanizes the buyer-seller exchange
management process. Business ethics brings the moral values of both intellectual virtues (e.g., prudence,
wisdom, transparency, due diligence, and objective investigation) and moral virtues (e.g., temperance,
fortitude, honesty, integrity, justice, and compassion) to the marketplace, and specifically to the buyer-
seller exchange system of inputs, process and outcomes. Business ethics is the ethics of commerce and e-
commerce, the ethics of the marketplace with its produce and products, brands and services, the ethics of
building human, physical and money capital, and the ethics of the production, distribution and
consumption processes that define the markets.

This Book follows this latter approach of defining, operationalizing and assessing ethics as an
actionable program of responsible values that humanize societies. Ethics deals with human behavior.
Ethics becomes relevant wherever people interact and function together. Hence, every field of business
such as planning and strategy, accounting, finance, human resources management, business law
compliance, marketing, business research, and production management involves ethical issues and moral
challenges.

What is Corporate Ethics?

Corporate ethics is a subset of managerial ethics. It is a field of highly professional and specialized
executive ethics behavior that involves corporate-wide decisions and choices, strategies and
implementation processes, and being accountable for the outcomes of one’s corporate-wide choices and
decisions. The scope and domain of corporate ethics is wider than in managerial ethics. Corporate ethics
embraces the corporation as a whole with all its divisions and subdivisions, branches and affiliates, joint
ventures and wholly owned subsidiaries, mergers, acquisitions and divestitures, corporate strategic
alliances, products, brands and services, and uses and renewals of its accumulated human, physical and
money capital.

Hence, corporate ethics, par excellence, is an actionable program that seeks goodness in its corporate,
ethical and moral deliberations, decisions and actions. Business ethics, in general, and corporate ethics, in
particular, should empower ethical reasoning, critical thinking, rational explanation and understanding,
moral deliberation and choice, ethical judgment and decisions, and ethical decision making for business
practitioners and business corporate executives.

Business ethics should provide tools of ethical and moral reasoning, fortified with relevant theories,
models and paradigms of ethical and moral reasoning and values. Every field and function of business
such as business strategy, organizational behavior, accounting, finance, human resources management,

9
business law, marketing, business research, and production management involves people and behavior,
and, therefore, involves ethical issues and moral challenges.

Commonality between Ethics, Business Ethics and Corporate Ethics

As is apparent from the above three definitions, the first common element between ethics, business
ethics and corporate ethics is values, actually, human principled moral values. Moral values are our
fundamental meanings, beliefs and principles by which we define and distinguish what is right and
wrong, good and evil, just and unjust, and truth from falsehood. These values provide guidance and
standards for our daily lives and career ambitions. The word “evaluate” (derivative of values) implies the
use of rules and standards by which we compare different behaviors, and judge whether such behaviors
meet our standards.

Secondly, even though not contained explicitly in each definition, the next common element across
all three branches of ethics, business ethics and corporate ethics is that these moral human values deal
with human judgment and decisions (ethics) that deal with business exchanges (business ethics), and
human judgment and decisions that deal with major corporate wide exchanges (corporate ethics) such as
mergers, acquisitions and divestitures, entering new industries and markets, developing new products and
brands, downsizing plants and labor, and the like.

Thirdly, business ethics and corporate ethics are interdisciplinary fields that entail the domain of at
least two or more distinct disciplines, a) business exchanges and decisions, b) economics, psychology and
sociology, and c) the philosophy and science of ethics. It is a dynamic interdisciplinary field, as all these
disciplines are refining, changing and expanding.

Corporate or business ethics is a treatise about ethical and moral process of business exchange
deliberations and decisions, judgments, choices and actions. Business and corporate ethics should
empower moral deliberation, ethical judgment, ethical decision making, serious foresight of the
consequences of our decisions, choices and strategies, and undertaking responsibility for harmful
consequences, if any. Business and corporate ethics should provide tools of ethical and moral reasoning,
fortified with relevant theories, models and paradigms of ethical and moral reasoning and values. Every
field of business such as accounting, finance, human resources management, business law, marketing,
business research, and production management involves ethical issues and moral challenges today.
Corporate ethics should identify, understand and address such ethical issues and moral challenges.

Descriptive vs. Prescriptive Ethics

We also use the term ethics to denote a field of moral philosophy. Like logic, epistemology and
metaphysics, ethics as a moral normative philosophy in the West dates back to the time of ancient Greeks
[e.g., Socrates (470-399 BC), Plato (427-347 BC) and Aristotle (384-322 BC)]. In this view, ethics as a
philosophical endeavor is the study of morality. Ethics studies morality; ethics presupposes the existence
of morality and moral people who judge right from wrong (De George, 1999, p. 19). Such a study can be
descriptive or normative. While descriptive ethics is a scientific inquiry into the actual moral beliefs and
behaviors of people, normative ethics, based on various philosophical theories and doctrines, prescribes
what our beliefs and behavior should be. A third division of ethics is called meta-ethics – the study of the
language, syntax, grammar, expression and communication of ethics.

While ethical behaviors are external in source and motivation (e.g., ethical codes, regulation,
mandates, customs, pacts and agreements, norms and conventions), moral behaviors are internal in
power, motivation and dynamism (e.g., one’s moral upbringing at home, one’s moral conscience, one’s

10
moral principles, and one’s moral convictions). Ethics is the domain of the “should” while morals
denotes the domain of the “ought.” That is, ethics tells me what I should do. While morals tells me what
I ought to do. Morality is powered from within us. Ethics is powered from without.

In this connection, a great philosopher, Michael Foucaultvi writes “For a rule of (ethical conduct) is
one thing; the conduct that may be measured by this rule is another. But another thing still is the manner
in which one ought to form oneself as an ethical subject acting in reference to the prescriptive elements
that make up the code.” Foucault argued that ethics is a work of art where subjects (individual, collective)
explore different possibilities of being by experimenting while being in their present conditions. That is,
individuals develop their ethics conforming to existing codes, but also while imagining new ways of
being ethical. This process requires a continuous revision and modification of what one is and what one
thinks. In this sense, laws, ethics, morality and spirituality are not static but dynamic social systems of
self-control and humanization.

Major Ethical Theories

The distinctive aim of any scientific theory is to provide systematic and reasonably supported
explanation and prediction of phenomena. A theory, therefore, is a system of hypotheses, most of which are
law-like formulae deductively connected with each other (Suppe, 1977). A theory is “set of propositions
which are consistent among themselves and are relevant to some aspect of the factual world” (Alderson,
1957, p. 5). Some of these propositions are "non-observational, from which other propositions that are at
least testable in principle can be deducted," (Zaltman, Pinson, & Angelmar, 1973, p. 78-79).

Howsoever defined, the major purpose of a theory is to increase scientific understanding through a
systematized structure capable of both explaining and predicting phenomena. Any systematized structure
that is not empirically testable will not be able to explain and predict real-world phenomena. All scientific
knowledge and theories are integral part of this knowledge, must be objective in the sense its truth can be
empirically testable or inter-subjectively certified by several investigators working independently. Thus,
minimally, a theory includes at least three constitutive elements: a) a set of law-like generalizations b)
systematically interrelated, and c) empirically testable, d) such that it can explain, predict and control real
world phenomena.

A set of discrete law-like generalizations is not enough; all the generalizations must be systematically
related (Kaplan), deductively connected (Bergman) and interrelated propositions (Blalock) such that they
generate a theory that is internally consistent and corroborating. The empirical test can be undertaken both
by traditional quantitative methods as well as by modern qualitative (non-number crunching) methods. The
latter are based on experiences, perceptions, feelings and values of people that can be expressed by symbols,
images, graphics, pictures, and narratives. Narratives are best subjected to qualitative analysis. Analysis of
narratives in the form of stories, vignettes, parables, proverbs, allegories and synecdoche offer tremendous
scope for research.

The Ethical Theory of Teleology

Table 2.1 reviews most of the known ethical moral rules that ground moral rule-based reasoning for
analyzing ethics of corporate decisions and actions.

The ethical theory of teleology [or utilitarianism or consequentialism] judges the morality of an
action primarily by its good or harmful consequences. Its basic moral rule can be framed thus: that
action is moral (teleologically) if it produces decidedly more benefits than costs and to the greatest
number.

11
 [Table 2.1 about here]

When the emphasis is not merely on costs and benefits, but from the perceived utility of such
benefits at the expense of costs, the theory is called utilitarianism. Since in the final analysis, costs and
benefits are consequences or outcomes that come to be best known after the action, the theory is also
called consequentialism (Anscombe, 1958). Under all forms, teleology, utilitarianism or
consequentialism, this ethical theory is very practical, pragmatic, and seemingly easy to apply. Hence it
commands appeal and popularity in USA.

In applying this theory, however, several problems arise. For instance:

• What is a benefit? What is a cost? To whom: One man’s meat is another man’s poison. A cost to
one is benefit to the other, and vice versa.
• Costs and benefits are consequences or outcomes. When are they known fully: before, during or
after the executive action? If after the action, how can teleology, utilitarianism or consequentialism
be diagnostically applied before the action?
• What is the greatest number: 1.2 billion people in India or China or 320 million in the USA? Or the
majority of a country’s population?

The Ethical Theory of Deontology

The theory of deontology is the ethical theory that is primarily geared to analyze the ethics of inputs
and processes (i.e., the ACT), and the duties and obligations associated with responsibility. It states: That
action is (deontologically) moral if it respects and upholds more rights than it violates corresponding
duties, and in relation to the greatest number.

As in teleology, the ethical theory of deontology poses several problems in its rule application, such
as:

• What is a right? What is a duty? Whose: One man’s right is another man’s duty to respect that
right. A duty to one is right for another.
• Rights and duties are given and defined by whom: God, state, society, or employers?
• Rights and duties are both antecedents to action. When are they known fully: before, during or
after the executive action?
• What is the greatest number: 1.2 billion of India?

The Ethical Theory of Distributive Justice

Justice is based on individual and moral rights, and the moral right to be treated as a free and equal
person lies behind the theory of distributive justice that benefits and burdens should be distributed equally
(Vlastos, 1962). Thus, distributive Justice considers both deontological and teleological aspects of human
actions and consequences. While deontological distributive justice reviews the "act" for its proper
distribution of rights and duties among people affected by the act, teleological distributive justice looks at
the consequences of costs and burdens, to see if they are properly distributed among all people concerned.
Thus, distributive justice is construed as considering both the "act" and "consequences" of an (executive)
act.

Justice and fairness are interchangeable terms, even though some (e.g., Rawls, 1958, p. 67; Hare,
1978, p. 119) consider the concept of fairness as more fundamental. Justice is fairness. It is giving each

12
one one's due. For instance, corporate executives act justly when they give customers and clients what
they (or their monies) deserve.

The theory of distributive justice judges the morality of an action by both the ACT (for its capacity
for distributing costs and benefits equitably across all people concerned) and the consequences (for their
actual distribution of costs and benefits across all members of society affected by the act). A useful rule
is: that executive action is moral (by distributive justice standards) if it decidedly distributes all costs
and benefits, all rights and duties evenly or equitably across all relevant stakeholders.

Even this rule presents several problems in its concrete application. Some are:

• What is equality? What is equity?

• How is equality or equity determined: by need, want, abilities, efforts, contributions, market value,
social status, or entitlement?
• Who distributes: government, state, society, company, status, caste?
• What should be the goal of distribution: income equality or economic equality or social equality or
opportunity equality, and why?

Rawls (1971) proposed two principles of distributive justice: 1) the Equality Principle: each person
engaged in an institution or affected by it has an equal right to the most extensive liberty compatible with
a like liberty for all; 2) the Difference Principle: inequalities as defined by the institutional structure or
fostered by it are arbitrary unless they work out to everyone's advantage, and provided that the positions
and offices are open to all. The first principle requires basic equal liberty for all. The second principle
admits existing inequalities and differences, if a) they work to the advantage of all, and b) if the social
system offers equal opportunity for all to combat or compensate for these differences.

Rule 1: An executive action is ethical if it offers all stakeholders fair opportunity for benefits
(Libertarian Fair Opportunism).

The morality of this act will depend upon the correct choice of a basic structure of society that
defines and ensures its fundamental system of rights and duties. The basic structure includes the political
constitution and the principal economic and social institutions that together define peoples' rights, duties,
and liberties and that together affect people's life-prospects and expectations.

Rule 2: An executive action is ethical if it seeks to nullify among firm's stakeholders the advantages
stemming from the accidents of biology, geography and history.

This is Rawls' (1971) Libertarian Egalitarianism. Rawls' central thesis is that a social arrangement
should be a communal effort to advance the good of all who are part of the society. Inequalities of birth,
sex, ethnicity, color, natural endowment, and other discriminating circumstances are "undeserved," cause
naturally disadvantaged members of the society, and should be progressively eradicated. Those who are
naturally endowed with intelligence, skills, health, wealth or luck, and those who are born in
geographically more productive zones (such as Western Europe and North America), are the more
fortunate in our society, but they do not deserve these advantageous properties any more than the
disadvantaged deserve their misfortunes.

By libertarian ethic, one should distribute all vital primary economic goods and services (basic food,
health, shelter, employment) equally, unless an unequal distribution would work to everyone's advantage
(Beauchamp & Childers, 1989). People born into a social system at different positions, in different social
classes, and with different natural attributes have varying life-prospects and expectations determined by
the system of rights, liberties and opportunities available in that social class. Equality of opportunity does

13
not entail equality of expectations - the latter are inevitable in a social structure. Inequalities are just only
if the social structure allowing or generating them, works out for the advantage of all engaged in it,
especially the least advantaged.

A corporate executive action is ethical if it offers all stakeholders (e.g., creditors, employees,
suppliers, distributors, retailers, clients and customers) fair opportunity for benefits (Libertarian Fair
Opportunism). This may not be necessarily moral. An executive action is ethical if it treats all people
equally (Egalitarianism). This may be moral, even though ideal or impractical. An executive turnaround
action is ethical if it treats all stakeholders with an equal share of all goods (Strict Egalitarianism). This is
moral, even though ideal or impractical.

Pre-emptive and protective justices are really subsets of procedural justice, which, in turn, is a subset
of distributive justice. Procedural justice demands that structures and procedures be set up in society
which are just and which produce just outcomes. Structures and procedures are relative to each group,
society, state or country. Hence, procedural justice is another instance of comparative distributive justice.

A distinction is made between 'just procedures' that ensure just outcomes (procedural justice) and 'just
results' (consequential justice). In some cases, just procedures are solely sufficient to ensure just results
(e.g., state lottery procedures that result in fair outcomes). In some cases procedures may be just, but not
the results. For instance, despite excellent and objective legal jurisprudence and procedures, one may
occasionally punish the innocent or acquit the guilty.

Sometimes, just results may stem from unjust or imperfect procedures, when, for example, a society
may create a legal system that protects more the innocent than punish the guilty. Distributive justice that
looks at both the act (procedures) and the results (consequences) implies both procedural justice and
consequential justice. The latter two forms of justice are often called "justice principles" (Mascarenhas,
1990, p. 219).

The Ethical Theory of Corrective Justice

Corrective justice is the idea that liability rectifies the injustice inflicted by one person on another.
This idea received its classic formulation in Aristotle's treatment of justice in Nicomachean Ethics (Book
V:1). Aristotle speaks about corrective and distributive justice as two contrasting forms of justice.
Corrective justice that deals with voluntary and involuntary transactions, today's contracts and torts,
focuses on whether one party has committed and the other has suffered a transactional injustice.
Distributive justice deals with the distribution of whatever is divisible (Aristotle mentions honors and
goods) among the participants in a political community. For Aristotle, justice in both these forms relates
one person to another according to a conception of equality or fairness. Injustice arises in the absence of
equality, when one person has too much or too little relative to another.

The two forms differ, however, in the way they construe equality. Distributive justice divides a
benefit or burden in accordance with some criterion that compares the relative merits of the participants.
Distributive justice, therefore, embodies a proportional equality, in which all participants in the
distribution receive their shares according to their respective merits under the criterion in question.

Corrective justice, in contrast, features the maintenance and restoration of the notional equality with
which the parties enter the transaction. This equality consists in persons' having what lawfully belongs to
them. Injustice occurs when, relative to this baseline, one party realizes a gain and the other a
corresponding loss. The law corrects this injustice when it re-establishes the initial equality by depriving

14
 vii
one party of the gain and restoring it to the other party. Obviously these considerations offer serious
challenges and mandates to corporate ethics.

An action is moral (by corrective justice standards) if it decidedly sets up just procedures to bring
about a just distribution of costs and benefits, rights and duties, among the greatest number.

However, as with previous three ethical theories, corrective justice also poses new problems:

• What are just procedures: those that minimize harm?

• Those that prevent harm? Those that protect people from harm? Those that do good to people?
• Who sets up these just procedures, why, when and where: the nation, the state, the district, the
municipality, one’s company?

The entire process of executive inputs, process and outputs can be further analyzed and enhanced by
the ethical theories of responsibility, which in turn, are supported by the ethical theories of human
personhood, ethics of virtue, ethics of trust, ethics of moral worth, and the ethics of moral reasoning. We
will be covering all these theories in later chapters. Specific moral rules under each ethical theory and the
associated problems are also stated in Table 2.1. Theoretical advances cum pro and con arguments on
each theory will also be covered in a later volume on Corporate Ethics.

Corporate Value Ethics

Value ethics is the theory and practice of good, good action, and good life. What we need, in order to
live well, is a proper appreciation of the way in which such goods as friendship, honor, promise,
commitment, virtue, wealth and pleasure fit together as a whole. In order to apply that general
understanding to particular cases, we must acquire, through proper upbringing and habits, the ability to
see, on each occasion, which course of action is best supported by reasons. Therefore, practical wisdom,
as Aristotle conceived it, cannot be acquired solely by learning general rules.viii We must also acquire,
through practice, those deliberative, emotional, and social skills that enable us to put our general
understanding of well-being into practice in ways that are suitable to each occasion. Value Ethics in the
best sense, therefore, is practical wisdom – experiential and rational skills of intellectual and moral virtues
that help us to discern right from wrong, truth from falsehood, justice from injustice, and give us the
courageous skills of pursuing right and avoiding wrong, seeking truth while rejecting falsehood, and
striving for justice while combating against unjust structures and their harmful consequences
(Mascarenhas, 1995).

Operationally, if ethics is a principled action program of deriving and experiencing moral values, then
Organizational Value Ethics is a hierarchically or democratically or consensually derived and guided
action program in an institution that consistently seeks new values, new directions, new meanings and
imperatives, new visions and missions, new goals and objectives, and new ends and ideals.
Organizational Value Ethics seeks to serve humanity better through principled institutions such as the
family, the school, the college and the university, the company and the corporation, the venture and the
startup, the government and the NGOs, the media and the marketplace, the church, the temple, the
mosque and the synagogue. We study ethics in order to improve our lives, said Aristotle, and therefore,
its principal concern is the nature of human well-being. In this sense, wherever there are people, there is
behavior, and wherever there is behavior, it has moral and ethical content, challenges and implications

The Grey Area in Corporate Ethics

Thus defined, ethics bears two important implications: a) as cultures change over time, ethics change;

15
hence, ethics is a dynamic and not a static concept; b) as values change over time, ethics change across
cultures; values define what we consider acceptable ways of working; hence, by its very definition, ethics
has a contextual or relativistic and not absolute connotation. Most societies, however, agree there is a
base level of “black and white” absolute values and ethics consistent across cultures (e.g., do not kill; do
not cheat; do not lie; be honest; honor contracts, and keep promises). Treat others the way you want
others to treat you, the Golden Rule, is an absolute value too. These are absolute universal values that
define and characterize human beings and society.

Nevertheless, there is a large spectrum of grey area in ethics where values and cultures are involved
(e.g., be non-hierarchical; be inclusive; be good; be caring; be compassionate; be fair; be just; do not
fraud; be generous; be contributing; be cooperative). It is the grey area that tests corporations, its leaders
and chief executives. Values such as social compliance, legal compliance, ethical conformance, moral
obedience, industrial codes of conduct, consumer privacy, personal security, patent rights and duties,
intellectual property rights and duties, and employee rights and duties may not be similar across countries
and continents.

As also, certain questionable strategies such as aggressive competitive practices, international

dumping of goods, wash trading, insider trading, and other financial shenanigans, acceptable in certain
countries and cultures may not be so in others, thus creating grey areas of ethical values and moral
interests. Most of the times business and corporate executives will have to operate in this grey area that
is prone to personal conflicts and choices, each of which tests individual ethical sensitivities, decision
abilities and personality characters (see Narasimhan, 2011).

Epistemologically speaking, the “good” and the “bad”, the “true” and the “false” are not necessarily
incompatible (Bahm, 1975). A solution can be both true and good at the same time; it can even be false
but good at the same time. A solution can be true and good from one perspective and false and bad from
another perspective. For instance, stem cell research is good when it is based on adult cells but bad when
it is solely based on embryonic cells, especially when human embryos have to be killed for saving victims
of presently incurable diseases.

A course in or book on Corporate Ethics should empower business executives, management students
and other business practitioners readily to identify and effectively to address ethical and moral problems
and challenges that each functional business field or discipline involves. We also need a moral
awakening, a quick recovery of ethical values of corporate integrity and honesty, and a great sense of
corporate citizenship and stewardship (Mascarenhas, 1995).

This book targets such audiences and challenges them with practical wisdom skills for ethical
reasoning, moral explanation, moral judgment and deliberation, ethical assessment of business decisions
and actions, and undertaking moral responsibility for harmful consequences of corporate decisions.

Methodology of Corporate Ethics

In general, methodology is the science of method - the science of finding the best method for
identifying, defining, characterizing, formulating and resolving problems in a given field or discipline.
Any methodology must match its subject matter. Thus, the methodology of studying value ethics must
match its subject matter - a principled action program of deriving and experiencing moral values. Value
ethics methodology seeks constantly to identify, define, characterize and formulate values that can render
any activity into a principled action program for experiencing and witnessing moral values.

16
 Similarly, the methodology of studying business ethics must match its subject matter - buyer-seller
exchange management processes. Its value ethics methodology constantly strives to identify, define,
characterize and formulate buyer-seller exchange management process values that can render any market
activity into a principled action program for experiencing and witnessing moral values in the marketplace.

The methodology of studying corporate ethics should match its subject matter – executive life of
corporation-wide business choices and decisions. Its value ethics methodology should constantly seek to
identify, define, characterize and formulate corporate-wide buyer-seller exchange management process
values that can render any corporate organizational decision and activity into a principled action program
for experiencing and witnessing moral values in the marketplace.

At the corporate level, CEOs and most of their decisions impact the entire corporation, often the
industry, and the country that the industry dominates. Thus, the major corporate decisions of Bill Gates,
Steve Jobs, Michael Dell, Narayana Murthy, Natarajan Chandrasekharan and Azim Premji have affected
the IT world, especially in India. Major corporate decisions of Michael Dell, Lenovo, and Compaq have
also affected the distribution and diffusion of personal computers in the world. Major decisions and
products of Apple, Sony, and Microsoft have affected the entertainment or electronic game industries of
the world. Corporate ethics deals with such deliberations, choices, decisions and strategies that impact
corporation-wide, industry-wide, countrywide, continent-wide, or globe-wide.

Legal, Ethical, Moral and Spiritual Executive Conduct

Throughout our discussions thus far we have used certain terms frequently such as legal, ethical,
moral and spiritual. Given these discussions we should now be able to define them more precisely and
comprehensively. Clear-cut distinctions, however, between what is legal, ethical, moral and spiritual are
not yet emerging, much less converging. Based on the introductory discussion of major ethical and moral
theories, we may conclude the following:

▪ Laws promote common good, but are basically reactionary in origin, and in general preempt injury or
evil (based on the principle of non-malfeasance). Legality is basically law compliance; it does the
“legal” thing; it is related to liability.

▪ Ethicality is predicated on conformance to external (social) norms and customs; it is primarily defined
by principles based on teleological (consequentialist) ethical theories. Ethicality safeguards, promotes
and defines social good in terms of outputs or consequences. Decisions and actions are ethical if and
only if their social benefits clearly outweigh social costs. Ethics is normative; it is norm-conforming; it
seeks to do the “right” thing; it seeks to do the just thing; it is related to justice.

▪ Morality is obedience to inner categorical imperatives. It is primarily predicated on one’s inner beliefs
and strengths, good reasons, intentions and motivations, one's character, personality and (religious)
conscience. Decisions and actions are moral if and only if they stem from right intentions and
motivations, regardless of consequences and circumstances. Right intentions and motivations are
defined principally by their consonance with deontological theories of human rights and dignity and
distributive justice principles of basic human equality. Morality safeguards, promotes and defines
personal and social rights and duties. Morality seeks to do “the right thing rightly.” Morality is related
to goodness.

▪ Spirituality goes beyond the legal, ethical and moral aspects of life to include and ground upon virtues
such as honesty, integrity, wisdom, commitment and moral audacity, and especially, the cardinal
virtues of prudence, temperance, justice and fortitude. Spirituality has several dimensions. It is all
embracing. It is best not defined and thus limited or compartmentalized but holistically experienced. It
is best not conceived, hypothesized, constructed, theorized and speculated. It needs to be lived,
witnessed, and then written about. It is surrender to God who alone can rescue us from our greed,

17
 selfishness, and avarice and jealousy. It is experiencing God and thereby fighting our addictions of
mind, body and matter. It is believing in God, accepting God’s reign in our life, accepting his presence,
providence and intervention into humanity and human history. It is a journey to God with God and
humankind, a voyage into destiny, into eternity. It is community, community-building, mutual trust,
mutual respect, mutual hope, mutual love. It is freedom; it is liberty; it is life; it is pursuit of happiness.
It is bliss. It is an inalienable God-given right and duty. It is a universal call to detachment or
renunciation. It is finding God in all things good and bad, especially in turbulent markets. It is
experiencing God in all things good and bad; it is seeking truth amidst darkness, risk, uncertainty,
ambiguity and chaos of today’s turbulent markets. It is reverential fear of God not enslaving timidity.
It is obedience to God not slavery. It is humility not arrogance.

▪ Virtue ethics deals with what is good life and what is happiness for the community. Without a theory
of good life and the good society, there is no check on legal maneuvering, political expediency, market
opportunism, and business turnaround malpractice. In a secular society, if moral rules and injunctions
are to derive their binding force, they must do so from a theory of moral law or from the assent of
virtuous individuals who choose the rules and the society they live in as part of their self-definition
(Anscombe, 1981, p. 30). According to MacIntyre (1981), the authority of moral law is best when it is
theological (i.e., based on divine law and revelation). But in a secular society such as ours, we must rely
on the virtues of people – it is only from the debate and shared life of virtuous people that we may
obtain a consensus on what is common good and what is good life. A business turnaround or
transformation situation constitutes a moral community in which the debate about common good for
society should take place within the context of executive virtues.

Hence, the following definitions and corollaries may be deduced:

▪ An act is legal if it fulfills legitimately promulgated laws, regulations, ordinances and written contracts.

▪ An act is ethical if additionally it conforms to publicly held norms and customs, corporate codes of
conduct and unwritten social pacts, respects social rights and fulfills social duties. In general, ethical
acts are consonant with ethical universals and teleological principles.

▪ An act is moral if additionally it is grounded on good reasons, intentions and motivations, virtuous
character, clear conscience and one's categorical imperatives. In general, morality is predicated on
deontological and distributive justice principles.

▪ An act is spiritual if additionally being legal, ethical and moral it is also grounded on good reasons
based on certain cardinal virtues like honesty and integrity, wisdom and prudence, moral courage and
fortitude, and on certain transcendental principles of faith, hope, love, detachment, renunciation,
compassion and altruism.

▪ What is legal may not be ethical or moral or spiritual (e.g., some states have legalized abortion and
legalized civil unions between couples of the same sex).

▪ What is ethical is not necessarily moral or spiritual (e.g., some employment rules or corporate codes of
conduct may discriminate against the elderly, women, the poor or ignore the marginalized).

Table 2.2 summarizes the above discussion and elaborates on the domain, definition, the predominant
ethical theory, and the dilemma, mandate and aspiration of legality, ethicality, morality and spirituality.
All these four concepts can also be distinguished in relation to their source of empowerment, predominant
virtue challenge, grounding responsibility, assessment criteria, and their formula of executive success.
Corporate executives need to excel in all four domains of law, ethics, morals and spirituality.

Any action, system, law, code, policy or procedure can be tested for its legality, ethicality, morality
and spirituality (LEMS) meaning and impact. We will be developing and applying this LEMS concept
and technique throughout this book. In a market-turbulent world, mere legality, even ethicality, may not

18
be enough. We must pass the litmus test of morality and spirituality for long term survival, growth and
sustainability.
[Table 2.2 about here]

The Dynamics of Corporate Ethics

Thus, business ethics and corporate ethics are interdisciplinary fields and practices that entail the
domain of at least two distinct disciplines, a) business exchanges and decisions and b) the science of
ethics as science of values and principles. It is a dynamic interdisciplinary field, as both disciplines are
refining, changing and expanding. The field of business is expanding into new areas such as revenue
management, motivation management, sustainability management, social analysis, e-business,
e-advertising, Internet marketing, cyber surveys and marketing research, social electronic networking,
globalization, social entrepreneurship, greening and global ecology, and steadily contracting from
traditional areas such as classic micro and macroeconomics, international trade theory and abstract
quantitative methods, statistical methodologies and high-powered management science.

Ethics is currently also shrinking from the classical philosophical ethics and absolute values of
ancient Greek and Medieval philosophers and dogmatic theologians. While expanding into modern and
postmodern ethics of consensual values and moral principles, corporate ethics should enhance critical
thinking and moral reasoning, ethics of dynamic business exchanges, rights and duties, moral worth and
obligation, executive spiritual development, corporate and social responsibility, distributive and
corrective justice, virtue ethics, relational ethics, ethics of trust, cyber ethics, ethics of cyber safety and
privacy, ethics of terrorism and ethics of war on terrorism, ethics of global poverty, disease and
inequality, and ethics of global ecology and sustainability.

Moreover, the veteran concept of business management, as represented by the over 110-year old
MBA curriculum and structures, is radically changing from the traditional silos of accounting, finance,
marketing, operations research and management, decisions sciences, human resources management,
business law, and economics into modern integrated business management that views all fields of
business as networked and interdependent, interacting and synergizing business solutions to simple,
complex, unstructured and “wicked” business problems of current markets. Specifically, with a
significant majority of domestic, international and global businesses, industries, markets and trade regions
floundering or disappearing from the business radar, there has emerged a new discipline – business
turnaround and transformation management that researches and applies new integrated business
management solutions to problems of under-performance, business downturns and recessions, corporate
cash flow crisis, financial distress, financial turbulence, worker apathy, insolvency and imminent
bankruptcy (Mascarenhas, 2011).

Every part and discipline of business (e.g., accounting, finance, marketing, OB, HR, production, and
business law) implies ethics. Every stakeholder of business (e.g., customers, producers, employees and
employers, suppliers and creditors, distributors and promoters, domestic and international governments,
local and global communities) involves moral rights and duties, moral and ethical responsibilities and
obligations that, in turn, invoke ethical values and moral principles. A comprehensive and integrated
course in corporate or business ethics should include every part of business, as also every stakeholder of
business. This book relates to corporate ethics that deals with major moral corporate executive leaders,
their specific skills, personality, and critical thinking inputs, their moral reasoning processes, their
decisions and choices, their mental models and business models, their strategies and actions, and above
all, executive moral obligations regarding the consequences of their decisions.

19
 Concluding Remarks

In general, the ethical-moral reasoning advocated in this book involves a five-dimensional ethical
appraisal: 1) a teleological analysis of positive/negative effects of executive decisions; 2) a deontological
analysis of the moral principles, rights and duties underlying these decisions; 3) a distributive social
justice based analysis of the spread of costs and benefits and rights and duties of corporate executive
decisions, 4) a distributive corrective justice based on setting up processes and procedures whereby
current and past wrong distributions of costs and benefits and rights and duties of all stakeholders may be
rectified, and 5) a virtue-ethics analysis of the physical, functional and moral well-being effects of
corporate decisions and strategies. Other things being equal, teleology relates primarily to executive
actions; deontological theory relates primarily to executive inputs and processes; distributive ethics and
corrective justice, ethics of human dignity, human virtue, human trust, ethics of moral worth and moral
responsibility relate to all three stages of executive action: inputs, processes and outputs. Figure 2.1
captures this Anatomy of Corporate Executive Action and the Application of Ethical Principles.

[Figure 2.1 about here]

Ethics has meant different things to different generations. While to the Greek philosophers Socrates,
Plato and Aristotle ethics was a science of human values derived from certain philosophical concepts and
theories and as lived by exemplary peoples and societies, over the centuries and millennia, ethics to
modern generations has come to mean something more practical, livable, applicable and demonstrable in
human conduct. Ethics is currently reckoned as a responsible action program for the betterment of
humankind represented by individuals, groups, organizations and societies. Ethics empowers us to chart
and live a new value-laden direction and meaning in life.

Business ethics, however, should go beyond certain pragmatic values that most business executives,
business management students and business institutions work for. Most top B-School students consider a
course in Business or Managerial Ethics as not “value-adding” as it may not support their desired set of
pragmatic values. Most of these values (e.g., revenue maximizing skills, cost-containment skills, profit
maximization skills, graduating with honors, securing a job in a multinational company, and striving up
the executive success ladder) are instrumental and temporary, and are means and not ends. Real human
and humanizing value go far beyond these mundane goals and objectives. B-school students focused only
on pragmatic values are ill-prepared to meet the tough challenges of today’s uncertain, ambiguous and
chaotic markets and economies, and hence, often fraudulent and corrupt world.

While conceptually ethics is a science of principled moral values and principled moral behavior,
operationally, ethics is life itself, is living, experiencing, and sharing moral values. The value and
behavior should stem from certain well established moral principles, moral standards and rules, or from
the moral judgments of people whom we call wise and honest. That is, values are real values when
certain universal moral principles ground and support them. Values derive value from these moral
principles, and not vice versa. The power of moral principles is that they are universal, timeless truths.
When we apply them and live by them, we generate values, we create values and best practices that
become legacy and posterity. Such principles deal with meaning and truth, honesty and integrity, wisdom
and justice.

20
Figure 2.1: The Anatomy of Corporate Executive Act and the
Application of Ethical Principles

Distributive Justice Principles:

Ethics of Distributive and Corrective Justice

INPUTS: PROCESS: OUTPUTS:

Personal and Business Management Business or Market
Corporate Inputs & Corporate Consequences
Governance Processes:
Executive Reasoning,
Decisions & Strategies

Teleological
Principles:
Deontological Principles: Ethics of Costs and
Ethics of Rights and Duties Benefits

Ethics of Responsibility; Ethics of Compassion;

Ethics of Human Personhood; Ethics of Virtue; Ethics of Trust;
Ethics of Moral Worth; Ethics of Moral Reasoning

21
 Table 2.1: Basic Moral Rule-Based Reasoning for Analyzing Ethics of
Corporate Decisions and Actions
Ethical Theory Rule Based on Ethical Theory:
(Focus on: ) That corporate action of designing,
producing, distributing and marketing new
and old products is:
Teleology Moral (teleologically) if it decidedly
produces more benefits than
(Consequences)
corresponding costs and to the greatest
number
Deontology Moral (deontologically) if it decidedly
upholds more rights of stakeholders than
(Inputs and
it violates corresponding duties, and in
processes) relation to the greatest number.
Distributive Moral (by distributive justice standards)
if it decidedly distributes all costs and
Justice
benefits, all rights and duties evenly or
(Inputs, equally or equitably across all relevant
processes and
stakeholders
outputs (IPO))
Corrective Moral (by corrective justice standards) if
it decidedly sets up just procedures to
Justice
bring about a just distribution among the
(IPO) greatest number, when the previous three
rules have failed.
Ethics of Moral (by human dignity standards) if it
decidedly sustains and empowers human
Human Dignity
dignity of people affected by the action
(IPO) and under all situations regardless of
nationality, color, creed, gender or age.
Ethics of Moral (by ethics of virtue) if it is
decidedly based on the practice of at least
Virtue
the four cardinal virtues of prudence,
(Inputs and temperance, justice, and fortitude, and in
Processes (IP))
relation to the greatest number.
Ethics of Trust Moral (by ethics of the virtue of trust) if it
is decidedly based on the practice of
(IP)
mutually benefiting trust between
exchange partners, and under all
circumstances of contingency.
Ethics of Moral (by ethics of the moral
responsibility) if it duly owns and is
Responsibility
answerable to the action before the act,
(IPO) and fulfills after the act all accountability,
obligations, duties, and liabilities to all
affected parties in relation to the greatest
number.
Ethics of Moral (by ethics of the virtue of
compassion) if it is decidedly treats all
Compassion
people with compassion, and under all
(IPO) circumstances of contingency.
22
Major Problems in the Rule Application of this
theory: In relation to the design, production, distribution, and
marketing of new or old products and services:
What is a benefit? What is a cost? To whom: One man’s meat is another
man’s poison. A cost to one is benefit to the other.
Costs and benefits are both consequences and outcomes. When are they
known fully: before, during or after the executive action?
What is the greatest number: 1.2 billion in India?
What is a right? What is a duty? Whose: One man’s right is another
man’s duty to respect that right. A duty to one is right for another.
Rights and duties are given and defined by whom: God, state, society or
employer? Rights and duties are both antecedents to action. When are
they known fully: before, during or after the executive action?
What is the greatest number: 1.2 billion in India?
What is equality? What is equity?
How is equality or equity determined: by need, want abilities, efforts,
contributions, market value, social status, or entitlement?
Who distributes: state, society, company, status, caste?
What should be the goal of distribution: income equality or economic
equality or social equality or opportunity equality, and why?
What should be equalized: income, skills, access, opportunity, culture?
What are just procedures: those that minimize harm? Those that prevent
harm? Those that protect people from harm? Those that do good to
people?
Who sets up these just procedures, why, when and where: the nation, the
state, the district, the municipality, one’s company?
What is human dignity? Is there an objective or universal standard or a
categorical imperative? What does sustaining and empowering human
dignity mean? Who defines this, and for whom, and by what rules or
standards?
What is virtue? What is vice? Is virtue power (“virtus” in Latin)? Is it
excellence (following its Greek derivation “arête”)? Hence, is it power of
excellence or power of greatness? Why are cardinal virtues cardinal (i.e.,
upon which all other virtue are hinged)? Prudence should discipline
temperance, fortitude and justice. Hence, prudence should be the
cardinal virtue. Is prudence practical wisdom? But how does one
cultivate it? Via virtue? This is circular thinking? Via experience of
being wise? Then ethics of virtue makes sense, as long we grow wise
through good experience or experience of doing good.
What is trust? When do you begin to trust somebody? Through mutual
interaction and knowledge? Then how do you trust strangers? How does
a patient trust the doctor whom she has never met before? All trust is a
blind leap into believing in the goodness of the other – hence vulnerability
is built into trust. Does one have to be vulnerable in order to trust?
What is responsibility? Answerability? Accountability? Obligation?
Duty? Liability? Acting or compensating to allay one’s guilt or blame?
When is one responsible to the action itself, rather than to its outcomes?
To what extent are our choices and actions deterministic or owned by our
free-will? Are they freely initiated and posited or constrained? If
constrained, is responsibility exonerated proportionate to the constraint
or pressure? When do we act voluntarily? When involuntarily? And
when under “duress”? Responsibility is a function of all three. If so, how
assessed?
What is compassion: kindness, mercy, graciousness, forgiveness,
condescension, being benign? Real compassion is never judgmental, never
condemnatory, always forgiving, and always giving. Is this real or surreal,
doable and practical, viable and desirable? If not, how can it be a rule of
moral or ethical action?
 Table 2.2: Distinguishing Legality, Ethicality, Morality and Spirituality
(LEMS Analysis)
Dimension Legality: Ethicality: Morality: Spirituality:
of LEMS Doing the Legal Doing the Right Doing the Right Doing the Right Thing
Distinction Thing Thing Thing Rightly Rightly for the Right Reasons
Law, Legislature, Ethics; Codes of Morals; Virtues;
Jurisprudence, conduct; Mores, Moral principles Integrity, honesty, trust
Enforcement – all customs; pacts and Moral rules Wisdom, prudence
Domain local and national agreements – Moral imperatives – Moral courage – timeless and
values organizational and Universal and non- eternal values, attitudes and
executive values reversible imperatives beliefs.

Law compliance Compliance with Internalization of Experiencing and witnessing

Definition professional codes moral rules, standards high levels of virtues such as
of conduct, mores and principles integrity, honesty, wisdom,
and conventions prudence and moral courage
Predominant Teleology of costs and Distributive justice Deontology of rights Virtue ethics, especially based
Ethics Theory benefits and duties on trust and wisdom

Legal dilemma: Ethical dilemma: Moral dilemma: Spiritual dilemma: conflicting

Dilemma Conflicting laws conflicting ethical Conflicting moral demands of virtues, drives and
codes and pacts principles and duties habits

Mandate Do not just ask what is Ask what is the Ask further how to do Go further, and do the right
the legal thing to do. right thing to do? the right thing rightly? thing rightly for the right
Do what is right. Do what is moral. reasons.
Do what is ethical. Do what is right rightly with
virtue, trust and good intentions.
This is being spiritual
Aspiration Legal compliance Ethical excellence Moral goodness and Spiritual quest and trust
imagination
Laws, ordinances, Mores, conventions, Moral rules, precepts; Cardinal virtues of prudence,
Source of Acts, Bills, Codes of conduct; Moral convictions; wisdom, courage and fortitude;
Legal rights Ethical rights Moral beliefs; Personality/character;
empowerment Sociality Immanence Religious conscience Spiritual rights
Individuality Moral rights Spiritual transcendence
Moral transcendence
Predominant Prudence, Honesty, Moral integrity Integral spirituality
virtue Frugality-Temperance Transparency Wisdom Compassion & trust
Fortitude-courage Accountability Moral courage Unconditional love
challenge
Legal responsibility Social Moral responsibility Spiritual responsibility
Responsibility Do not harm. responsibility; Protect from harm Do good unto others;
Law of malfeasance Prevent harm Protective justice Beneficent justice
Compensatory justice Preemptive justice Virtuous justice
Procedural justice Building trust
Are laws: Are mores and Are intentions: Underlying character:
Assessment Fair or unfair? codes: True or Right or wrong? Virtue or vice?
Just or unjust? false? Correct or Good or evil? Wise or unwise?
criteria incorrect? Courageous or cowardly?
Success Reactive legal Proactive/competent Interactive acceptance Prophetic and charismatic living
equation or compliance and compliances of of and adherence to and witness of great virtues and
greening of America pacts, codes and universally binding moral values that flow from an
formula agreements for moral principles, abiding moral and spiritual
global sustainability especially, the golden character.
rule

23
Endnotes:
i
Luk Bouckaert (1941- ) is professor emeritus of ethics at the Catholic University of Leuven, Belgium. He is a philosopher and
an economist by training. His research and publications fall within the fields of economics and business ethics and spirituality.
iiGautam, Pradeep Kumar (2016). Understanding Dharma and Artha in Statecraft through Kautilya’s Arthashastra. Institute of
Defense Studies and Analysis (IDSA) Monograph Series, July (53); In Indian traditions, social and political conditions must exist
for the pursuit of the four great ends of life: the purusharthas—ethical goodness (dharma); wealth and power (artha); pleasure
(kama); and spiritual transcendence (moksha) (Gautam, 2016, p. 14). One of the oldest human civilizations is that of
Mohenjodaro and Harappa of the Indus Valley possibly dating from 5000 BC. Puranashastras are documents that described the
customs, mores, meanings and beliefs, codes and practices of these people. According to Gita: kama esha kroda esha rajo guna
samudbhava (lust and anger all spring from rajo guna) or the tamasic guna (which is a source of laziness and laxity). Spirituality
is the subjugation of the tamasic guna and the activation of the rajasic guna (energizing power) via sattwa guna (or vigilance
power) on the part of a king for controlling shadaripus (Chakraborty, S. K. (2013). Exalted Business and Spirituality.
International Journal of Spirituality and Organization Leadership, 1(1), 5-20).
iii
Harshavardhana, the next greatest emperor of the Hindu Empire and Culture in seventh century AD, presumably followed the
same Arthashartra of Kautilya, was a king of non-attachment and humility. His father died when he was young and Harsha was
very reluctant to ascend the throne. But considerable persuasion made him accept kingship. The best proof of his rajarshi
leadership lay in the two strongest pillars of Bharat’s sanatan culture and society: tyaga and seva (renunciation and service).
Every five years of his 35-year reign, Harsha gave away in great charity (mahayajna) almost all his wealth in terms of gold,
pearls, garments, food, clothes and jewelry - first twenty days to selected Buddhists and Brahmins, and then for the next forty
days to the poor, orphans, and the destitute from far and near. This is spirituality at its best – all the accumulated wealth in the
king’s coffers was so exhausted that occasionally Harsha had to borrow some clothing from his sister Rajyasri for the closing
event (Majumdar, R. C. (ed.) (1954). History and the Culture of the Indian People. Bombay: Bharatiya Vidya Bhavan, 116-7).
Possibly Swami Vivekananda (see Vivekananda, S. W. (1962). Complete Works. Calcutta: Advaita Ashrama, 5, 228) and
Mahatma Gandhi (see Gandhi, M. K. (1998). My Varnashrama Dharma. Bombay: Bharatiya Vidya Bhavan, 71, 113) might have
done the same.
iv Lincoln Steffens (1866-1936) was the most famous of the American Muckraker journalists of the period 1903-1910. His
exposés of corruption in government and business helped build support for reform. Lincoln Steffens was born on April 6, 1866,
in Sacramento, California. A New York reporter, he launched a series of articles in McClure's, called Tweed Days in St. Louis,
which was later published together in a book titled The Shame of the Cities.
v Amartya Sen (1990: 2) comments on the surprising feature of modern economics to make it value-free or non-ethical.
Historically, he observes, the evolution of modern economics has largely been an offshoot of ethics. The subject of economics
was for long considered as a branch of ethics. At the very beginning of The Nicomachean Ethics, Aristotle relates the subject of
economics to human ends or ethics. Aristotle in his Politics connected both politics and economics to ethics. Adam Smith
(1976), the father of modern economics, was a Professor of Moral Philosophy at the University of Glasgow. Until recently,
economics was taught at Cambridge as part of moral science. Kautilya, an advisor and minister of the Indian emperor
Chandragupta, the founder of the Mauryan Dynasty (and grandfather of Ashoka), wrote around 400 BC his Arthashastra
(“Instructions on Material Prosperity”) that includes four distinct fields: a) metaphysics, b) ethics (as the science of right and
wrong), c) the science of government, and d) the science of wealth. This book also dealt with related engineering problems. In
fact, modern economics has a definite logistic and engineering approach as evidenced in the writings of William Petty, David
Ricardo, Augustine Cournot, and Leon Walras. However, modern “positive” economics has distanced itself from ethics, thereby
impoverishing itself seriously (Sen, 1990, p. 7-14).
vi (See Foucault, M. (1984). The History of Sexuality, Volume 2: The Use of Pleasure. Penguin: London, p. 26). Paul-Michel
Foucault (1926-84) a French philosopher and historian, was one of the most influential and controversial scholars of the post-
World War II period. Foucault continued to travel widely, and as his reputation grew he spent extended periods in Brazil, Japan,
Italy, Canada, and the United States. He became particularly attached to Berkeley, California, and the San Francisco Bay area and
was a visiting lecturer at the University of California at Berkeley for several years.
vii Aristotle likens the parties' initial positions to two equal lines. The injustice upsets that equality by adding to one line a
segment detached from the other. The correction removes that segment from the lengthened line and returns it to the shortened
one. The result is a restoration of the original equality of the two lines. More recently, it has become central to contemporary
theories of private law.
viiiAristotle follows Socrates and Plato in taking the virtues to be central to a well-lived life. Like Plato, he regards the ethical
virtues (justice, courage, temperance and so on) as complex rational, emotional and social skills. But he rejects Plato's idea that
training in the sciences and metaphysics is a necessary prerequisite for a full understanding of the good or human well-being. The
good of human beings cannot be answered with the exactitude of a mathematical problem since mathematics starts with general
principles and argues to conclusions. Aristotle conceptualized ethical theory as a field distinct from the theoretical sciences.

24
 Chapter 03
A Systems-Thinking Approach to Understand the Challenge
of Corporate Ethics in the Turbulent Markets of Today

Executive Summary

Morality is primarily a system of values, meanings, convictions, beliefs, principles and drivers of good
behavior and good outcomes in any organization Using system-thinking concepts and applications introduced
and developed during the last 50 years or so by various scholars from MIT, Stanford, and Wharton, such as
Chris Argyris, Russell Ackoff, G. K. Forrester, Peter Senge, Stephen Covey and Jim Collins, this Chapter seeks to
explore various past and contemporary market systems and challenges in terms of specific inputs, processes, and
outputs. Systems-thinking reckons everything in the cosmos (usually classified as subjects, objects, properties and
events) as a system (composed of two or more interactive parts with individual and interactive effects) that is
connected to every other system in the universe. Various System-Thinking Laws and Archetypes that have been
developed thus far by systems-thinkers will be introduced in order to identify basic patterns, structures and
constraints of human thinking and reasoning that create market phenomena. The academic and managerial
challenge is to identify, explore and capitalize such nonobvious connections for creating and developing new
markets and corporate growth opportunities in the highly turbulent markets of today. In a globalized, digitized
and networked planet and universe, systems-thinking is a very effective tool for analyzing turbulent market
systems holistically and in an inclusive and integrated manner, with their specific inputs, processes, and
outcomes. Several contemporary market cases will be included to illustrate the contents of this chapter.

Introduction:
Amerigo Vespucci, a sixteenth-century Spanish royal court-appointed “pilot major,” was the first
atlas maker of the world; he based his work on notes, charts and artifacts, books and portfolios of
hundreds of sailors before him. In Seville, Spain, Vespucci hung a giant wall chart where navigators
sailing into port traced their discoveries and planned adventures. Vespucci’s efforts were recognized; for
a time he was credited with discovering the “Americas,” and the Western Hemisphere still bears his
name.

However, the more significant atlas maker of his time was Gerardus Mercator, a Flemish
mathematician, who drew the first map of the world on a grid of uniform north-south, east-west parallels,
thus creating a medium for systematically placing the then known continents, oceans and islands of the
world. Even though Mercator’s framework was unabashedly Europe-centric (he placed almost two-thirds
of the world above the equator), yet subsequent cartographers have gradually assembled all major round-
the-globe journeys on one global map that we have today. Systems-thinking is also road-mapping the
world of humans, human behavior, organizational behavior and social cultures, history and humanity.
Systems-thinking is a simple and systematic way to organize the diverse tales of explorers of
organizational change into a coherent whole (Senge et al., 1999, p. 4).

As part of our methodology for exploring corporate ethics, we now introduce some preliminary
concepts and terms of systems and systems-thinking in order to understand better the dynamic nature of
ethics and morality in general, and of corporate ethics and morality in particular.

What is a System?
The word “system” originates from a Greek verb sunisthánai, which originally meant “to cause to
stand together.” Etymologically, therefore, a system implies a structure that holds the parts together in a
functional whole. A system is a perceived whole whose elements hang together because they continually

1
affect each other over time and operate toward a common purpose. In this sense, the human body, the
heart and its organs, the home and the factory, the ecology and the atmosphere, diseases and epidemics,
are systems or structures that hang together via forces of interrelationships and interactions (Senge et al.,
1994, p. 90). i

A system is anything (subjects, objects, properties or events - SOPE) that is made up of two or more
parts. Each part of the system interacts with other parts within the system to produce a holistic effect that
transcends the effects of individual parts. Everything in the universe has two or more parts, and,
therefore, is a system. The universe with all its constellations, galaxies, stars and planets is a system. Our
mother earth is a unique planetary system of geo-, hydro-, thermo- and atmospheres that make mineral,
plant, animal and human life possible. Ethics, morality, business ethics, managerial ethics, executive
ethics and corporate ethics – all are systems that we need to explore.

Everything that exists is a system. As human beings we are bio-rational systems, our homes and
workplaces are socio-physical systems, our schools and universities are education and knowledge
generating systems, our corporations and governments are management or governance systems, our planet
and the universe are terrestrial and cosmic systems. Our businesses and markets, our work and human
endeavors are systems bound by an inevitable fabric of interrelated forces and actions that often take
years to fully play out their effects on each other. Since we are part of the lacework, it is doubly difficult
for us to see the whole pattern of the fabric and pace of change. Instead, we often focus on snapshots of
isolated parts of the system, and wonder why our complex problems never get solved.

All reality is a system. Every system has at least three dynamic elements: inputs, processes and
outputs. “Inputs” are subjects and objects as antecedents, determinants, materials, infrastructure, and
resources that are the starting elements of any system. The inputs are converted into outputs by elements
called “processes” such as policies, procedures, organization learning routines, patents, technologies,
regulations and enforcements. Thirdly, “outputs” are outcomes or consequences, intended or unintended,
good or bad, just or unjust that result from inputs and processes.

What is Systems-Thinking?
System thinking is a discipline for seeing wholes. It is a framework for seeing interrelationships
rather than linear cause-effect chains and things, for seeing processes and patterns of change rather than
static snapshots. Systems-thinking is a sensibility for the subtle interconnectedness that gives living
systems their unique character. It is a discipline for seeing the “structures” that underlie complex
situations, and for discerning high from low leverage change. It is a shift of mind from seeing parts to
seeing wholes, from reacting to the present to creating the future, from seeing ourselves as helpless
reactors to changing reality to seeing ourselves as active participants in shaping that reality. “The
unhealthiness of our world today is in direct proportion to our inability to see it as a whole” (Senge, 2006,
p. 68). Systems-thinking is more than a powerful problem-solving tool; it is a powerful language,
augmenting and changing the ordinary ways we think and talk about complex issues and problems. It is a
dynamic language for describing how to achieve fruitful change in organizations. Jay Forrester and his
colleagues at MIT, USA developed this language as “systems dynamics” over the last 50 years. It has its
own tools and methods, links and loops, laws and archetypes, stock-and-flow modeling, all of which help
us to understand how complex feedback processes can generate problematic patterns of behavior within
organizations and large-scale human systems (Senge et al., 1994, p. 89-90).

Market Turbulence Problem as a System at Unrest

Every problem is constituted of two sets or vectors of variables: a) controllable variables, say vector
Ẋ, and b) uncontrollable variables, say vector Ẏ. That is, problem P = f (Ẋ, Ẏ). Problem arises when Ẏ
2
dominates Ẋ. The problem in corporate ethics and corporate morality is basically a “system at unrest.”
Operationally lived and experienced corporate ethics and morality is to identify variables in Ẏ that
dominate specific variables in Ẋ, and find an economic, legal, ethical, moral and spiritual solution to
optimize performance despite this dominance. The problem of FECS during its October 2008 financial
crisis can be defined, characterized and formulated as P = f (Ẋ, Ẏ). Problem arises when Ẏ (e.g.,
investment banks, institutional investors, money markets, stock exchanges) dominate Ẋ (small
shareholders, household investors, small farmers or entrepreneurs that need loans for working capital or
cash).

For instance, if your environment Ẏ is predominantly your competition whom you cannot dominate
or control, and if the uncontrollable variables in competitive environment Ẏ (e.g., y1 = price, y2= quality,
y3= distribution, and y4 = advertising) are dominating or negatively influencing your corresponding
variables in Ẋ (e.g., x1 = price, x2= quality, x3= distribution, and x4 = advertising), then a specific problem
arises. Solution alternatives are a) either to optimize despite or because of Ẏ, b) or seek dominance over
Ẏ by merger or acquisition, c) or seek to dominate a specific y i (i = 1, 2, 3, 4), or d) divest this business,
or e) ignore Ẏ and create your own market (Kim & Mauborgne, 2005), or f) change your market, and so
on. Each solution that you choose should be legal, ethical, moral, spiritual, and hence, economically
optimizing. This is the essence of corporate ethics or corporate morality in action.

A system without an environment does not exist in our universe. An environment of a system is itself
a system whose contents, that is, subjects, objects, properties and events (SOPE) impact a given system,
but the latter cannot impact or control the system that impacts it. If a system can control its environment,
then that part of the environment becomes a part of that system. For instance, if competitors, new
government regulations, new globalization challenges or new technologies impact and control the firm,
and the firm, in turn, cannot control them, they form the firm’s environment. But if you decide to buy or
merge with a given competitor, then the merged or acquired system is no more an uncontrollable
competing variable, but becomes part of your system.

Systems Thinking and Process Mapping

Process mapping and systems thinking are distinct but complementary. Process diagrams show a
flow or sequence of activities. The labels are verbs, tasks or steps. The arrows show a flow or sequence
and chronology. A change in one element does not necessarily change other elements – they are
sequential not causal. For instance, D follows C, C follows B and B follows A. A, B or C do not cause
D. Analogously, moon follows the earth, the earth follows the sun, the sun follows the Milky Galaxy, and
the Milky Galaxy follows its constellation – one does not cause the other (Senge et al., 1994, p. 184-85)

A linear sequence will be: A ➔ B ➔ C ➔ D.

A circular sequence could be: A affects B, B affects C, C affects D, and D affects A;

or A➔ B ➔ C ➔ D ➔A.

A causal-loop diagram from system dynamics represents cause-and-effect relationships. The labels
on systems diagrams represent variables (not actions), usually nouns or noun phrases. Changing any
variable will produce change in all the variables in the loop. For example: production quantity affects
product quality that in turn affects product price which in turn affects product sales and which in turn
affects production quantity. Each stage could involve ethics and morals; in which case the morality of
quantity production affects the morality of product quality which in turn affects the ethics of product
pricing, and so on.

3
 Fast cycle time is process mapping; it is specifically about improving the speed of performance in an
organization, not by moving faster, but by redesigning your work. Fast cycle time must combine with
TQM or quality improvement, new relationships with suppliers, high-performance teams, and redesigning
work flow as a system. Each method or systems component should reinforce each other in a virtuous
cycle.

The Concept of Feedback

An important concept in systems thinking is “feedback.” The term means a much broader concept
than the positive or negative feedback we receive from our customers, colleagues or bosses. In systems
thinking, feedback means any reciprocal flow of influence. Feedback, in this sense, is the foundation of
reality. The key to seeing reality systemically is seeing circles of influence rather than straight lines.
Every circle tells a story. By tracing the flows of influence, we can see patterns that repeat themselves,
time after time, making situations better or worse. The practice of systems thinking starts with
understanding a simple concept called “feedback” that shows how actions can reinforce or counteract
(balance) each other. Systems-thinking recognizes “structures” or patterns of change that recur again and
again. It enables us to simplify life by helping us to see the deeper moral patterns lying behind the events
and the details of ordinary life and reality.

Figure 3.1A represents the traditional linear sequence of causal-effect influence. In contrast, in
systems-thinking, feedback is an axiom that states, every influence is both cause and effect. Nothing is
ever influenced in just one direction. Reality exists in structures, and structures cause behavior. Figure
3.1A captures this phenomenon. Seeing only individual actions and missing the structure underlying our
actions, is the root of our linear thinking and moral powerlessness in understanding complex systems. If
you include the blue dotted line as in Figure 3.1B, then the system also becomes dynamic and circular -
outputs becoming inputs to another system or to the same system in reverse gear. Figure 3.2 is another
version of circular causation.

Local and domestic problems have international and global antecedents, concomitants, determinants
and consequences.

• Antecedents are factors and events that precede but influence the problem at hand.
• Concomitants are factors and events that accompany and influence the problem at hand.
• Determinants are factors and events that cause (necessary and sufficient conditions to) the problem.
• Consequences are effects and outcomes that are causally connected to the problem or its selected
solution.

A problem correctly identified and well formulated is half solved (John Dewey). To solve a problem,
you have to get ahead of it and change the determinants for its occurring. Formulating a problem carefully
can help you identify the reasons it is occurring. A linear solution is good enough for simple and
structured problems. We need circular (or non-linear) systems solutions to understand and resolve
unstructured or “wicked Problems.” Dynamic complexity implies many complex effects (Senge, 2006,
p. 71):
• The same action has dramatically different effects in the short run and the long run;
• The same action has one set of consequences locally and a very different set of consequences in
another part of the system;
• Obvious interventions produce non-obvious consequences.

4
 Figure 3.1A: The Traditional Linear Influence of Cause and Effect in
Non-Systemic Thinking

Concomitants

Antecedents Causes Effects

Figure 3.1B: The Circular or Dynamic Influence of Cause and Effect in

Systemic Thinking

Concomitants

Antecedents Causes Effects

Figure 3.2: The Reciprocal Influence of Cause and

Effect in Systems Analysis

Cause Effect

Conventional linear methods such as forecasting, planning and analysis are ill-equipped to deal with
dynamic complexity. Insights into causes and possible cures require seeing interrelationships between
various factors and variables and at various times and contexts. A poignant example of destructive linear
thinking was the USA-USSR arms race. Each one perceived the other as a threat for some forty years,
and accordingly, piled up nuclear arms. Each party independently estimated each one’s arms buildup,
assessed the additional threat, and build further arms to neutralize the threat. The process became circular
– each one’s reactive strategy causing counter-acting strategy. The long-term result of each party’s effort
to be more secure was a heightened insecurity for all and an escalation dynamic – a combined nuclear
stockpile 10,000 times the total firepower of World War II (Senge, 1990, p. 71-72).

5
 The current mess of financial market collapse of October 2008 and the financial crisis that followed
are effects of previous causes. Nothing happens randomly. One could identify the following factors that
led to the current financial crisis:

❖ Ingenious financial instruments (e.g., derivatives, bond options, hedge funds, and the Ponzi scheme)
created by human ingenuity;
❖ Various financial bi-products that we have created to sell debt or spread risk (e.g., risk insurance, debt
securitization, collateralized debt organization (CDO), default credit swaps (DCS), and the like), and
thus, presumably, to offer better credit conditions, and, accordingly, the
❖ Various lending rates that we have devised (e.g., constant tampering with the Federal Reserve Bank rates,
almost zero percent Treasury bills, lowering prime interest rates, sub-prime mortgage rates, zero
collateral easy home mortgage credit, and adjustable rate mortgages (ARMs)) are all “causes” that
conspire together to create the
❖ Various “effects” – the blasting mortgage homeowner markets, the real estate and housing price boom,
seeking large dream homes that one could not afford, credit payment default, mortgage payment defaults,
housing price collapse, home foreclosure, personal bankruptcies, and investment banks bankruptcies – a
mega financial mess.

Our state, federal, and global level bailout plans are only quick-fix temporary solutions in this regard.
The causes are still left unidentified, unregulated and unaccountable (Stiglitz, 2015, p. 1-69). The effects
are just the tip of the iceberg of an array of unintended consequences.

Using the cause-effect circular thinking represented in Figure 3.2, Figure 3.3 illustrates a systems-
analysis of the current financial market crisis. We also anthropomorphize actions, making us, humans as
the center of all actions, and worse, the center of the universe. From the systems perspective, the human
actor is part of the feedback process, not standing apart from it. We are part of nature, not separate from
nature or standing apart from it. This represents a profound shift in awareness. It enables us to see how
we are continually both influenced by and influencing our reality. This shift of awareness is fundamental
to ecology, sustainability and global climate change – unless we see ourselves as part of the nature that
surrounds us, not separate from it, we will not feel responsible to the harm that we do to nature by our
wasteful habits (Senge, 1990, p. 78).

Figure 3.3: A Circular Cause-Effect Systems Analysis of the Current Financial Crisis

Easy Lending Consumer &

Rates Investment
Market Crisis

Unregulated
Financial Unregulated
Bi-products Financial
Instruments

6
The Reinforcing and Balancing Feedback Processes
There are two distinct types of feedback processes or building blocks in systems-thinking:

• Reinforcing feedback loop: these are amplifying processes that constitute the engine of growth. In any
growth or decline situations, reinforcing feedback is at work.
• Balancing feedback loop: these are stabilizing processes whenever there is goal-oriented behavior. The
goal can be any desired target such as higher market share, plant shutdown, cost-containment,
massive layoffs. Nature loves balance and has built-in balancing-mechanisms.

Reinforcing loops generate exponential growth or collapse, in which the growth or collapse continues
at an ever increasing rate. For instance, if you add $100 a year to your piggy bank, it grows linearly and
steadily to $4,000 at the end of forty years. Whereas, if you invested each year $100 in a 7% interest
yielding CD without withdrawing the interest, it could exponentially grow to more than $40,000 in forty
years. In all reinforcing processes, as in a bank account, a small change builds on itself. High birth rates
lead to higher birth rates; industrial growth begets more industrial growth; higher debts to higher debts;
high deficits lead to higher deficits; high crime generates higher crime. Reinforcing loops can be positive
or negative, constructive or destructive, exponentially rising or collapsing, a virtuous or vicious cycle.

There can be a number of elements in a reinforcing loop – all in a circle, all propelling each other’s
growth. More could be added or deleted. By definition, a reinforcing loop is incomplete. Often it may
have balancing elements built within the loop. For instance, start at the top right of the circle and proceed
clockwise with each of the following connected reinforcing elements (Senge, 2006):

▪ Your team’s agenda is full.

▪ The fuller the agenda, the less time people have to explore issues in depth.
▪ This scatters the team’s level of focus.
▪ The more scattered the focus, the lower the level of shared understanding, and the more superficial
the treatment of problems.
▪ Thus, decisions made are not momentous and do not stick.
▪ Therefore, problems arise adding to the team’s agenda.
▪ Over time, as the team moves around the cycle, more and more problems pile up.
▪ And your team’s agenda is overfull again.

In an organizational context, a common reinforcing feedback is when managers influence their

subordinates by their prior expectations about them. For instance, if a manager sees high potential in
Jack, a subordinate, and accordingly gives him much attention to develop that potential, Jack may actually
fulfill the manager’s expectation and turn out to be a great leader, and the manager may feel reinforced in
his original appraisal of Jack. Conversely, if a manager labels Jane as a low-potential subject, and
consequently, pays less attention to her, she may actually turn out to be ineffective, and the manager may
feel reinforced in his belief. The psychologist Robert Merton (1968) called this phenomenon as the “self-
fulfilling prophecy.” It is also known as the Pygmalion effect. ii

Pygmalion effect often occurs in schools when teachers pre-label students as first track or second
track or third track, and treat them accordingly; the students are victimized by such pre-classifications
and labeling, and often, and possibly because of this negative tag, persist in their learning disabilities.
Pygmalion effect often occurs in corporations and institutions when people scout talent and earmark
certain individuals for higher administrative tasks. In reinforcing feedback processes such as the
Pygmalion effect, a small change builds on itself, amplifies itself, and produces more movement in the
same direction. These are vicious cycles.

7
 There are virtuous cycles, however, reinforcing feedback processes that reinforce in desired
directions. For instance, physical exercise can lead to a reinforcing spiral – you exercise more, you feel
better, you eat better, you work better, and all these, in turn, spur you to keep exercising regularly. The
growth of any new product involves positive reinforcing spirals – a word-of-mouth by satisfied customers
can snowball and produce a positive spiral chain effect among potential customers. Conversely, a
defective product can generate the chain in the opposite direction. Similarly, the extinction of
corporations or certain rare species, ecological damage, gas crisis, financial crisis, and the like are vicious
cycles of negative reinforcing feedback processes, unless counteracted in time by balancing feedback.
The human body has thousands of balancing mechanisms whereby it maintains homeostasis, an
ability to maintain conditions for survival in a changing environment. Mechanisms such as eating when
hungry, drinking when thirsty, resting when tired, keeping warm in cold temperatures, keeping cool in
warmer climates, are all balancing self-correcting processes. Besides these externally fed mechanisms,
our human body has thousands of internal mechanisms by which it maintains desired level of body
temperature, oxygen level, blood sugar, and cardiovascular rhythm to maintain blood pressure and
heartbeat, and neuromuscular mechanisms to maintain neural balance, and the like.
The balancing mechanisms often maintain the status quo, and hence, go unnoticed. In general,
balancing loops are more difficult to see than reinforcing loops because it often seems that nothing is
happening. The balancing processes, however, can generate surprising and problematic behavior if they
go long undetected. Most human sicknesses and diseases, and eventually death, are problems of
undetected strained balancing loops.

Free Enterprise Capitalism System

From a systems-thinking viewpoint, the free enterprise capitalist system (FECS) is a dynamic,
interconnected organic system and not a discrete or compartmentalized entity composed of disaggregate
parts. Systems-thinking calls for a shift of our mind-set from seeing just parts to seeing the whole reality
in its structured dynamic unity. Systems-thinking demands a sensibility to see subtle interconnectedness
that gives FECS its living and unique character. Moreover, it mandates that we see ourselves as active
participators or partners of FECS and not mere cogs in its wheels or as just factors of its production,
distribution and consumption processes.

The essence of the discipline of systems thinking lies in the shift of mind along two dimensions
(Senge, 2006, p. 73):

❖ Seeing interrelationships rather than linear cause-effect chains in reality;

❖ Seeing processes and patterns of change rather than static snapshots of reality.

Reality is made up of circles of interdependencies and structures of systems, but we see reality
linearly, in straight lines. One of the reasons for fragmentation in our thinking stems from our language.
Language shapes perception. What we see (i.e., our perception) depends on what we are prepared or
trained to see. Western languages with their subject-verb-object structure are biased toward a linear view
of reality. By contrast, many Eastern languages (e.g., Japanese, Chinese) do not build up from subject-
verb-object sequences. If we want to see system-wide interrelationships, we need a language made up of
circles, that is, a language of interrelationships. A language of interrelationships is critical in facing and
understanding dynamically complex problems and issues and strategic choices in business. Individuals,
teams and organizations must see beyond events into forces that shape events and change.

FECS as a System of Subjects, Objects, Properties and Events

A problem is a “system at unrest” (Ackoff & Emery, 1972). For instance, a business “system at
unrest” implies that any or all of the following four components are dysfunctional or non-coordinating:
8
 ❖ Subjects (e.g., people, employees, executives, and suppliers),
❖ Objects (e.g., products, services, machinery and equipment, patents, cash and inventory);
❖ Properties (e.g., skills, talents, quality, R&D, technology, logistics, promotions, service, market
research, and complaints feedback) or
❖ Events (e.g., new product development, new product announcements, best quality awards, press
release, peak progress, peak market share, peak profits, peak losses, peak stock prices, peak market
evaluation, peak brand equity, and the like).

Any system is composed of subjects, objects, properties and events (SOPE). An economy is a market
system with an environment. From a systems perspective, an environment is SOPE outside you that
impact you while your SOPE cannot impact. If and when you impact and control, then that part of the
environment becomes your SOPE or internal environment.

All products and services offered in that market economy are systems. A business corporation or
organization that offers such products and services is a system. A market that absorbs these products and
services is a social or economic system. Any of these systems could be at unrest at a given time. That is,
there are economic, market, business and environmental problems. Governments, politics, laws and
legislatures, economy, culture, religion, civilization, historical eras and epochs are systems in the world.
When they are at unrest, there are market turbulent problems. A business system at unrest, accordingly,
may be unclear in its vision and mission, its goals and objectives, its policies and procedures, in its
strategies and tactics, and, hence, fails to realize expected goals and objectives. This is a business problem
in some form of turbulence.

Stakeholders are those in the environment of a system whom the company impacts and, in turn, gets
impacted and affected (Freeman, 1984). Corporate deliberation, choices, decisions, strategies and
implementations affect company stakeholders as subjects, objects, properties and events. Under subjects a
company should include all its major stakeholders such as customers, employees, shareholders, suppliers,
distributors and vendors, banks and creditors, governments and media, local and global communities, and
even competition.

Hence, corporate executives should periodically identify and characterize the “structure” of specific
Corporate Morality as suggested in Table 3.1. Every system has an environment, either internal (elements
within the system that you cannot control) or external (elements outside the system that you cannot
control). If and when you control these elements they become part of your system. In this sense, a
problem is a “system at unrest” (Ackoff & Emery, 1972). The “unrest” that causes and defines the
problem is, in turn, caused by the internal or external environments beyond our control, but still
controlling us and our organization.
[Table 3.1 about here]

Critical Systems-Thinking Questions for Corporate Ethics

Hence, applied to the capitalist system that we seek to understand, we can raise many questions
based on systems-thinking. For instance:

❖ How do we see the Free Enterprise Capitalist System (FECS) as a whole, with circular cause-effect
relationships rather than linear, discreet, static, snapshot, cause-to-effect unidirectional transactions?
❖ How do we see FECS as a whole dynamic organic system and not compartmentalize it into its parts:
how do we shift our mind-set from seeing just parts to seeing the whole reality in its structured
dynamic unity?
❖ How do we develop a sensibility to see subtle interconnectedness that gives FECS its living and
unique character?

9
 ❖ How do we see ourselves as active participators or partners of FECS and not mere cogs in its wheels?
❖ How to identify the “structures” that underlie complex situations in FECS that bring about high
versus low leveraged changes?

The same is true of our bodies, our jobs, our families, our organizations and neighborhoods, our
industries and markets – they are dynamic processes; they are dynamic systems. Often order emerges
from chaos, stability from turbulent environments, meaning from confusion, and unity from diversity
(Senge et al., 1994: 96-97).

The art of systems thinking is in seeing through complexity to the underlying structures generating
change. Systems thinking does not ignore complexity; on the contrary, it organizes complexity into a
coherent story that empowers us to detect and distinguish between causes and effects of problems, their
separation in space and time, and how we can remedy them in enduring ways. The greatest benefit of
systems thinking is to distinguish between high-leverage from low-leverage changes in highly complex
situations.

The increasing complexity of today’s world leads many managers to assume that they lack
information to act effectively. The problem is not lack of information, but too much of it. Information
overload adds unnecessary complexity (Senge, 1990/2006, p.128). Systems-thinking enables us to sift
what is important and what is not important in the world of information explosion that we confront every
day. By using the systems archetypes, we can learn how to structure mountains of information and
relevant variables into a coherent picture of the forces that play.

Systemic Laws for Systems-Thinking

There are many paradoxes in organizational life. For instance, the time of our greatest growth is the
best moment to plan for harder times. The policies that gain the most for our current dominant market
position may ultimately drain our resources most quickly. The harder we strive for what we want, the
more we may undermine our own chances of achieving it. Systems principles like these are meaningful
not so much in themselves, but because they represent a more effective way of thinking and acting.
Incorporating them into our corporate strategic behavior requires “peripheral vision” - the ability to pay
attention to the world as if through a wide-angle lens, so you can see how your actions interrelate with
other areas of activity (Senge et al., 1994, p. 87-88).

Peter Senge and his associates (Senge, 1990/2006, p. 57-67; Senge et al., 1994, 1999, 2000) enunciate
some basic laws of the “fifth discipline” that can help us in understanding the origins of problems, their
underlying structures and patterned behaviors, and their systemic solutions. A first law, in this regard is:

Law 1: “Today’s Problems come from Yesterday’s Solutions.”

That is, the causes of our problems are immediate – we merely need to look at our own solutions to
other problems in the past. This law is particularly true when yesterday’s solutions are a) short-term, b)
quick-fix, and c) patchwork or band aid resolutions of a market turbulent problem that is ill-defined. In
each case, solutions merely shift problems from one part of the system to another. They often go
undetected because those who “solved” the first problem are different from those who inherit the solution
– a new problem.
Every “problem” we face today, in education, in the environment, and even in our personal lives owes
its very existence to a well-meaning step we individually or collectively took yesterday. Decisions we
make today often become tomorrow’s problems. The solution – engage your community to help identify,
frame and solve the problem. A large, diverse group that sees the problem from all angles is more likely
to anticipate unintended consequences.
10
 Jay Forrester called systems-thinking the “new dismal science,” because it points out the
vulnerabilities, limited understandings, and fallibilities of the past, and the assurance that today’s thinking
will be the source of tomorrow’s problems (cited in Senge et al., 1994, p.93). But finally, things do get
better. People bring formerly “undiscussable” problems to the surface; they also realize that their old
ways of thinking have anchored and trapped them with current problems. iii

Law 2: “Harder you push, harder the system pushes back.”

This is the second law. There is a limit up to which a system can be pushed. Beyond the limit, the
system breaks from its ideal environment and gives disastrous results. Consider another source-pattern of
problems (Senge, 1990/2006, p. 58-59):

• In the 1960s, there were massive federal programs to build low-income housing and improve job
skills in decrepit inner cities in the U. S. Despite this great welfare program, these cities were worse
off in the 1970s. Why? One reason was that low-income people from other cities and rural areas
migrated to these high-welfare cities, thus overcrowding them and the job training programs were
swamped with applicants. The city’s tax base began to erode – obviously, being overcrowded with
welfare recipients.
• The developed countries have great programs that subsidize or assist food and agricultural programs
of the developing countries. More food, however, reduces deaths due to malnutrition, that, in turn,
causes higher net population growth, and eventually more malnutrition.
• In the mid-1980s, in order to correct the U. S. trade imbalance the federal government let the dollar
depreciate. Foreign guerilla competitors, however, let the prices of their goods fall in parallel, thus
“compensating” or neutralizing the value of the depreciated dollar.

Under each case, there is a well-intentioned intervention that calls forth responses from the system
that, in turn, offsets the benefits of the intervention. In systems-thinking, this phenomenon is called the
“compensating feedback.” Compensating feedback is not confined only to “larger systems” but occurs in
smaller or personal systems. Consider the following (Senge, 1990, 2006, p.59):

• Jack quits smoking only to find he is gaining weight, and suffers so much loss in self-image that he
takes up to smoking again to relieve the stress. He is back to square one, but possibly in worse
condition than before.
• A protective mother who wants so much for her young son to get along with his schoolmates that she
repeatedly steps in to resolve problems, ending up with a child that never learns to settle differences
by himself.
• Jane is an enthusiastic newcomer so eager to be liked that she never responds to subtle criticisms of
her work and ends up embittered and labeled “a difficult person to work with.”

Senge (1990, p. 59) concludes: “Pushing harder, whether through an increasingly aggressive
intervention or through increasingly stressful withholding of natural instincts, is exhausting. Yet, as
individuals and organizations, we not only get drawn into compensating feedback, we often glorify the
suffering that ensues. When our initial efforts fail to produce lasting improvements, we “push harder.”
We hope that hard work will overcome all obstacles, all the while blinding ourselves to how we are
contributing to the obstacles ourselves.”

Law 3: “Behavior grows better before it grows worse.”

This is the third law in systems thinking. Low-leverage investments and solutions actually work, but
mostly in the short term. Consider the following problems:

• New housing developments mushroom. New houses are built. But low and behold, the connecting
roads get congested, water supply is overstrained, sewerage buckles up, electricity runs in short
11
 supply, trash collection gets delayed, children need to be bussed to far away schools, groceries and
gas stations are too far, police stations are over-tasked, and emergency hospitals are tens of miles
away! The new housing subdivisions and developments were great additions to the township, but
soon they cause unintended consequences that become “wicked” problems.

Law 4: “The Easy Way Out usually Leads Back In”

This fourth law of systems thinking is very much connected with all three previous laws. We all find
comfort applying familiar solutions to complex or unfamiliar problems, sticking to what we know best. If
solutions were easy to find to these problems, they would already have been found. In complex human
systems, there are always many short-term strategies to make things look better. Only eventually the
compensating feedback comes back to haunt you.

Kaplan called this the law of the instrument: ”Give a small boy a hammer, and he will find that
everything he encounters needs pounding” Maslow reframed this saying “If all you have is a hammer,
everything looks like a nail.” This is a comfort zone challenge. When something works, we like to reuse
it. This happens when we try to apply the so-called “best practices” to complex problems. Engaging your
community members provides much needed insight and a diverse set of tools to apply to the problem.

This Law also reflects symptomatic solutions. A typical short-term solution feels wonderful when it
decidedly cures the symptoms. You feel the improvement; you think the problem has gone away. It may
be a year or two later, however, when the problem recurs with vengeance. The initial cure can be worse
than the disease. “Pushing harder and harder on familiar solutions, while fundamental problems persist or
worsen, is a reliable indicator of non-systemic thinking” (Senge, 1990/2006, p. 61). iv

Psychologists distinguish between acts of commission and those of omission. Although their
economic impact is the same in economic terms (e.g., a dollar not lost is a dollar earned), yet risk
managers do not treat them equally. They place a greater emphasis on earning profits than they do on
avoiding losses. Risk managers do not like to invest and thereby conserve value. However, a company
can be also successful by preventing losses while its rivals fail, and it can then grab market share from
them. In chess, grand masters focus on avoiding errors; rookies try to win. Suppose you had not invested
in stocks during the last two years but kept your money in low-interest paying banks, when everyone else
investing in stocks lost capital by 40%. Not losing half your retirement is undoubtedly a victory (Taleb,
Goldstein, & Spitznagel, 2009, p. 80). Good hindsight can be a good foresight.

Law 5: “The Cure can be worse than the Disease.”

This Law is similar to “shifting the burden” and is easy to confuse with the push/push back law. It is
slightly different though and can occur at the same time. The “cure” in this case is an intervention that is
enabling and becomes addictive. As dependence on the intervention increases, the system’s ability to cure
itself lessens. This is about the difference between giving someone a fish and teaching him how to fish. If
an intervention is needed then we have to make sure the intervention does not weaken the entire system
causing more and more dependence. In some ways, public education shifted the burden of teaching
children from parents to teachers. Engaging stakeholders in defining problems and finding solutions keeps
the burden where it belongs, shared across the entire system and not just on one part of it.

This fifth law follows from all the first four laws. The fifth law is also a compensating feedback
mechanism. Senge’s fifth law of systems thinking states that “Often, the easy, familiar and short-term
solution is not only ineffective, it could be addictive and dangerous.”

Next, consider the dreadful consequences of the 2008 financial markets crisis and the quick-solutions
– the cure was worse than the disease!
12
 • Consequently, the cost of borrowing soared for many companies, and global financial investment
companies - Goldman Sachs and Morgan Stanley, that declared themselves relatively strong a week
ago, came under assault by waves of selling during the last two weeks of September 2008. Less than
a week thereafter, both Morgan Stanley and Goldman Sachs who almost faced bankruptcy
requested the federal government for a change of status from investment banks (that served as
securities brokers and under SEC vigilance) to mainline commercial banks (that can do loans and
deposits like any other commercial bank but come under more federal regulatory control).

• The financial services industry posted losses close to $800 billion since July 2007. Giant financial
companies are experiencing deep trouble. Table 5.1, Chapter 05, presents market-capitalization
performance statistics of 17 mega U. S. financial firms. Together, they had a market-capitalization
total of over $1.6 trillion on October 9, 2007. It quickly eroded within a year, however, to a total of
$865.6 billion by September 12, 2008, a total loss of $791.72 billion (47.8%), or an average of $46.6
billion per company.

• Ripple effects of the collapse of these financial giants have been felt all over Europe, Japan and the
Asian financial markets. While Congress initially turned down a $700 billion bailout deal hurriedly
packaged by the Treasury Secretary and the Reserve Bank Chairman, a follow-up deal was crafted
by the Senate House and soon voted in. The bailout plan bailed out some of the largest surviving
financial companies of the world (e.g., Citi-Group, Bank of America, Goldman Sachs); the trickle
down effects of this bail out, however, are highly dubious and questionable. In short, the entire
financial word is experiencing a distress situation and needs a massive global turnaround even now
in the closing months of 2016. v

Law 6: Faster is Slower.

The story of the tortoise and the hare suggests that when we try to move too fast we can get left
behind. Every system has it own unique and optimal speed. This kind of thinking is often articulated as
“fixing” things. When you hear something like: “We’re bringing in a consultant (or hiring a new
manager) to fix things around here”, be very wary. A fast fix often leads to a slow cure. Finding
sustainable solutions can take time. Community members may need time and space to absorb and adjust
to new ideas or changes. The pay value of slowing the pace is a more involved and supportive
community.

Like the first five laws, this law also is a compensating feedback mechanism. For most Americans, in
general, and business technocrats, in particular, the best rate of growth is fast, faster and fastest. Together
with this illusion are other parallel illusions: bigger is better; taller the better; more is desirable; sooner
the better; faster the more efficient; the more pleasurable the more awesome; the less risky the better, and
the more I get the better it is.

Hence, we love gigantic corporations, massive cities, sky-reaching massive structures, larger GDPs
and annual incomes, instant and immediate gratification, sensuous and sensational products, exotic
theaters, restaurants and sports arenas, high-protection comprehensive insurances on life and limb and
everything we do and possess, and massive accumulation of wealth. Unfortunately, in the long-run, all
these illusions slow us down:

Yet, virtually all natural systems (e.g., animals, ecosystems, forests) have intrinsic optimal rates of
growth that are neither fast nor slow. When growth becomes excessive, as in cancer, the system itself
will seek to compensate by slowing down. The current stories of shaky gigantic corporations (e.g., Wal-
Mart, GM, Ford, Chrysler, Toyota, Wal-Mart, Northwest-KLM-Delta, Bear Stearns, AIG, Washington
Mutual, Fannie May, Freddie Mac, Merrill Lynch, Citi-Group, Goldman Sachs and Morgan Stanley) are
basically problems of overgrowth and faster growth. Most of these giants are slowing down, seeking
government bailouts, or Chapter 11 Bankruptcy Protection, or just declare bankrupt.

13
Law 7: Cause and Effect are not closely related in Time or Space

Obvious pathological examples of this Law are asbestosis (also called the white-lung disease) and the
black-lung disease, where the effects of fatal damage to the lungs occur after over 25 years of incubation
and inhalation of dangerous asbestos or coal mining pollutions. The deleterious diffusion effects of the
atomic bomb of Hiroshima and Nagasaki are still felt even though events took place in 1945. The after
effects of the 2008 Financial Crisis are still affecting economies.

How many times do you push an elevator button? How often have you over compensated for the
amount of cold water in the shower? We tend to believe that when we do something there should be an
effect that we can see within a set amount of time. Our testing, funding and business practices reflect this
belief. The challenge is that sometimes there is a clear and present relationship between cause and effect.
Just not all the time. When you actively inform, engage and include your community you provide them
with an opportunity to see the real space between cause and effect.

Delays between cause and effect are normal since cause and effect are not closely related in time and
space - this is the fundamental characteristic of complex systems, human or organizational. Effects are
the obvious symptoms (e.g., declining sales, eroding profits, worker malaise or turnover, absenteeism, or
under-productivity) that indicate there are problems. Causes, on the other hand, are the interaction of the
underlying system that is most responsible for generating the symptoms (Senge, 1990, p. 63). If you
recognize the symptoms in time and do something about it, you can bring about appropriate change to
stop the symptoms. Here lies the difficulty - symptoms do not appear soon after the causes. Cause and
effect are not close in time and space.

We look for immediate effects from causes. Hence, if there is a problem on the manufacturing line,
we look for a cause in manufacturing. When sales people cannot meet targets, we think the problem is
with the sales force and devise new incentives. If there is inadequate housing, we build more houses. If
there is poverty, we increase welfare.

Law 8: Small Changes can produce big Results – but the areas of higher Leverage are often
the less obvious.

Butterfly wings and hurricanes! This is the law of leverage. Small, focused actions at the right place
in the system can produce the biggest and best changes. The challenge is that the “right place” is not
obvious and can seem counterintuitive. Most often leverage in a system is the goals of the system. Some
say that the education system is not working. I think it works quite well given the original goal of
producing factory workers. Right now the goal is changing, in part because of changes in technology that
allow education system stakeholders to collaborate and cooperate and influence the goals of the system.

A great example of small, counterintuitive actions is the use of insects to control insects. Wasps are
introduced in many a greenhouse as a way to control other insects that feed on the greenhouse crop.
Brilliant, effective and not the most intuitive solution. The key to being able to use leverage in a system is
knowing the structure of the system. In education, the structure is massive and very few people know it
well enough to intuit where the leverage points are. Here again, including a large, diverse group of
stakeholders and using their collective intelligence can help find those points.

In systems thinking, we do not look for leverage near the symptoms of the problem – we need to go
upstream and back-stream in time and space to ferret out the root cause. Often, the most effective action
is the subtlest. Sometimes it is best to do nothing, letting the system make its own correction or guide the
action. Other times, the highest leverage is found in a completely unexpected source. For instance, Cray
Supercomputer Company found its highest leverage for supercomputer applications not within the

14
supercomputer industry, but in aeronautical engineering and movie animation (Disney World) – projects
that need supercomputers (Senge et al., 1994, p. 92)

Small well-focused actions that take place at the right place and the right time can sometimes produce
significant, enduring improvements – in systems thinking we call this principle as “leverage.” Tackling a
difficult problem is often a matter of seeing where the high leverage lies – a small strategic change that
produces lasting and significant improvements.

High-leverage changes, however, are usually not obvious, as effects are separated from causes in time
and space (Law 7). There are no simple rules to find high-leverage changes. Learning to see underlying
structures and processes (rather than events) is a good starting point. In the section that follows we will
examine systems archetypes that may enable us to identify and capitalize on high-low leverage points.

Law 9: You can have your cake and eat it too – but not at once.

Black and white, either/or thinking - courtesy of Mr. Newton. In so many instances we think
something is an either/or problem when in fact its a dilemma that can become both/and if we change how
we think of the problem and allow time for solutions to work. Invite stakeholders into the process of
imagining possible solutions and potential long term outcomes.

Most of our so called problematic “dilemmas” are not real dilemmas; they are products of static
thinking; they are effects of “snapshot thinking” rather than process thinking. The classical dilemmas
such as cost-containment versus revenue generation, low costs versus high quality products, earning gains
versus avoiding losses, centralization versus decentralization, global versus local control, happy
committed employees versus competitive labor costs, individualization versus standardization, individual
one-on-one training versus team training, and the like, are by-products of static thinking. Most turbulent
market problems are the effects of either/or dichotomous thinking. These dilemmas imply “either-or”
choices as static, fixed point snapshot view of reality. But when we view reality dynamically as a
continuous flow, and study the processes involved, then the either-or choices become “both” choices, but
at different times.

Investing time and money to develop new skills and methods of assembly, including new methods for
involving everyone on the assembly line for improving quality may involve short-term, high up-front
costs. Nevertheless, they produce immense cost-saving dividends in the long-run.

Law 10: Dividing an Elephant in half does not produce two Elephants

Inability to see the system as a whole can create a world of problems. In the education system, the one
BIG elephant in any country, it is almost impossible for one person to see the entire thing. The best
approach is to have more eyes looking at the elephant from different angles and vantage points. Chunking
up the system and trying to analyze the parts independently is possibly the worst solution. What works for
the trunk will probably be the worst possible solution for the tail. This does not mean you cannot work
within boundaries; it just means that staying aware of the whole, using multiple, diverse perspectives and
attending to how the parts interact will be more helpful and less messy.

Most of our institutions and organizations and the turbulent markets problems they create suffer from
man-made boundaries that impede organizational learning and effectiveness. For instance, businesses
comfortably divide business functions into manufacturing or production, accounting or financing,
marketing and human resources management. Correspondingly, most MBA programs teach these
business functions as separate disciplines. Each one may see a business problem clearly from the narrow
perspective of one’s discipline, but not see how the policies and strategies of their solutions impact and

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interact with other departments or disciplines.

Law 11: There is no blame

In a complex adaptive system there is no separate “other,” – the we versus they. Everything and
everyone is connected and together we co-create the whole system. Sometimes we have difficulty with
this. We reflex to blame, we deflect, and deny. Its hard to take full responsibility for something that seems
to be outside of our control without trying to control everything. It can feel like two competing ideas and
for many that feeling is uncomfortable. Peter Senge suggests: The cure lies with the relationships with
the very people we typically blame for the problems we are trying to solve.

The challenge, in this century, is being brave and making the choice to invite those we see as
adversaries, into the process. Inviting community into problem-solving and decision-making will not rock
the boat as many fear. Rather they will provide the ballast to keep an even keel in any storm.

Law 11 follows from most of the previous ten laws. We tend to finger point at others for the
problems we face such as the competition, regulation, taxes, erratic marketplace, labor unions, legacy
issues, outsourcing, globalization and now, artificial intelligence. At a deep level, there is no difference
between the inside and the outside of the business, the inner sanctum and the outer forum, as most of
these are created by artificial boundaries we impose upon ourselves, our thinking, disciplines and
departments, our corporations and institutions.

Boundaries are symptoms of linear thinking. Hence we ask linear questions such as: who was
responsible for the arms race? Who perpetrated 9/11? Who was the terrorist group behind the Bali
massacre? Who master-minded the November 26, 2008 attack on Mumbai? Who caused the 2008 Wall
Street meltdown? Who propelled the 2007-2009 global recessions? We ask linear, one-way-causation
questions, and we expect linear, one-way causation answers.

If we think in feedback circles (see Figures 3.1A, 3.2, and 3.3), however, then we must remember the
axiom, every influence is both cause and effect. Every incident mentioned above, from this perspective, is
a chain of causes and effects. We ignore some, and over-emphasize others; that is, we search for
scapegoats, and this generates problems in thinking and problems in understanding solutions. The best
solution: No Blame. Systems-thinking shows that there is no outside; that we and the causes of our
turbulent market problems are part of a single system. The cure or solution lies in the relationship we
build with the outside or the enemy. Hence, a corollary: Everyone shares responsibility for problems
generated by a system. This axiom does not imply that everyone involved exerts equal leverage in
changing the system. Some may share responsibility (i.e., blame or guilt) more, some less (Senge,
1990/2006, p. 78).

Archetypes of Systems Thinking:

Nature’s Templates that Control Human Events
Having explored some system Laws that help us to understand patterned behavior among systems and
their component parts, we now seek to identify the “structures” that underlie complex human patterned
behavior and economic situations in the free enterprise capitalist system (FECS) in general, and in
turbulent market problems in particular. These structures bring about high versus low leveraged changes.
A system is strengthened and reinforced by feedback of reciprocal exchanges that makes the system alive,
transparent, human and humanizing. Above all, systems-thinking provides a dynamic framework to
understand, unfold, assess and predict the inner spirit of ethics, morals and cosmic spirituality within the
FECS.

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 In systems thinking, the word “structure” (derived from the Latin word struere = to build) is the
pattern of interrelationships among key components of the system. The interrelationships are not only
organizational such as strategic decision-making processes, hierarchies and process-flows, product quality
and control, but also includes human components such as attitudes, perceptions and emotions, beliefs,
convictions and meanings, social relationship and bonding, ethnic groups and cultures. Not all structures
are visible or conscious; they are built from choices people and organizations make over time,
consciously or unconsciously.

Systems seem to have a mind of their own. Nowhere is this more evident than in delays – delay
between cause and effect, interruptions between our actions and their consequences. One of the highest
leverage points for improving system performance is the minimization of system delays. For instance,
American manufacturers typically reduce delay by controlling inventory, while Japanese counterparts
reduce delays by reducing the entire new product development cycle – a much better competitive
advantage.

Systems archetypes are reinforcing processes that set in motion to produce the desired result. They
create a spiral of success or a spiral of failure. Archetypes refer to recurring, generic systemic structures
that are found in many kinds of organizations, under many circumstances, and at different levels or scales,
from internal personal dynamics to global international relations. With the help of system archetypes, we
can recognize the pattern under a given situation and can predict the behavior under that situation.

Systems archetypes are common and usually reoccurring patterns of behavior in organizations. They
are one of the tools to capture certain pattern and with which managers can quickly construct credible and
consistent hypotheses about the governing forces of their systems. By using the systems archetypes, we
can learn how to structure information and relevant variables into a coherent picture. We can use the
archetypes to broaden our perspective on systemic problems, generate additional or unexpected questions,
notice when there is any recurring pattern and anticipate possible future outcomes of current actions and
events by associating that pattern with one of the archetypes.

Structures of which we are unaware hold us prisoners. Conversely, learning to see structures within
which we operate begins a process of freeing ourselves from previously unforeseen forces. Certain
patterns of structures recur again and again. These “systems archetypes” or “generic structures” empower
us to see structures in our personal and organizational lives. In Greek, archetypes mean “the first of its
kind.” Archetypes are accessible tools with which managers can quickly construct credible and consistent
hypotheses about the governing forces of their systems. They are also a natural vehicle for clarifying and
testing mental models about those systems. They are powerful tools for coping with the astonishing
number of details that frequently overwhelm novices in systems thinking (Senge et al., 1994, p. 121).
Systems archetypes are reinforcing (amplifying) processes that set in motion to produce a desired result.
They create a spiral of success or a spiral of failure.

Systems-thinking literature has identified ten systems archetypes that we now briefly review. Each
archetype has been coupled with a “management principle” that explains the archetype.

Archetype 1: Limits to Growth

Management Principle: Do not push growth; remove the factors limiting growth.

Archetypes are limits to growth structures. Individuals and organizations grow for a while, and then
slow down or stop growing. Many well-intentioned efforts to improve can meet with bumps or limits to
growth. Often growth suddenly comes to a halt, and even reverses itself. Limits to growth structures
operate in organizations at many levels. For example:

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▪ A high-tech organization grows rapidly because of its innovative products. As new products grow,
revenues grow, the R&D budget grows, and the technical staff grows. Eventually, the burgeoning staff
becomes increasingly complex and difficult to manage; bureaucracy sets in; internal competition for
promotions, positions and power slows down innovation and the introduction of new products. Senior
management is divided, or just cannot handle this complexity. Your quality suffers; you lower standards.
These, in turn, after a delay, reduce revenues, then, R&D budget, and eventually, growth mysteriously
levels off. There are limits to growth.

▪ Consider a services firm such as a law firm, a consultancy firm, or an investment bank. Initially, each
firm draws the best talent, brings in good clients, grows rapidly, and the profits are fed into the business
to grow even more. Morale grows; the young talent is highly motivated, and hopes to become partners
within ten years. As the firm grows larger, however, complexity sets in, and its growth slows. Perhaps,
tough competition or market saturation slows growth. Possibly, the founding partners are no longer
interested in sustaining rapid growth. Occasionally, some in-fighting disaffects company morale. The
growth rate slows, which means less promotion opportunities, less hiring, even firing, and the limits to
growth have already set in.

In both cases, limits to growth become powerful. Often, the high-tech company, the law firm, the
consultancy firm, or the investment bank may never recapture their capabilities for developing
breakthrough new products and services or generating rapid growth. The more aggressively you try to
change the process, the more your subordinates perceive risk, and the more they resist. Eventually,
relationships sour, mutual trust breaks down, adversarial attitudes develop, and rumor and suspicion dank
the organization climate. The reinforcing spiral turns around and runs in reverse.

This archetype basically says that almost all systems after growing to a point will slow down and
there will be a reduction in their growth. This is the time for organizational reinforcement via reflection,
discernment and due diligence. Almost all systems with growth will eventually be constrained by the
Limits to Growth archetype.

This archetype is made up of a reinforcing loop (growth) running into resource constraints causing a
balancing loop. Consider the oil industry in this context. Oil companies’ profits are based on the quantity
of oil they sell. In order to increase their profits, they drill out more and more oil but oil is a non-
renewable resource and the cost of drilling oil will increase as oil will become more scarce. There will be
a situation when the cost of drilling oil will be so high that it will not be profitable to drill oil. In this type
of situation, the solution may be to decouple the limiting factor from the system itself by transitioning to
alternative energy sources.

Uber was established in the year 2009 as app-based taxi aggregating company where taxi driver is
the owner of the car. Uber started very well as a luxury cab company and was able to raise funds quickly.
Anybody could register. The only requirement was to have a driver license and a car. They were
aggressive in their growth and were rising exponentially. They were also burning money at a very fast
pace. There was competition from companies like Lyft which led their managers to push hard. They also
got into several controversies which led to halting in their growth and several people stopped using Uber
after the controversies related to the service Uber provided. Even after such an aggressive growth policy,
they are not able to make many profits as they are focusing on getting more revenue by aggressive pricing
and giving incentives to the driver. But there is a limit to which they could go, as it was burning lot of
cash and after a point, they stopped giving incentives and discount to the customers. This situation can be
explained by archetype limit to growth. Had Uber focused on profits from the very start, its current
profitless growth situation could have been avoided.

Typically, most managers react to limits to growth by trying to push harder. When the rate of
growth or improvement slows down, managers compensate by striving even harder. Unfortunately, the
more vigorously you push the familiar levers (e.g., R&D, innovation, promotions, strategic alliances,
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recruitment of new and young talent, borrowing, new debt-equity structures, venture capital, mergers and
acquisitions, or new joint ventures), the more strongly the balancing process resists, and the more futile
your efforts become.

Nevertheless, there is a way out of this loop. In each case, the leverage lies in the balancing loop,
and not the reinforcing loop. To change the behavior of the system, you must identify and change the
limiting factor. This may require actions or choices you have never noticed or considered, or difficult
changes in norms or rewards. The easiest way to recognize limits to growth structures is through the
pattern of behavior. That is, see if you can identify the appropriate elements of the reinforcing and
balancing loops.

First, identify the reinforcing loop or process - what is getting better and what is the action or
strategy that leads to improvement? For instance, in dieting, you not only cut down on fatty foods but
also exercise. In recruiting, you not only get the best talent, but also insist on equal opportunity hiring
program. In maintaining morale and productivity in your professional firm, you not only introduce a new
set of norms and rewards, but distribute them equitably regardless of gender, color, age, religion or
nationality. In maintaining steady new breakthrough products, you not only step up R&D, but also
continuously foster creativity and innovation among all people concerned along the entire new product
value chain of upstream, midstream, and downstream stages of the value added processes.

Archetype 2: Shifting the Burden.

Management Principle: Beware the symptomatic solution.

This archetype basically deals with symptoms, not the actual problem. It deals with a problem
symptom that prompts someone to intervene and solve it. The solution that is obvious and immediately
implementable usually relieves the problem symptom very quickly. Symptomatic solutions address only
the symptoms of a problem, and not the fundamental causes, not the actual problem, and tend to have
short-term benefits at best. There is always an underlying problem that generates the symptoms; it may
be obscure and difficult to notice, or too costly to confront. Thus, you “shift the burden” of the problem
to well-intentioned easy fixes that may work well for the short-term.

But these symptomatic solutions have two specific negative effects. First, they divert attention away
from the real or fundamental source of the problem. Second, easier solutions only worsen the symptoms;
they leave the underlying problem unaltered or even worse. In the long term, the problem resurfaces and
there is increased pressure for symptomatic response. Meanwhile, the system loses whatever abilities it
had to solve the underlying problem; the capability for fundamental solutions can atrophy (Senge 2006, p.
103). For instance, a person turns to alcohol or drugs to boost his self-esteem or help deal with stress may
end up developing an alcohol or drug dependency.

Typical symptomatic solutions are:

• Managers believe in delegating work to subordinates but still rely on their own ability to step in and
handle things at the first sign of difficulty – this is the quick fix of micromanagement. The
subordinate never gets the necessary experience to do the job.
• Busy HR managers bring in external HR consultants to sort out personnel problems, and the HR
managers are unwilling to change the status quo or improve their ability to resolve the problems by
themselves. Soon, the HR managers become addicted to outside experts.
• Indulging in incrementalism (e.g., incremental innovations and products) rather than targeting
breakthrough and radical innovations for winning larger market share.
• Over advertising products for shoring up sales and not working on improving their quality.
• Businesses losing market share to foreign competitors seek a quick-fix in tariff protection or press
legislature to ban foreign products, and find them disabled to operate without such short-term

19
 solutions.
• Countries that experience trade deficits go for the quick-fix of devaluating their currency.
• Countries with gaping federal deficits seek printing more money thus fueling inflation.
• Controlling world grain prices by providing domestic farmers subsidies not to grow.
• Prescribing drugs to fight the problems originated by unhealthy lifestyles (e.g., smoking, drinking,
over-eating, lack of exercise) rather than change the lifestyle itself.

All symptomatic interventions shift burdens and are quick-fixes; they may solve the symptoms of the
problem, even quickly, but only temporarily. These are low-leverage changes and solutions. We focus
on symptoms where the stress is greatest. We repair or ameliorate the symptoms. We think thereby that
we have solved the real problem, thereby diverting our attentions from the fundamental problem. Seeking
symptomatic solutions progressively reduces our capacity to find fundamental solutions, and increases
our addictive dependence on symptomatic solutions. The problem resurfaces to haunt you with added
complexities. Most quick-fix symptomatic solutions make matters worse over the long term.

Often, in shifting the burden structures, there is also an additional reinforcing (amplifying) process
created by “side effects” of the symptomatic solution. For instance, the side effects of drugs administered
to correct a health problem. If the original health problem was caused by an unhealthy lifestyle (e.g.,
overeating, drinking, smoking, or lack of exercise), the only fundamental solution lies in a change in
lifestyle. The drugs may make the symptom better, shift the burden of changing lifestyle to medication,
but in the end, the side effects accumulate leading to even worse health problems. An alcoholic who
admits his drinking problem and that he will be an addict all his life knows well that drinking on the sly is
a symptomatic solution, and that he should seek support and power from Alcoholic Anonymous.

Consider the problem of stress when we need to juggle work, family and community responsibilities.
Quick symptomatic solutions to such stress are often smoking, drinking, eating, or overworking, each of
which has its own side effects. Nevertheless, long-term good solutions exist. If the workload increases
beyond our capacity, the only fundamental solution is to limit the workload. It may mean passing up a
promotion that entails more travel and being away from the family, or declining a position on the local
school board. It means prioritizing and making right choices.

The character of an organization is its ability to resolve fundamental problems and lessen its
interventions of symptomatic solutions. That is, the character of an organization is its ability (or inability)
to face shifting-the-burden structures. Strengthening fundamental responses almost always requires a
long-term orientation and a sense of shared vision. Weakening the symptomatic response requires
willingness to distinguish between quick-fix palliatives and long-term solutions.

Sometimes symptomatic solutions are needed as palliatives, but they must be acknowledged as such,
and must be combined with strategies for rehabilitating one’s capacity for fundamental solutions. In fact,
fundamental solutions and symptomatic solutions are relative terms. What is most valuable is that you
can recognize multiple ways of addressing the problem, from the most fundamental to the most
superficial (Senge, 1990, p. 110-113).

In case of Uber, it did several things in order to cure the symptom but not the actual problem. Uber
tried to wane off competition by sabotaging Lyft company by booking a large number of rides and then
cancelling them so that normal app user cannot book on Lyft. Uber also tried to recruit Lyft drivers and
also gave commissions to a recruiter who recruited them. These are all temporary solutions to slowing
down ride-booking sales. They should have focused on their quality of service which they are providing
instead of sabotaging the sale of a competitor company. Uber did not have a stringent background check
of drivers, and when complaints started coming initially, Uber tried to shrug off complaints saying that it
is just a platform to bring drivers and users together. Uber tried to shift the burden of controversies by
saying they are just a technology company but eventually it had to admit the negligence of background
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check. If Uber would have already dealt with the main problem instead of dealing with only symptoms,
then this condition could have been avoided and Travis Kalanik could have continued working with Uber
as its CEO.

Archetype 3: “Fixes that Backfire”

Management Principle: A continuing series of fixes to a stubborn problem improves only momentarily.

The familiar expression “The squeaky wheel gets the oil,” or “Whoever makes the greatest noise,
grabs the attention,” are indicative of “fixes that backfire.” Suppose you are annoyed with a squeaky
wheel in your car, and instead of lubricating it with proper oil, you hastily throw a can of water on the
wheel. The noise stops momentarily, but to return louder. The air and water have joined forces to rust
the joint. Suppose, not knowing the problem you splash water again onto the wheel, thinking it worked
last time. You keep on doing this whole day or a whole week. At the end, the wheel has stopped
squeaking altogether, because by now it is encased with rust. A solution is quickly implemented (the fix)
which alleviates the symptoms (in the balancing loop). But the unintended consequences of the fix (the
vicious cycle of the reinforcing loop) actually worsen the performance that we are attempting to correct
(Senge et al., 1994, p. 125-126).

A squeaky wheel could be a dissatisfied customer screaming for a product that is two weeks late.
How do I treat this customer, by splashing with a water palliative or treating the disease with proper oil?
The central theme of this archetype is that almost any decision or a turbulent market problem carries long-
term and short-term consequences, and the two are often diametrically opposed. A problem symptom
alternately improves (the quick fix enables the problem variable to go down) and deteriorates (the
untended consequences sets in, problem goes up, worse than before). If the problem symptoms keep
gyrating in your company with small triumphs and long troughs, then you are in a “fixes that backfire”
archetype.

Examples of business symptoms that attract fixes that backfire are:

• Your (de-seasonalized) sales are up and down, either steadily increasing or flat.
• Your salesperson productivity (measured by time per sale or dollar profits per employee) is vacillating.
• Your productivity (judged by scale, scope and time) is undulating badly.
• Your net cash flows (cash inflows minus cash outflows) are precipitously ebbing downward.
• Your debt/equity ratio is overleveraged.
• Your work-in-progress inventories are mounting.
• You are plagued with delayed deliveries.
• Your finished products inventories are overstocked and eat your cash flows.
• Your receivables are exponentially increasing, some ending in bad debts.
• Your employee apathy (judged by non-punctuality, unenthused work, absenteeism, and turnover) is
unpredictable.
• Your product quality (judged by recalls, returns, and warranty-failure) is badly fluctuating.
• Your company is vexed with cost-overruns forcing you to downsize.
• Your profitability (judged by ROS, ROI, ROE, or ROIC) is spiraling downward.

Each of these problem symptoms has its traditional quick-fix solutions, most of which do not work in
the long-run. After all, a fix only alleviates a symptom, does not eradicate it. Hence, are you trying to
splash water or apply lubricating oil to the problem? Are you trying the same quick-fix solution a little
more, and then a little more … until you catch yourself resisting the idea of trying something else. Soon,
you are overwhelmed with a sense of powerlessness when confronting the too many unintended
consequences of your quick-fixes.

In the case of Uber, in order to increase the number of cab bookings it allowed any driver to register
21
without any proper background check. The problem was to get profits as they were burning only the
investors’ money. To fix this problem they allowed anyone to register as cab driver without any proper
check which increased their revenue but backfired later as many complaints started coming from the
riders about the improper behavior of the drivers. In another incident, Uber was forced to pay $20 million
to settle allegations that the company duped people into driving with false promises about earnings (AP,
2017). The Federal Trade Commission claimed that most Uber drivers earned less than what the Uber
claimed. It agreed to pay drivers in New York City tens of millions of dollars after admitting it underpaid
them for more than two years by taking a larger cut of fares than it was entitled.

In avoiding quick-fixes that backfire, Senge et al. (1994, p. 129) suggest the following:

• Make commitment to address the real problem now.

• Engage in shared vision: what do others think of your quick-fixes?
• Increase awareness of the unintended consequences by opening up people’s mental models.
• Do you need to fix the problem right now? Will the system take care of itself in the long-run?
• Reduce quick-fixes by both number and repetition.
• Can you manage or minimize the undesirable consequences of your fixes?
• Select interventions that produce the least harmful or most manageable consequences.
• Reframe and address the root problem. Every fix that backfires is driven by an implicit target in the
balancing loop. So make it explicit.

Archetype 4: “Tragedy of the Commons”

Management Principle: A continuing increase of use of a common resource will eventually overstrain the
resource until it crashes.

Any new resource (e.g., a new expressway, a new airport, a new mall, a new charter school, a
children’s park, a new credit union) always opens with people benefiting individually by sharing a
common resource (e.g., the City or state budget). Soon, at some point, the amount of traffic grows too
large for the “commons” to support; congestion, overcrowding, and overuse lessen the benefits of the
common resource for everyone – the tragedy of the commons!

If the new resource cannot be expanded or replenished with additional space, it becomes a constraint,
a problem, and you cannot solve the problem on your own, in isolation from your fellow drivers or
pedestrians or competing users. The total activity on this new resource keeps increasing, and so does
individual activity; but both begin to fall after a peak, the latter faster than the former. Eventually, if the
dynamic of common use and overuse continues too long, the total activity will also hit a peak and crash.
What makes the “tragedy of commons” tragic is the crash dynamic – the destruction or degeneration of
the common resource’s ability to regenerate itself. The tragedy of the commons, thus, is a corollary of the
“limits to growth” archetype.

Some examples of the “tragedy of the commons”:

• Putting increasing number of cattle on a range land eventually undermines the ability of the soil to grow
grass.
• Draining the financial resources of an enterprise, past a certain critical point, threatens the life of the
enterprise.
• Divisional heads making tremendous demands from one centralized sales force or technical support - the
central sales staff grows increasingly burdened by all the field requests, and the net gains for each division
are greatly diminished.
• A common reservoir that feeds many cities and villages runs easily dry owing to increasing number of
users and increasing intensity of use. The reservoir needs to be shut down periodically in order to replenish
itself to full capacity.

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 • A common district school budget may fund public elementary, middle and high schools, some charter
schools, Cornerstone schools, and several day-care centers. All have good reasons to exist, but all draw
from the same common source. If the budget is finite and difficult to replenish, then each group will feel
pressure to get its share, and the more ingenuous win, while the remaining less ingenuous lose. If the
archetype “success to the successful” dominates (see Archetype 6), then only the winners win (See Senge et
al., 2000, p. 507-510).
• A common forest has been progressively deforested by timber and lumber merchants such that the forest
cannot regenerate itself anymore – it is forced to remain fallow.

In most of these tragic cases, individual users cannot do much, even if they stop using the common
resource. A Tragedy of the Commons often involves a catastrophic crash – the destruction or
degeneration of the common resource to replenish itself. When resources are depleted beyond a certain
point, they cannot be replaced. Yet despite the dwindling resources, every one pushes harder to get one’s
share of the shrinking pie. Doing so stresses the overall system capacity even more, making a crash more
likely and more dangerous (Senge et al., 2000, p. 508).

There are three potential forms of leverage (Senge et al., 1994, p. 144):

• Bring to individual attention the collective costs of their actions; the more clearly they see the
structure, the more likely they may stop overusing;
• Close the common resource for replenishment or delayed maintenance – this is the best leverage
in the case of ecological resources;
• If this is a technology, then innovate new technology with doubled capacity and better.

Archetype 5: “Accidental Adversaries”

Management Principle: Understand your partners’ needs, see if you are unintentionally undermining
them, and look for ways that support each other

Jennifer Kemeny proposed this archetype (Senge et al., 1994, p. 145-148). It explains how groups or
people who ought to be or want to be in partnership with each other, end up bitterly opposed. They get
locked up in fierce combat and resentment. The archetype of accidental adversaries applies to teams
working across functions or disciplines, strategic alliances among overspecialized engineers, joint
ventures between organizations, aggressive marketing among highly imaginative and innovative
promotional artists, union-management battles, civil wars, family disputes, and teenager rivalry. Is there
a structural reason for this adversarial stance?

For instance, P&G and Wal-Mart, two of the most capable corporations of the world, had long been
aware of the advantages of cooperating as suppliers and distributors. Nevertheless, their relations have
long since strained. In the mid 1980s, P&G believed in aggressive marketing of their products via deep
discounts, and other price promotions. Wal-Mart did not believe in heavy marketing, hoping to pass on
the saved costs to the consumers. Moreover, Wal-Mart does “forward buying” or stocking up – i.e.,
buying large quantities of the product during the discount period, selling it at a regular price when the
promotion ended, and using the extra income to improve their margins. This strategy is part of Wal-
Mart’s balancing loop, but it undermined P&G’s productivity and profitability, creating great swings in
manufacturing volume. This strategy would be adding to the costs of P&G, as distributors (who have
already stockpiled) would not order more products for months. An impasse resulted; a reinforcing loop
had formed in the middle, causing a death spiral of mutually detrimental actions. Each partner’s
symptomatic solution turned out to be unintentionally counterproductive and obstructive to the partner’s
success. They became accidental adversaries or good-willed enemies.

One way to get out of this social mess is for both sides to seek ways to strengthen one’s
understanding of the partner’s fundamental needs, and how one can unintentionally undermine them.

23
Dialogue and discuss how you can support each other. This may include helping to remove or weaken
the constraints in your partner’s system that resists your own solution. Both P&G and Wal-Mart started
dialogue, met in the same room, and understood the structure they had built up. Their individual strategy
made sense locally for their own corporation, but not collectively. Hence, having recognized this they
had to craft a new joint strategy. Their new resolution: if you help me realize my goals, I can help you
realize yours. P&G offered, for the first time, to stop promotions at Wal-Mart, and instead, provide for an
“everyday low price” (EDLP) strategy. Wal-Mart would order from P&G in such a way as to strengthen
P&G’s productivity. From accidental adversaries, P&G and Wal-Mart became purposeful and strategic
allies.

Archetype 6: “Success to the Successful”

Management Principle: Should the success of the successful spell failure of the failed? Break this
vicious zero-sum game cycle. [See also Senge et al. (2000, p. 355-359)]

This archetype states that given the equal opportunities when two systems are competing with each
other, one system gets better and better and other one gets worse and worse. This archetype consists of
two reinforcing loops which interact in such a way as to create a single reinforcing loop wherein if one
loop increases the other decreases. It basically says that if a system does well, we tend to appreciate that
system and allocate more resources to that system. We tend to pull the resources from the less effective
system as they are giving less output and in turn, these less performing systems are neglected and they
become more inefficient or nonproductive assets (NPAs) over the time. This problem can be avoided by
taking into account the success as the success of both the systems together, breaking the competitive
nature of success and encouraging and giving more resources to less efficient systems so that they can
also equally contribute to success. This will bring a greater shared success as a whole.

In the “success to the successful” archetype, two reinforcing cycles come into conflict: one is a
virtuous spiral where things get better and better for some; the other is a vicious spiral where things get
worse and worse for others. At the beginning of the spirals, both groups may be equally competent or
promising. The virtuous group, however, shows its promise more quickly and visibly.

Archetype 7: “Balancing Process with Delay”

Management Principle: In a sluggish system, aggressiveness produces instability. Either be patient or
make the system more responsive. [See Senge (1990, p. 378-379)]

This archetype is based on the principle that in a sluggish system, aggressiveness produces instability.
Either be patient or make the system more responsive. It explains the system in which the response to
action is delayed. If the agents do not perceive the delayed feedback, they might overshoot or
underestimate the requisite action in order to reach their goals. This could be avoided by being patient or
by increasing the responsive nature of systems.

A person, a group, or an organization, acting toward a goal, adjusts its behavior in response to
delayed feedback. If they are not conscious of the delay, they may end up taking more corrective action
than needed, or often just giving up because they cannot see any progress is being made.

Examples:

▪ Real estate developers keep building new properties until the market has gone soft; but by then,
there are already enough additional properties still under construction to guarantee a glut.

▪ Home mortgage lenders keep lending to build or buy very large homes with or without due process
into borrowers’ collateral or affordability until the market explodes. By then, however, before any
corrective is applied, the overpriced housing market collapses. Soon, home mortgage premiums far
24
 exceed the value of the homes, and distressed homeowners are forced to opt home foreclosure.

▪ Each year, domestic auto manufacturers pre-set their annual goals for X millions of vehicles to be
sold in order to maintain their target market share. Meanwhile, they overbuild inventories, while in
reality the auto demand has slackened. Overstocked inventories start piling up sucking up too much
cash, and the domestic automakers experience cash flow crisis.

▪ Cycles in production rates and in process inventory due to long manufacturing cycle times.

▪ The Tiananmen Square massacre – the Chinese government delayed its reaction to protest, and then
cracked down unexpectedly hard slaughtering over 3,000 students.

▪ The New York Stock Exchange (NYSE) market (especially as judged by Dow Jones Industrial
Average, and the more broad Standard & Poor Index) has been overheated and soaring peaking at
12,500 DJ industrial average points in the mid 2007, and currently has been crashing to well below
8,000 points in a delayed reaction to the current financial market crisis. In 2008 alone, most of the
NYSE indices lost over 40% of their market capitalization, losing almost all the capital gains since
2003.

In most of the above cases, people thought they were in balance, while overshooting the mark. Later
they keep overshooting in other directions. Hence, most cases end up in current high level of crisis and
its ramifications. Hence, as a corrective:

o Watch for the early symptoms of imbalance, and seek immediate correction. Costs of delayed
maintenance or adjustment could be soon insurmountable.

o A stitch in time saves nine. Prevention is better than the cure. Procrastination is the thief of time.
Correcting effectively today is better than doing it tomorrow.

o Preemptive strategies are proactive, and are better than protective (i.e., protecting people from
harm) and non malfeasance (i.e., doing no harm to people) strategies.

o Other things being equal, corrective justice is better and more effective than long-term distributive
justice and utilitarian justice strategies (Mascarenhas, Kesavan, & Bernacchi, 2008).

Archetype 8: “Growth and Underinvestment”

Management Principle: If there is a genuine potential for growth, build capacity in advance of demand,
as a strategy for creating demand. [See Senge (1990, p. 122-125, 389-390)]

This archetype states that if there is a genuine potential for growth, one must build capacity in
advance of demand, as a strategy for creating demand. This archetype operates whenever a company
reduces its growth by investing less. Underinvestment means building less capacity than is really needed
to serve rising customer demand. We also lower our goals and performance standards to justify
underinvestment. Lower goals lead to lower expectations, and lower expectations lead to lower
performance. The company makes an investment based on past experience which can be deteriorating for
the growth of the company. Past performance may be taken into account, but it should not be the only
criteria in the decision-making process. Often, the past may not influence or condition the future. Instead,
identify the marketplace factors that are driving growth. Otherwise, the company may end up with
investment decisions that are too dependent on past experience and not on present (and future) needs.

This archetype describes that growth is limited by capacity. The investment must be aggressive and
rapid to forestall reduced growth. By that time, key goals and performance standards are lowered to

25
justify underinvestment. When this happens, there is a self-fulfilling prophecy where lower goals lead to
lower expectations, which are borne out by poor performance caused by underinvestment.

This is another archetype of systems thinking – growth and underinvestment, much more subtle than
other archetypes such as the “limits to growth” and “shifting the burden.” Growth approaches a limit that
either can be eliminated or pushed into the future if the firm, or the individual, invests in additional
capacity. The additional investment, however, must be aggressive and sufficiently rapid to forestall
reduced growth and produce tangible results. Meanwhile, you must hold the vision, especially in relation
to key goals and performance standards, and accordingly, evaluate whether the additional capacity can
meet potential demand.

This archetype operates whenever a company limits its own growth through underinvestment.
Underinvestment means building less capacity than is really needed to serve rising customer demand.
Our thinking goes this way: “Well, we used to be the best, and we will be the best again, but right now we
have to conserve our resources and not over-invest.” We also lower our goals and performance standards
to justify underinvestment. When this happens, there is a self-fulfilling prophecy – lower goals lead to
lower expectations, and lower expectations lead to lower performance.

Often, financial stress makes aggressive investment difficult. The underlying problem of financial
distress, however, is that it is cause and effect of underinvestment of the past. It is a vicious circle. This
structure underlies the “boiled frog” syndrome. The frog’s standards for water temperature steadily
erode, and its capacity to respond to the threat of boiling atrophies.

Underinvestment in the past along critical factors of growth (e.g., product quality, design and
manufacture, delivery service, warranty and guarantee service, and dealer network service) is what is
ailing our American industries today, especially, railroad, steel, autos, machine tools, and consumer
electronics). The steady decline in market share and profitability since the late 1980s, the increasing
vulnerability of foreign competitors with better and higher standards since the early 1990s, have both
happened so slowly and gone long unnoticed, that these domestic industries, like the boiling frog, are
unable to respond anymore. Meanwhile, we have shifted the burden by several symptomatic solutions
such as aggressive marketing, promotional advertising, rebates, consumer credit, easy financing,
discounts, lobbying for tariff protection, restructuring, - all masking palliatives that make us insensitive to
the underlying eroding standards. The problem of growth and underinvestment also plagues several
services industries in the U. S., especially, schools, hospitals, radio and television stations (Senge, 1990,
p. 124-126)

Archetype 9: “Escalation”
Management Principle: Look for a way for both sides to win, or to achieve their objectives
[See Senge (1990, p. 122-125, 384-385)]

Two groups or organizations, each see their welfare as dependent on a relative advantage over the
other. Whenever, one side get ahead, the other feels threatened, and acts more aggressively to reestablish
its advantage. This situation, in turn, disturbs the other and makes it more aggressive, and so on. Often,
each organization sees its own aggressive behavior as a “defensive” response to the other organization’s
aggression. Obviously, each side acting in “defense” keeps building-up aggressive defenses that escalate
far beyond the desires of each side.

The archetype describes that two people or organizations each see their welfare as depending on a
relative advantage over the other. Whenever one side gets ahead, the other is more threatened and tries to
re-establish its advantage and this circle leads to aggressiveness on both sides, each side is acting ‘in
defense’. The most common example which comes to mind is the recent N. Korea and U.S. exchange

26
regarding war with each side trying to be aggressive and gain an advantage over each other with N. Korea
threatening the US by claiming development of Hydrogen bomb. Another incident will be the India-China
impasse in Doklam. Going towards the business side, any child growing up in the 90s in India would be
aware of war between Coca Cola and Pepsi through advertisements. There were a series of advertisements
where each side would make fun of the other.

“Civilization, in the real sense of the term, consists not in the multiplication but in the deliberate and
voluntary restriction of wants. This alone promotes real happiness and contentment, and increases the
capacity for service" (M. K. Gandhi: Yaravada Mandir 1935).

Archetype 10: “Eroding Goals”

Management Principle: Hold the vision; do not compromise established standards for short-term gains.
[See Senge (1990, p. 122-125, 383-384)]

This is a subset of Archetype 2: Shifting the Burden. The organization shifts the burden by adopting
a short-term solution that essentially compromises its long-term goals and performance standards. The
basis of this archetype is to hold the vision; do not compromise established standards for short-term gains.
The organization shifts the burden by adopting a short-term solution that essentially compromises its
long-term goals and performance standards. An example of this might be if your company releases two
new products each year and there’s a goal to increase this number to four. This goal drives increased
investment as the company moves towards increasing the capacity and capability to release four new
products. But there is a delay in the results from the actions taken to increase capacity. This lack of results
causes investors to lose confidence and commitment to the initiative. So, to avoid making increased
investments, they lower their goals from four to three; an incremental increase instead of a dramatic
increase.

Whenever there is a gap between our goals and our current situation, there are two sets of pressures:
1) to improve the situation or 2) lower the goals or standards. Most of the typical symptomatic solutions
(see under Archetype 2) either try a prophylactic improvement of the situation or lower the standards. In
1992, President Clinton inherited the largest budget deficit in U. S. history. However, with the help of
Budget Omnibus Act in 1993, he converted the deficit into a record budget surplus of $200 billion by the
end of the 1990s. In 2005, the Bush administration lowered the standards and ended with a budget deficit
of $318 billion. Similar eroding goals dynamics affect R&D targets, personnel management growth
projects, organizational improvement objectives in most organizations today.

Concluding Remarks
Most organizational change initiatives have failed despite concentrated efforts around great themes
such as TQM, Six Sigma, scenario planning, role playing, reengineering business processes, process
redesign, mergers and acquisitions, corporate strategic alliances, and the like. Two independent studies in
the early 1990s (Arthur D. Little; McKinsey & Co.; see The Economist, April 18, 1992) claim that over
70% of organizations that introduced heroic new efforts towards organizational change, failed in bringing
about long-term improvements in organizational learning. John Kotter, the guru of organizational change
management at the Harvard Business School, studied the transformational efforts of over 100 top
management-driven corporations and came to the same conclusion (Kotter, 1995, p. 59). The source of
the failures to change cannot be remedied by expert advice from consultants, or by hiring highly talented
and committed managers. The sources lie in our most basic ways of thinking. If these do not change,
then any additional input by way of experts and consultants will end up producing the same
fundamentally unproductive organizations. The reason is lack of systems-thinking: the initial effort
creates some short-term, local and peripheral changes, but the lack of lasting systemic momentum fails to
realize long-term high-potential goals of the organization (Senge et al., 1999, p. 6-7).
27
 David Orr (1991) warns that we mistakenly believe that having won the cold war the triumph of
capitalism over communism is complete. Communism failed because it produced too little at too high a
cost. But capitalism has also failed because it produces too much, shares too little, also at too high a cost
to our children and grandchildren. Communism failed as an ascetic morality. Capitalism failed because it
destroyed morality altogether. This is not the happy world that any number of feckless advertisers and
politicians describe. We have built a world of sybaritic wealth for a few and Calcuttan poverty for a
growing underclass. The fact is that we live in a disintegrating culture. In the words of Ron Miller, editor
of Holistic Review: “Our culture does not nourish that which is best or noblest in the human spirit. It does
not cultivate vision, imagination, or aesthetic or spiritual sensitivity. It does not encourage gentleness,
generosity, caring, or compassion. Increasingly in the late 20th Century, the economic-technocratic-statist
worldview has become a monstrous destroyer of what is loving and life-affirming in the human soul,”
(cited by Orr (1990)].

28
Table 3.1: A Framework of Interrelationships for Identifying the Structure of
Corporate Morality
Corporation Constituents of Corporate
SOPE Morality
Key Subjects Chairman and Board of Directors
CEO or MD or CMD or CXO
VPs of major corporate functions
Key managers and supervisors
Key skilled employees
Key staff and supporting
Key Objects Key land and location resources;
Key building and workspace
resources;
Key utilities and IT infrastructure;
Key sustainable competitive resources;
Key products, brands and services
Key Core skills and competencies;
Properties Core patents and technologies;
Key networking connections;
Key company hierarchies;
Key company reporting structures;
Key company codes of conduct,
regulations and ordinances;
Core company moral and ethical
values and beliefs;
Key Events Key branch or division foundations;
Key new product announcements;
Key new market entries;
Key anniversaries, milestones,
certifications and awards.
29
Structure of Corporate Morality:
SOPE Interrelationships
Boardroom attitudes and mindsets
CEO’s short-term and long-term goals;
VP perceptions, attitudes, beliefs on goals;
Managerial perceptions, attitudes and beliefs;
Key skilled employee hopes, fears, anxieties;
Key staff perceptions, attitudes & beliefs of corporate goals.
Appreciation and conservation of land resources;
Appreciation and conservation of workspaces;
Appreciation and conservation of infrastructure;
Appreciation and conservation of materials;
Design, development and appreciation of company’s key
products, brands and services
Self-involvement in building core competencies;
Joint ownership of patents and intellectual properties;
Building company and brand communities;
Resistance to or acceptance of company hierarchies;
Rejection to or abidance of reporting structures; Compliance
or non-compliance of company regulations, codes of conduct,
and ordinances.
Adherence to core company values and beliefs.
Positive versus negative attitude toward company’s major
events like Foundation Day, new product announcements, new
market entries, new joint ventures, new mergers and
acquisitions, new landmarks and milestones, and excellence
awards and recognitions.
Endnotes
i
Here's a definition from Barry Richmond, who coined the term in 1987: Systems Thinking is the art and science of making
reliable inferences about behavior by developing an increasingly deep understanding of underlying structure. Cultivating this "art
and science" leads to routine use of correct mental models that see the world as a complex system whose behavior is controlled
by its dynamic structure, which is the way its feedback loops interact to drive the system's behavior. The term systems thinking
is preferred to holistic or whole systems, which have looser and more intuitive meanings, and emphasize understanding the whole
rather than the dynamic structure of the system.
iiPygmalion is a character in Greek and Roman mythology, who believed so strongly in the beauty of the statue he had carved
that it came to life. George Bernard Shaw wrote a play, The Pygmalion Effect (which later became My Fair Lady) to describe a
similar phenomenon.
iiiNo forecasting model predicted the impact of the current economic and financial crisis of September 2008, and its
consequences continue to surprise businesses, economists and academics even in late 2017. The crisis was compounded by the
risk-management models of the banks, which increased their exposure to risk instead of limiting it and rendered the global
economic system more fragile than ever. Low probability but high impact events, called Black Swan events, are increasingly
dominating the business environment. Because of the Internet and globalization, the world has become a complex and vulnerable
system, composed of a tangled web of relationships and other interdependent factors. Complexity not only increases the
incidence of Black Swan events but also makes forecasting even ordinary events impossible. Companies that ignore Black Swan
events will likely go under. Instead of perpetuating the illusion that we can anticipate or predict the future, risk management
should try to reduce the impact of the threats we do not understand (Taleb, Goldstein, & Spitznagel, 2009, p. 78-79).

ivIn all these tragic and frightful sequences, all four laws of the “Fifth Discipline” were playing out: Today’s problems come
from yesterday’s solutions; the harder you push, the harder the system pushes back; behavior gets better before it gets worse; and
the easy way out usually leads back in – all are “compensating feedback” mechanisms. We overestimate our abilities and
underestimate what can go wrong. The biggest risk lies within us – it is our hubris or arrogance. The ancients considered hubris
the greatest defect, and the gods punished it mercilessly. Thus, Achilles and Agamemnon died as a price of their arrogance;
Xerxes failed because of his conceit when he attacked Greece; many generals have died throughout history for not recognizing
their limits. Any corporation that does not recognize its Achilles’ heel is fated to die because of it (Taleb, Goldstein, & Spitznagel
2009, p. 81).

v Another current illustration of Law 5: While most of the economy suffered during the current recession, candy sales were up.
Kraft’s recent $16.7 billion offer to buy Cadbury, the British chocolate maker, is another sign of the appeal of candy and comfort
foods during these hard times. Mars bought the gum maker Wrigley for $23 billion – this was another bright spot in a market shy
of deals during the recession. Cadbury’s shares jumped by 40% since Kraft’s offer. Candy sales were up by 3.5% in 2008-2010.
During hard times people eat more candy. Hershey thrived during the Great Depression, and the 1930s gave us an array of new
sweets, including Tootsie Pops, Snickers, and Mars bars (See Fortune, October 26, 2009, p.14). Consumption of sweets during
recession caused obesity and elevated cholesterol levels. The cure to recession could be worse than the disease.

30
 Chapter 04
The Success of Free Enterprise Capitalist System (FECS)
when Designed and Deployed Rightly

“The Constitution only guarantees the American people the right to pursue happiness. You have to catch it
yourself” (Benjamin Franklin)
“I believe that the free enterprise system is the greatest engine of prosperity the world’s ever known”
(President Barak Obama)i

Executive Summary

The typical corporation is based on free capital markets, and in general, on the free market capital system for all
its factors of production, distribution and consumption. Hence, this Chapter studies the economic, legal, ethical
and moral goodness and promise of the Free Enterprise Capitalist System (FECS) as it exists and thrives in the
open and free economies of the world. We will review several versions of FECS starting from Thomas Aquinas
(1225-1274) views on private property, Thomas Hobbes’ (1588-1679) The Leviathan (1651), Adam Smith (Wealth
of Nations: 1776), Max Weber (The Protestant Ethic and the Spirit of Capitalism: 1904/1958) to modern defenses
of capitalism by David Bollier (Aiming Higher, 1997), Raghuram Rajan and Luigi Zingales (Saving Capitalism
from Capitalists: 1998, 2004), C. K. Prahalad (2005) on Inclusive Capitalism, Nitesh Gor (The Dharma of
Capitalism: 2012), and John Mackey and Raj Sisodia (Conscious Capitalism: 2014), to name a few. Based on
these seminal authors and subsequent theoretical developments, this Chapter seeks to defend, save and uphold
the goodness of the free enterprise capitalist system (FECS) along multiple viewpoints such as economics,
management, law, ethics, morals and executive spirituality.

Introduction
In the wake of the October 2008 Financial Crisis, what should the corporate world do in order to
detect, predict and avert such a massive debilitating and globally impoverishing crisis that fundamentally
rocked investors’ and consumers’ confidence in the free enterprise capitalism? This Chapter describes and
analyzes the nature, causes and effects of the October 2008 Crisis in the background of the theory of Free
Enterprise Capitalism proposed by Adam Smith (1776) in his book: An Inquiry into the Causes of
Economic Growth: The Wealth of Nations, and many other standard works on Capitalism. Such an
analysis will help us understand and appreciate the role of free enterprise capitalism in the turbulent
markets, in governments, in business management education, and the corporate world. It will particularly
serve as a background for corporate executive ethics that this book intends to explore. We will start with
some mini cases that support and demand FECS for businesses to survive. We will then discuss various
ways of understanding, protecting and developing the free enterprise capitalism as the best foundation and
justification for the modern corporation.

Given the massive financial market crisis of 2008 in the United States and its near collapse in the global
markets, does the U. S. model of free enterprise capitalist system have a chance to survive and rebound to
prove itself? Even if it rebounds, will it ensure the prosperity of all people or just favor the rich and the
famous? Given our current track-record of overcomplicated and opaque financial instruments (e.g., shares
trading, derivatives, derivatives of derivatives, hedge funds, and private equity funds), massive corporate
fraud and collapsing gigantic investment markets, serious ethical and moral questions arise:

• Is Capitalism economically good for America?

• Is American Capitalism morally good for America?
• Is free enterprise capitalism economically and morally good for the rest of the world, especially

1
 the emerging BRIC countries?
• Is the Free Enterprise Capitalist System worth saving?
• If so, at what costs to humanity?

With the recent fall or near fall of the Command economies (e.g., USSR, Cuba, and China) American
and European capitalism have emerged as the apparent winners. A prevailing efficient system or theory
goes under attack only when it cannot cope with its own products. Its variant constellation becomes so
extended and complicated that it verges on the self-contradictory. Every effort to account for its
aberrations causes ever-increasing complications with even more anomalies that eventually reach crisis
proportions.

In his inaugural speech on January 20, 2009, before a groundswell crowd of over two million on the
Capitol Mall, President Barack Hussein Obama, addressing the very same questions posed above and in
relation to the current problem of financial crisis, said [See Commemorative Inaugural Edition,
Newsweek, Inauguration 2009, p.28]:

“Nor is the question before us whether the market is a force for good or ill. Its power to
generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a
watchful eye, the market can spin out of control – and that a nation cannot prosper long when it
favors only the prosperous. The success of our economy has always depended not just on the size
of our gross domestic product, but on the reach of our prosperity, on our ability to extend
opportunity to every willing heart – not out of charity, but because it is the surest route to our
common good.”

Since corporate organizations and institutions and their respective workers, managers, and corporate
executives operate within the context of a free enterprise system, it is proper that we start our exploration of
ethics of corporate governance by examining the corporate ethics of the capitalist system itself. Capitalism
has its own costs and benefits, but by and large benefits exceed costs, as many success cases demonstrate.

We assume the legality, viability and validity of the free enterprise capitalism. We presume that free
enterprise capitalism is the best economic system we currently have as it has been working in most of the
developed world markets for over two centuries. It has its flaws and problems, and so does every
economic system of the world today. Business ethics in general, and corporate ethics in particular, should
affirm their faith in the free enterprise capitalism and its strengths, while pointing out its obvious
weaknesses, and proposing corrective justice solutions to remedy its current shortcomings.

Case 4.1: The Grameen Bank: A Defense of Capitalism

Muhammad Yunus, the founder of the Grameen Bank and Nobel Laureate (2006), narrates a telling story in his
autobiography (Jolis, 2001). Suffiya Begum was a young mother in a Bangladesh village called Jobra who earned
her living weaving bamboo stools. She had no access to finances, and each day she had to borrow 22 cents from a
local lender to buy the raw materials required for the stools. The middleman lender forced Suffiya to sell the stools
back to him for 24 cents as repayment for the loan, leaving Suffiya with just two cents of wages for the day with
which she had to fend for the family. Suffiya could hardly afford to send her children to school and pay for the
tuition and books with that kind of earnings. Hence, she was trapped in her poverty for years.

This is when Muhammad Yunus invented the micro-lending Grameen bank precisely to take care of millions of
people like Suffiya who needed small monies to finance their mini-businesses. That is the justification of banks, of
financial markets, and of the free enterprise capital system (FECS). Today, Grameen (Village) Bank functions in
more than 50 countries supplying capital to millions of small businesses in villages thus alleviating poverty at its
roots.

The financial markets have been financing new ideas, and have thus spearheaded marvelous innovations or

2
“creative destruction” that have kept economies and markets alive, industries burgeoning, and countries progressing.
Despite their inherent contradictions and unpredictable devastations, we owe to the free markets, especially free
financial markets, much of the prosperity, creativity, innovation and increased opportunity in our civilization today.

Case 4.2: Success of Online Capitalism:

Flipkart Buys Myntra for Dominating E-Commerce in India
Sachin Bansal, 32, who was a software engineer at Amazon.com, started Flipkart in 2007. Today, Flipkart
India is the biggest seven-year old Bangalore-based e-commerce player in India. CEO of Flipkart, Bansal announced
Thursday, May 22, 2014, his intention to buy out rival Myntra.com in a move that will help e-retailer Flipkart to
consolidate its position in the online multi-brand retail sector as well as take on global competitors like Amazon.com
and E-bay that are beefing up their presence in the over $3-billion Indian market. Bansal said that Flipkart would
bring an additional $100 million into the business. India’s internet retail market is estimated to expand seven-fold to
$22 billion by 2018 according to experts.

According to Crisil, the industry analyst, online retailing in India, both direct and through market places, is
tipped to grow to Rs 50,000 crore ($7.65 billion) industry by 2016, growing at 50-55% annually. The segment has
been growing with revenues surging from around Rs 1,500 crore in 2007-2008 to an estimated Rs 13,900 crore in
2012-2013, a compound annual growth rate (CAGR) of 56%. In the last four to five years, competition from
Flipkart.com, Snapdeal, Myntra.com, Amazon.com and Jabong has hurt brick-and-mortar on-the-ground physical
retailers. According to Bloomberg, Flipkart had a 4.9% share of the $2.9-billion worth of internet retailing
transactions in 2013; Myntra controlled 4.1%, Amazon 1.6% and e-Bay 1.2%. E-commerce industry in India has
reached a scale to take off and is now beyond books, ticketing, and electronics to expand to apparels, furniture,
consumer durables, food and groceries.

Bansal said that his firm would buy out 100% the fashion retailer Myntra.com, but the two companies will
operate independently to preserve and safeguard their individual brand values and target market segments. Myntra
is focused on fashion wear offering consumers a fashion experience; it occupies a certain luxury space in the
consumers’ mind. Flipkart’s consumer base is different and looks for range, price and service. Fashion e-commerce
fetches very high margins. Currently, the largest chunk of Flipkart’s revenues comes from e-selling electronic
products. An outright acquisition of Myntra would lose value for both e-retailers.

The Myntra deal has been discussed for a long time now and presumably was initiated by private equity
players Tiger Global management and Accel Partners, who have stakes in both retailers. In the financial year ending
March 2013, Flipkart’s revenues jumped fivefold to Rs 1,180 crore, but its loss widened to Rs 281.7 crore from Rs
109.9 crore a year earlier. Flipkart has received close to $600 million from private equity players. Flipkart is
India’s largest online retailer, and after the Myntra purchase will be the third biggest e-commerce player in Asia.

Myntra has been valued by independent experts anywhere between $300 and $330 million. No value for the
deal, however, was fixed as of Thursday, May 29, 2014 nor any specifics of the transaction disclosed. Mukesh
Bansal, co-founder and CEO of Myntra will presumably continue to head the fashion store and join the Flipkart
board.

The latest news (May 28, 2014) is that Flipkart acquired a majority stake in Myntra for $300 million (about Rs
1,770 crore). Private Equity (PE) and Venture Capital (VC) firms Tiger Global, Accel Partners, and Sofina helped
Flipkart with investor capital. [Earlier, VC firms Accel Partners and Tiger Global had helped Myntra to buy e-
commerce companies Letsbuy, Shersingh, and Exclusively.in.]. Thus, the PE/VC firms have a stake in Flipkart too
and are set to reap major returns through consolidations of losers with winners. Snapdeal, another large e-dealer in
India, received a tranche of follow-up investment worth $100 million (about Rs 585 crore) from a consortium of
overseas investors. There have been 19 e-commerce deals worth about $500 million in 2014-2015 so far. There
were 60 deals totaling $592 million in 2013-2014. According to KPMG, the e-commerce industry is worth about
$13 billion (about Rs 76,700 crore) in 2014. Indian government policy does not allow FDI in B2C e-commerce,
while it allows 100% FDI in B2B e-commerce.

3
 Alibaba Group Holding, China’s largest e-commerce company (value traded on Alibaba’s platforms was $248
billion in 2013), has fans in India, and Sachin Bansal considers Alibaba as a role model. Back in 2008,
Amazon.com was the most dominant player in the Indian market and the role model for a lot of Indian e-commerce
starts and shoppers. Flipkart is seeking to emulate Alibaba in going beyond e-commerce to build related businesses
that include logistics, seller development, internet payment gateways, and mobile shopping solutions. The number
of annual active buyers on Alibaba’s platforms rose by 14% to 231 million in 2013, each customer placing an
average of 49 orders over that period. China has about 618 million internet users, while that number in India is
projected to reach 243 million by June 2014, according to the Internet and Mobile Association of India.

Meanwhile, there are hundreds of complaints registered with online retailers all over the world for selling
counterfeit products to customers. Just recently, June 2015, French luxury brand Gucci sued Alibaba, presumably
the world’s largest online retailer, for allegedly selling counterfeits of its products on its website. Gizmobaba,
Chumbak and Sahil International have registered complaints against Flipkart, Snapdeal, eBay, and Amazon.com for
selling counterfeits of their products. Is mass counterfeiting, therefore, behind the current online retail boom?
When Alibaba, Flipkart, Snapdeal and others offer to sell original branded products at 20-30% discount throughout
the year, they could run the risk of being counterfeit. In comparison, offline retailers can afford large discounts only
at end-of-season sales. Understandably, operational costs for online stores are significantly less than offline stores,
but are these savings big enough to run discount sales throughout the year, asks [Neeraj Thakur (2015, June 15). The
Other Side of Online Retail. BW Business World, p. 20)].

People shop online mostly to get super-discounts. It is this very phenomenon that may make online retailing
very vulnerable to cheating. Currently, some loopholes in online retailing laws seem to protect the online retailers.
Alibaba, Flipkart and Snapdeal are recognized as marketplaces for selling online manufacturers. This definition
gives them some immunity from criminal charges, but how long? While the naïve customer may fall for such online
tricks a few times, in the age of instant and ubiquitous information it will not be long before customers become
aware and may change their loyalty from online to offline brick-and-mortar retail stores.

References:
Bansal & Bansal’s new Myntra to beat Amazon. (2014, May 23), The Financial Express, Kolkata, p. 1, 2.
Bloomberg (2014, May 24). Alibaba appeal prompts Flipkart to tap Chinese Lesson. Sunday Business Standard, Kolkata, p. 5.
Editorial, (2014, May 28), Business Standard, Kolkata, Wednesday, p. 11.
Balakrishnan, Raghu (2014, May 29).VCs ride on E-commerce Mergers. Business Standard, Kolkata, Thursday, p. 6.
Russian Internet Investing Guru Won over by Flipkart. (2014, May 27), Business Standard, Kolkata, Tuesday, p. 2.
Thakur, Neeraj (2015, June 15). The Other Side of Online Retail. BW Business World, p. 20.

Ethical Questions:
1. Does Flipkart’s e-commerce success prove the viability and ethics of capitalism in India? Discuss.
2. Is Flipkart’s strategy to dominate the e-retailer market in India economically, legally, ethically and
morally good for India?
3. Critique the ethics of Flipkart’s merger with Myntra.
4. Flipkart draws its capital requirements from venture capitalists and private equity firms – analyze the
ethics of this rather risky strategy.
5. During the last 4-5 years, competition from Flipkart.com, Snapdeal, Myntra.com, Amazon.com and
Jabong has hurt brick-and-mortar on-the-ground physical retailers. Is the online market good for India
whose culture is basically the kirana (Mom & Pop store) stores on the ground?
6. Currently, Flipkart’s model is China’s Alibaba. Is this cross-cultural emulation morally good for multi-
cultural India? Discuss.

In Defense of Capitalism
As these two cases demonstrate, capitalism, or more precisely, the free enterprise capital system
(FECS), is the most effective way we know to organize research and development, recruitment and
retention, procurement and production, transportation and logistics, and distribution and marketing that
human beings have ever found. Free markets, particularly free financial markets, have been the most

4
visible form of capitalism, and perhaps, the most criticized and least understood parts of the capitalist
system. At the same time, healthy and competitive financial markets can be an extraordinarily effective
tool in spreading opportunity and fighting poverty (Rajan & Zingales, 2013, p. 1). Free markets, by their
very nature today, are most sensitive to political winds. All too often, finance and financial markets are
considered the tools of the rich. But because free markets depend on political goodwill and infrastructure
for their existence, and because they have powerful political enemies among the establishment, their
continued survival and revival cannot be taken for granted even in developed countries, argue Rajan and
Zingales (2013: 3).

What is Capitalism?
The term capitalist, meaning an owner of capital, appears earlier than the term capitalism. It dates
back to the mid-17th century. Capitalist is derived from capital, which evolved from French capitale,
which might be traced to the Latin word caput (meaning "head"); (it also connotes “heads” of cattle, the
origin of chattel and cattle in the sense of movable property (only much later to refer only to
livestock). Capitale emerged in the 12th to 13th centuries in the sense of referring to funds, stock of
merchandise, sum of money, or money carrying interest. By early fourteenth century (c.1283) it was used
in the sense of the capital assets of a trading firm. It was frequently interchanged with a number of other
words – wealth, accumulated money or wealth, money, funds, goods, assets, property, and so on.ii

Capitalism is an economic system and an ideology based on private ownership of the means of
production and their operation for profit.iii Characteristics central to capitalism include private
property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive
markets. In a capitalist market economy, decision-making and investment are determined by the owners
of the factors of production in financial and capital markets, and prices and the distribution of goods are
mainly determined by competition in the market.

Economists, political economists, and historians have adopted different perspectives in their analyses
of capitalism and have recognized various forms of it in practice. These include laissez-faire or free
market capitalism, welfare capitalism, and state capitalism. Different forms of capitalism feature varying
degrees of free markets, public ownership, obstacles to free competition, and state-sanctioned social
policies. The degree of competition in markets, the role of intervention and regulation, and the scope of
state ownership vary across different models of capitalism. The extent to which different markets are
free, as well as the rules defining private property, are matters of politics and policy. Most existing
capitalist economies are mixed economies, which combine elements of free markets with state
intervention, and in some cases economic planning.

Market economies have existed under many forms of government, in many different times, places,
and cultures. The development of capitalist societies, however, marked by a universalization of money-
based social relations, a consistently large and system-wide class of workers who must work for wages,
and a capitalist class which dominates control of wealth and political power, developed in Western
Europe in a process that led to the Industrial Revolution. Capitalist systems with varying degrees of
direct government intervention have since become dominant in the Western world and continue to spread.

Morality of Private Property

Thomas Aquinas (1225-1274), an Italian Dominican friar, philosopher and theologian, affirmed the
supreme dominion of God over everything, adding that ‘‘man has a natural dominion over external
things, because, by his reason and will, he is able to use them for his own profit’’ (1981, II–II, 66, 1).iv
He adds that it is lawful for man to possess property because this is a necessary element in human life for

5
three reasons. First, because every man is more motivated to procure what is for himself alone than that
which is common to many or to all. Second, because human affairs are conducted in a more orderly
fashion if each man is charged with taking care of some particular thing himself. Third, because a more
peaceful state is ensured for man if each is content with his own. However, adds Aquinas, ‘‘man ought
to possess external things, not as his own, but as common, so that, to wit, he is ready to communicate
them to others in their need’’ (Ibid). Aquinas’ view entails, therefore, a natural right to property, but
regarding its use, he stresses the social and moral responsibility of property owners to pay attention to
other people’s economic needs.v The School of Salamanca emerged in the context of the influx of
precious metals coming from the New World and of increasing domestic and international trading,
financial transactions and banking. In the sixteenth century, Spanish and European fairs were privileged
settings for exchanging merchandise, coins, bills of exchange and other financial instruments.vi

Thomas Aquinas also discussed the role of the state in social behavior. Aquinas believed that the
laws of the state were, in fact, a natural product of human nature, and were crucial to social welfare. By
abiding by the social laws of the state, people could earn eternal salvation of their souls in the afterlife,
he purported. Aquinas identified three types of laws: natural, positive and eternal. According to him,
natural law prompts man to act in accordance with achieving his goals and governs man's sense of right
and wrong; positive law is the law of the state, or government, and should always be a manifestation of
natural law; and eternal law, in the case of rational beings, depends on reason and is put into action
through free will, which also works toward the accomplishment of man's spiritual goals.vii

Government’s respect of property rights is the first step towards the development and stabilization
of financial markets (Ragan & Zingales, 2003, p. 201). Based on market and business skills, this respect
of property has been mostly realized when property was owned by the most competent and specialized.
If and when property needed to be widely distributed, then representative government arises. But even
in most democratic governments there was no guarantee that policies would reflect the needs of the
people. Property owner incumbents can easily capture the policy-making process and enact anti-market
legislation, until competition from outside the country curbed the incumbents. The latter can happen,
however, when markets rely on open borders to limit the power of domestic vested interests. But then
how stable are open borders?

Hobbesian Capitalism
Thomas Hobbes (1588-1679), an English philosopher who systematically investigated the nature of
matter, man and society, proposed two key doctrines on man: a) truth is empirically determined not
dogmatically asserted; b) the truth of man and man’s nature scientifically established is that he is
composed only of matter that can be empirically verified and tested. The so-called mind, will, soul, spirit
and heaven are fabrications of the mind. His view of society was expressed in his most famous work,
The Leviathan (1651), in which he proposed his social contract theory: given human motivation and
rationality social institutions like markets, states governments including absolute monarchy are
inevitable. This was a radical deviation from prevailing concepts of human nature and ethics. He based
his theory of man in which appeals to morality or conscience were frowned upon.

Each man is the measure of his own good (homo mensura sui), Hobbes asserted, and the good in
society is whatever is desired by each particular person. Right and wrong are relative to the desires of
every man and the purpose of the society and institutions is to help men realize their desires (within the
bounds of the law). The quest for fulfillment or salvation often merely becomes a struggle for wealth
and power. Hobbes made man God on earth. A higher spiritual nature within man, that could be the
universal reference point for life, was denied. For Hobbes, the most stable society was one based on
enlightened self-interest, where fear (of death) harnessed pride.

6
 The Hobbesian man, accordingly, had neither duty nor power to control his desires, since there was no
power of the 'will' to choose between various desires. 'Will' was only the desire that happened to be
uppermost at the time. There was no 'highest good'; something was good because it was the object of
desire for a particular person at a certain time. Hence, Hobbes’ view of man was quite different from the
then prevailing view. It is also one that is often tacitly accepted in modern economics. Hobbes essentially
reduced the concept of 'good' to that of the modern economic good of revealed preference. So wrote
Thomas Hobbes in the 17th century: “The felicity of this life consisteth not in the repose of a mind
satisfied. For there is no utmost aim or summum bonum (i.e., the greatest good) of the old moral
philosophers. … Felicity is a continual progress of the desire, from one object to another; the attaining of
the former being still but the way to the latter.” viii

Adam Smith’s Version of Capitalism

Adam Smith (1723-1790), a Scottish philosopher and economist, founder of the modern political
economy, made the conclusions of Hobbes less controversial. Scientifically viewed, the free market
system is viewed as a natural phenomenon, with an internal self-regulatory mechanism that enables it to
function as though it were a physical system independent of all human interference. The prevailing
belief was that economics followed mechanistic laws like those of classical physics. Adam Smith (1776)
was regarded as the Newton of Economics, i.e., its founder as science. Modern economics is considered
to have been started with Adam Smith, especially with his Wealth of Nations. Sociologically viewed,
Smith believed that the intrinsic laws of the free market system can lead to the prosperity of all nations
provided that one allows them to work without outside intervention of the state. When each strives for
riches via absolute competition, the selfish agents in the market systems will hold one another in check
and advance developments in a way that would be favorable to all.

According to Adam Smith, “man’s principal concern was with subsistence and material improvement,
generally as ends in themselves, and at best as proxies for the achievement of respect and admiration.
Hence, either man had no passions or his passions could be satisfied through the pursuit of his interests."
ix
Smith's philosophy of human nature and ethics provided the foundations for a socio economic system
that has enabled nations to accumulate great wealth and power. However, the shallow ethical foundations
of Smith's system also hold the seeds of its own destruction. The aspects of human nature ignored in
Smith's system may be, in fact, real and their neglect, the reason for the existence of persistent socio-
economic problems that seem beyond the scope of prevailing paradigms.

We may trace the foundations of contemporary market capitalism to Adam Smith’s Book: The Wealth
of the Nations (1776). Smith’s ethical goals were dominantly utilitarian. He argued that economic
institutions should be arranged in ways that would promote the overall wealth of the nation, rather than
the personal wealth of royalties, nobilities and aristocracies. Smith argued that if society adopted certain
economic principles, such as those that we now call market capitalism, then the pursuit of individual self-
interest would as if “led by an invisible hand” result in greater prosperity for all. Smith was a utilitarian
who believed that a free market economy was the most efficient means to attain the utilitarian goals
(Hartman & Desjardins, 2008, p. 68).

In Defense of Free Enterprise Capitalist System (FECS)

Adam Smith (1776) defined a capitalist corporation as an institution for:

• Managing productive skills of the labor force;

• Stimulating, diffusing and institutionalizing technological innovations;
• Accumulating the nation's human, physical, and money capital;

7
 • Developing a strong and large market that controls itself, and thus, for
• Raising sufficiently high living standards among the nation's people.

American capitalism has basically fulfilled this fivefold mission of FECS since its founding years.
Hence, today, the United States of America is the best surviving model of FECS and the largest industrial
capital base in the world. This incredible success story demonstrates that capitalism works.x To the extent
that the free market system has succeeded for the last 300 years in fulfilling its basic fivefold mission with
minimal levels of government interventions and regulation, it proves that the capitalist enterprise as
originally conceived by Adam Smith (1776) is a viable, valid and legitimate institution. The U.S.
government itself as a democratic capitalist system has been the best when it was the least - that is, when
it was least needed to correct the ills of the free market system (Gans, 1988; Kelman, 1987). Currently,
with the U. S. market embroiled in recession or stagflation, some timely government interventions in
terms of appropriate monetary and fiscal policies are needed.xi

But like any socio-economic and political institution, American capitalism has its own strengths and
weaknesses.xii Any free market system makes certain assumptions, some of them are basic and some are
derived, that can help us to assess the system ethically. We summarize these assumptions in Table 4.1.

[Table 4.1 here]

Assumptions 1-3 are based on Adam Smith’s theory of free capitalist markets. He maintained, “it is
not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their
regard to their self-interest.” In the process of “naturally” seeking one's own self-interest, the individual
contributes to the good of the whole society as if by “an invisible hand.” xiii “The market thus determines
how society shall invest its resources, human and material. It decrees when, where, and how humans shall
labor. It determines the disposition of capital. The market becomes the regulator of what shall be produced,
its quality, quantity and price.” The market is truly called the “sovereign.”

The free enterprise or the free market system is based on the first three assumptions. Assumption 4
seeks to justify the advertisement-promotion communication system which is an integral part of the
capitalist system. Assumptions 5 to 8 justify the free market system. They were not proposed by Adam
Smith. But several moral philosophers [e.g., John Locke, Jeremy Bentham, Thomas Hobbes, and
Sidgwick] and others have proposed similar or equivalent defense systems of the free enterprise capitalist
system.

Major concerns regarding capitalism and its assumptions 1-8 are:

1. The interplay of self-interested suppliers and self-interested buyers will not necessarily result in the good of
the individual or of the society.
2. Individual decision-making may not always be well informed in terms of all personal and social choices, and
their intended or unintended consequences.
3. The marketplace is often dominated by very large corporations that are frequently not brought to heel by
the forces of the market or by consumerist movements.
4. In relation to certain addictive products (e.g., casinos, political campaigns, pornography, fatty fast foods,
alcohol, and cigarettes), commercial ads may not be the right form of appeal or the right medium to inform
and instruct. Such ads tend to misinform, under-inform, or over-motivate such that vulnerable audiences
(e.g., children, teenagers, senior citizens) may succumb to appeals that may have socially undesirable effects
(e.g., impulsive or addictive, shopping, purchasing and consumption, behaviors). Ads may often lead
consumers to want and buy things that are superfluous (Galbraith, 1968).
5. Expanding consumption is presumed essential to an expanding economy. Expanding consumption involves
more people spending more money for more goods and services to satisfy more needs, wants and desires.
Nevertheless, "civilization, in the real sense of the term, consists not in the multiplication but in the

8
 deliberate and voluntary restriction of wants. This alone promotes real happiness and contentment, and
increases the capacity for service" (M. K. Gandhi: Yaravada Mandir 1935). Thus, big is not always better
than small –indeed, small is beautiful (Schumacher, 1973). In fact, less can be more (e.g., ads, websites,
billboards, aerial ads can be more effective with less information, animation and graphics clutter)!
6. The "deliberate and calculating individual" is not quite as capable when it comes to the wiles of the seller.
Today, many products and services are so complex that even a reasonably well-informed buyer needs the
aid of an Internet, a cell phone, a blog, a Facebook, twitter or you-tube interaction, a nutritionist, an
engineer or a doctor to make wise decisions about the often bewildering array of possible choices. This is
the tyranny or explosion of choice (Trout, 2004). This is particularly true when we have so many "parity
products" and so many apparently unnecessary products such as cheap disposable products, artificial
products, showy or show-off products, too many brands of snacks, candy bars, soft drinks, dog foods,
children's toys, beers, cigarette and alcohol products.
7. Freedom from tyranny is freedom to make a mistake and the duty to learn from the mistake, as well as
freedom to be right. While some will have to learn by making mistakes of wrong choices, over-consumption,
substance abuse or bankruptcy, others will enjoy their freedom by making the right choices. What
advertising does for the children, the elderly, and the economically illiterate, however, is a separate issue
that needs further exploration.

Morality of Profits and Losses

Can we prefer not to have profits and losses? But then who would create, design, and innovate new
products and services? Who would create new markets, malls and supermarkets, new brands, more
competition, lesser prices? Who would found new schools, colleges, universities and research centers,
new hospitals, clinics and medical advances, new telecommunication, social media, and entertainment
services? Above all, who would design new “convenient” products and services that we have today that
save us on money, time, efforts, anxiety, hard work, boredom, retirement worries, - all these we call
improvement of civilization today? Moreover, who would create jobs for those who do not own the
“capital” to start on their own such as entrepreneurs, start-ups and small and big businesses do?

However, our current markets of hyper capitalists have unnecessary excesses: conspicuous and
extravagant production, distribution and consumption, creation of new wanton needs, wants and desires,
exorbitant pricing, aggressive pricing, cartelization, price collusions, corporate giants that exploit more
than they “employ,” and the current epidemic of fraud, deception, obfuscation, corruption, bribery, and
money laundering. These latter have delegitimized the markets and “alienated” us from them. They form
a market turbulence that is negative.

Neverthless, nobody stops us from being owners. Capitalism provides all the opportunity for social
upward mobility of “rags to riches.” Even though some gigantic capitalists are powerful, it can be argued
that the consumers are still their masters.xiv It is by responding to us, to our needs and wants for cheaper
prices and better conveniences that they have become successful and so improved our quality of life. It is
surely that thought that drove William Morrison ever since he first set up a shop in Keighley in the
aftermath of the last war. By excessive hard work and attention to his customers’ needs, Morrison’s has
now become the 4th largest supermarket chain in UK, (after Wal-Mart, Amazon.com and eBay) to win
over 40 million online customers. So did Sam Walton with his largest retailing chain in the world Wal-
Mart, Bill Gates with his global software Microsoft, and Michael Dell with his personal computers.

At what point in their progress can we have demanded that they be stopped? By and large, it is those
that offer a better deal to the customer who succeed. However, some grow and some go bust. The
unhappy results spring mostly from competition, not from the necessity of employing capital.

9
Max Weber’s Ethics of Capitalism
Formalized by Max Weber (1925/1958), the Protestant Ethic refers to the set of beliefs and, more
specifically, to the set of binding social rules that argue a “secular asceticism” – the methodical, rational
subjection of human impulse and desire to an unknown God’s will through continuous, systematic and
dedicated work in a “worldly calling.” Highly prevalent among Calvinists and Puritan merchants, the
Protestant ethic believed that the community must always come first and that individuals had to bend their
wills to the common good and community’s needs. Hence, the Protestant ethic spelt a constant conflict
between individualism and communalism, between individual pursuit of wealth and status versus
common good. Under such tensions, doctrines and doctrinal quarrels were less important than moral
probation – how one proves one’s worth to other people. The enduring significance of the Protestant
ethic was due to the way it linked the probation of self, work in the world, and eternal salvation (Jackson,
1987, p. 8). One served God not necessarily by prayer and almsgiving, but by faithfully, continually, and
unremittingly performing one’s duty to worldly work. This rational and systematic pursuit of a worldly
vocation, when it was crowned with economic success, proved the doctrine and necessity of common
good before individual good, social primacy over individual primacy. The individuals had to self-
convince that they had proved themselves to God and man and attained salvation.

This powerful intellectual instruction, the ethic of ceaseless work combined with ceaseless
renunciation of the fruits of one’s toil, provided both the economic and moral foundations for modern
capitalism. This secular asceticism became a powerful salvific tool to the large upward-moving middle
class – self-made industrialists, merchants, farmers, and enterprising artisans. This pragmatic bourgeois
ethic of self-reliance, hard work, frugality, and rational planning became a social myth and an
empowering ideology that purified and justified one’s attention to the world, one’s accumulation of
wealth, and a rational justification of the social inequities that inevitably followed such accumulation. In
mainstream emerging urban America of the late nineteenth and early twentieth centuries, the Protestant
ethics had secularized into a strong work ethic that resulted in rugged individualism and a success ethic of
capitalism. Frugality was soon forgotten for commercialization of leisure and the sanctification of
conspicuous consumption in varying degrees became the norm.

However, with millions of immigrants flooding the nation, with the emergence of governments and
laws, with the miniaturization of the agricultural farm sectors and the urbanization of mainline America,
with the advent of mass production and mass distribution systems accompanied by the emergence of large
corporations with the bureaucratization of management and the emergence of the salaried employees, the
old Protestant ethic has virtually disappeared to what it is today.

Welfare Capitalism or the Dependence Culture

Defenders of the culture of dependency seem to believe that wealth inequality and oppression by the
rich have stifled opportunity and are the cause of our economic failures, and that only policies aimed at
reducing this inequality will help our economy, such as welfare economics of progressive taxation and
heavy regulation.

Before the entitlement state culture became prominent, self-determining individuals knew they had to
support themselves through their own productive work and they planned for potential tough times, by
working hard, saving, keeping within their means, and assuming responsibility for their own lives.

In departing from this American standard, our national, state and local governments have taxed too
much, regulated too much, promised too much, and borrowed too much. The history of the past few
centuries shows that these types of government policies have resulted in fewer individual freedoms and

10
reduced economic opportunity. No person has a “right” to anything that other people have to pay to
provide.

Meaningful reform must also give middle- and lower-income families and entrepreneurs a real
opportunity to achieve and raise their standard of living by freeing them to compete and fight for their
own prosperity within a robust economy; to develop their individual skills through the process of taking
risks, succeeding, and failing. This is how economic freedom works.

Government action in the name of “fairness” is actually more unfair than the condition it seeks to
rectify. It is a political mechanism that strains the social fabric of a free society, and tends to favor one
group of citizens at the expense of another group; and for which there will always be some portion of
citizens who are for and against the action.

Moral Issues on Welfare Capitalism based on Taxing the Rich

• Is it unfair when people desire to keep more of what they earn?
• Or, rather, is it unfair when some demand a greater share of what others earn?
• Is it truly in the best interests of people to become dependent on anything other than their own
talents and creativity?
• Are “Entitlement state” policies that tax income so as to subsidize idleness counterproductive to a
prosperous society?
• If the government is a giver of all things then how can it be the engine that stimulates or produces
wealth?
• Was the government designed to protect individual rights and properties, and not to infringe upon
them and seize them for politicians’ personal political gain?
• Is a return to the pursuit of individual happiness and the freedom to achieve personal excellence via
free enterprise capitalist system (FECS) the only way we can unleash our true potential and prosper
as a people and as a state?
• In general, an over-dependence on government has bred in the past decades of stagnation, cronyism
and waste – is this true?

Coercive redistribution policies demands that different people live by different rules and establishes
contradictory values: seeking unearned prosperity for one group via the destruction of another group’s
rightful property. This philosophy is corrosive to a free society and will inevitably lead to the very kind
of conflicts we see in our state and municipalities today … pitting various special interest groups against
various taxpayer groups. Public policy should aid, not hinder, the “invisible hand” that shepherds this
energy once again into the most productive economic system the world has ever known.

Additionally, the process of designing and implementing public policy based on “fairness”
inevitably becomes corrupt because it rewards the well-connected, is prone to bureaucratic and political
favoritism, fosters cronyism and fraud, and leads to undue influence by powerful special interests. Public
policy that funnels different people toward the same outcome, is restrictive and counterproductive;
whereas public policy that allows each person to utilize their own free-will to determine their own
outcome is the true meaning of freedom and emblematic of the American Dream.

Systems-Thinking New Ways of Understanding FECS

Following systems-thinking and its Laws and Archetypes as discussed in Chapter 03, we restate some
important systems principles. What we assert about a public system renewal such as the Free Enterprise
Capitalist System (FECS) can, mutatis mutandis, be applied to a corporation, with the CEO as the
principal and cardinal (pivotal) systems thinker.

11
 One could apply systems thinking for revitalizing any failing organization. Most of us agree that the
corporate world in general and, say, India in particular, need revitalization and growth. Our basic question
then is: what can revitalize the world and India in particular? What are the best points of greatest
leverage? That is, how can we systematically stimulate growth, expansion and prosperity in the corporate
world despite national recessionary threats?

Table 4.2 provides an initial canvas and framework for FECS revitalization based on systems
thinking. Most of us agree that the global markets in general and the free enterprise capitalist system
(FECS) in particular, need revitalization and growth.

[Table 4.2 about here]

A Systems View for Resolving Capitalist Problems

Our basic question then is: what can revitalize FECS in particular? What are the best points of
greatest leverage? That is, how can we systematically stimulate growth, expansion and prosperity in
FECS despite national and global recessionary threats?

At this juncture, let us recall some systems-thinking fundamentals on leverage:

• In systems thinking, feedback is an axiom that states, every influence is both cause and effect.
Nothing is ever influenced in just one direction. Reality exists in structures, and structures cause
behavior.
• The bottom line of systems thinking is the concept of leverage – the capacity to see where actions and
changes in structures can bring about the most significant and most enduring improvements.
• Leverage looks for underlying structures such as limits to growth (archetype 1) and shifting the
burden (archetype 2), that is, looks for reinforcing and balancing processes that underlie
symptomatic changes.
• In case of a business failure, a good systems thinker first unravels symptomatic solutions or shifting
the burden events or policies. In shifting the burden structure, the first thing a systems thinker looks
for is what might be weakening the fundamental response.
• Leverage lies in the balancing loop, not the reinforcing loop. To change the behavior of the system,
you must identify and change the limiting factor (Senge, 1990, p. 101, 2006, p. 100). This may require
analysis, decisions and strategies you have not yet considered, choices you never noticed, or difficult
changes in rewards or norms.
• Strategic thinking also addresses core organizational dilemmas such as centralization versus
decentralization, command and control versus distributed power and authority, mission and identity
versus diversification, productivity versus creativity, revenue generation versus cost containment,
and the like. Good strategic thinking brings such dilemmas to the surface, and uses them to catalyze
imagination and innovation (Senge et al., 1994, p. 16-17). Systems thinking can empower good
strategic thinking.

A. Positively and externally, some basic questions in this regard are:

• How can we attract both domestic and foreign investment into corporate and political systems of a
country such as India in the near future? Alternatively, how can we effectively attract venture
capitalists, private equity firms, and domestic and foreign investors to invest into the corporate and
political India revitalization project? That is, what is the differentiating strategy of corporate and
political India for attracting investments into it? A nation’s talent pool is not only the ones it trains,
but what talent it can attract, develop and retain from domestic and foreign sources.
• What tax havens, subsidies and other stimulants can the federal, state and city governments induce
into the corporate and political world for rapid and sustained growth in the coming decades?

12
 • Further, what is the quality of inter-organizational trust (e.g., between state/local governments of
corporate and political world and investor corporations) that will make such investments into
corporate and political India safe and secure for the future?
• How can key influential groups such as major school networks, community colleges and universities,
labor unions, consumer advocacy groups, non-governmental organizations (NGOs), EPA and
environmental watchdogs, main line churches, synagogues, mosques and temples collaborate to
eradicate corruption in our world and thus attract, retain and develop human and non-human
investments into corporate and political worlds of, say, emerging countries?

B. Conversely, that is negatively and externally, some basic questions are:

• What can stop corporate and political India from its present malaise of apathy, stagnancy and
stalling?
• How can we stop the drain of talent, energy and investment from corporate and political worlds?
• How can we stop and hold back, objectively and effectively, corporations, establishments, and
venture capital institutions from abandoning corporate and political India and migrating into other
more lucrative neighboring countries?

C. Positively and internally, some basic questions are:

• What imagination, creativity, innovation and innovativeness programs and projects do we bring to
the corporate and political worlds and turbulent markets such that we can revitalize them from
within and without? What we need are not default strategies and incremental innovations, but
radical innovations and technological breakthroughs that change our mind-set of complacency to
game-changing innovations that will alter our so-called fundamentals to lead us toward a more
desired future.
• What entrepreneurial and intrapreneurial talent can we identify, develop and retain for catapulting
corporate and political world into an exponential and rapid growth path?
• What corporate, organizational and cultural change agents must we cultivate in transforming
corporate and political world markets into sustainable and competitively strong corporate
communities?

D. Negatively but internally, some basic questions are:

• What is failing the corporate and political world and its defining corporations and government
institutions?
• What are the major symptoms of corporate and institutional stalling, stagnancy, sickness, downturn,
decline, distress, and insolvency crises that are gripping and choking corporate and political
countries like India today?
• How can we diagnose and control these symptoms so that we can turnaround corporate and political
India and get it on the track of renaissance and vitality?

Systematic research into (D) and (C) should indicate at least partial answers to the basic questions
raised under (B) and (A). That is, research in (D) should lead us to (C) – that is, turnaround management
of corporate and political India should spur corporate and political India transformation management. For
instance, Table 4.3 explores the three objectives under (C) in relation to the “laws” of systems-thinking.

[Table 4.3 about here]

Looking at the ongoing financial crisis, it is important to realize that the subprime-mortgage crisis in
the USA was only a trigger. Even without the crisis in the housing market, the system would probably
have collapsed sooner or later. Since the 1980s, structural problems have been gnawing away at the global
financial system, rendering it very unstable and fragile. The system turned a blind eye to inherent risks

13
and promoted irresponsible, short-term and speculative behavior. It produced a high degree of moral
myopia and selective blindness. The system not only fostered irresponsible behavior but also dazzled
people so they would not realize the likely consequences or anticipate the looming catastrophe. In
classical tragedies the hero’s fall is always preceded by his or her inability to grasp the ambiguity of what
is happening or the fragility of their predicament. Moral myopia and hubris always come before
catastrophe (Bouckaert, 2015, p.17).xv

In systems thinking we view the whole cosmos as one system of which the planet earth is an integral
part, with humans and non-human systems considered as inherently embedded within the larger cosmic
system. Hence, every system is connected with every other system; that is, everything has an effect on
everything else and is affected, in turn, by every other system. According to the Gaia theory (Lovelock
1979, 2006), the planet is a dynamic system and collection of living and non-living elements that
continuously interact with each other within a series of highly complex self-regulatory mechanisms that,
given certain parameters, support life. Such self-regulatory mechanisms which include evolution, natural
selection, weather patterns, natural extinction and rebirth patterns in the composition of the planet’s
water, air, land and energy ecosystems, form the core of contemporary understanding of sustainability,
ecology and science (Valero-Silva, 2015, p. 264).

Most systems have owners. They are dynamic mental constructs that behave as if they have some
purpose (Ackoff & Emery, 1972). Thus, organizations such as corporations, joint ventures, strategic
alliances, subsidiaries, corporate spinoffs, branches and affiliates, divestitures, mergers and acquisitions
are systems. In this sense, philosophies, theologies, ideologies, cultures, religions, schools, colleges and
universities, ethical and moral theories, economic and political theories, laws and ordinances are systems
with definite purpose and destination. They reflect the views and value systems of their owners. At a
broader level, all products and brands, industries and markets, countries and continents, planets, stars,
galaxies and constellations, and the cosmos are systems. A system, from this viewpoint, is a group of
components (e.g., elements, parts, components and relationships) linked in an organized manner. The
components are affected by being included in the system, and are changed if they leave it or forced to
leave it (e.g., fish die when drawn out of water; animals change their behavior when caged in zoos;
workers and their families suffer when displaced, and the like). Capitalism is best understood as a human
system operating in a world of non-human systems.

Systems have inputs, process and outputs, with the inputs being churned into outputs through
specific processes. Most systems interact with their environment to produce properties that may often be
beyond the contribution of inputs. These are emerging systems that explain evolutions, extinction and
rebirth. Hence, the whole may be greater than the sum of its parts. Life is an emerging system that
cannot be explained just by its component parts. The environment can support life, vitality, opportunity,
growth and development far beyond the scope of its parts or inputs.

Thus, systems exhibit feedback mechanisms (Beer, 1985). That is, information about the outcomes
is fed back to the system at the inputs or process levels so that the system learns and improves from and
adapts to the outcomes. Feedback can be both positive (reinforcing, life giving, balancing) and negative
(extinguishing or diminishing). Most biological processes (e.g., body temperature, blood pressure,
oxygen level controls, recycling) thrive on positive feedback (e.g., biological thermostats that control
body heat), and die on negative feedback (e.g., industry toxic waste of solid, liquid or gas, biodegradable
or non-biodegradable effusions). Human systems thrive on positive feedback (e.g., motivation,
satisfaction, trusting relationships, loyalty, leadership, reputation, recognition) and diminish on negative
feedback (e.g., mistrust, misunderstanding, discouragement, denunciation, blackmailing, slavery,
colonization, suppression, religious intolerance, and persecution).

Capitalism when used responsibly has produced positive effects such as creativity, imagination,

14
intuition, discovery, invention, innovation, venture, entrepreneurship, statistical quality control (SQL),
Six Sigma quality, total quality management (TQM), just-in-time (JIT) inventory systems, human
resources development (HRD) systems, employee relationships management (ERM) systems, supply
chain management (SCM) systems, customer relationships management (CRM) systems lean
management movements, fair trade, distribution partner relationships management (PRM systems,
healthy competition systems, buyer-seller transparency, recycling, slow or delayed consumption,
greening, forestation, reducing carbon footprints, and other friendly ecosystems. Capitalism’s negative
effects include promoting consumerism, overconsumption, conspicuous consumption, wasteful or wanton
consumption, immediate gratification, forced product obsolescence, throw-away cultures, forced buyer-
seller information asymmetry, opaque and confusing financial products, deforestation, pollution, global
warming, unlimited growth ideology, economic development without social progress, and global poverty,
disease, inequality and structured forms of injustice.

New Ways Of Understanding Capitalism

Recent initiatives present new ways of understanding Capitalism, such as Conscious Capitalism,
Benefit Corporation, and Inclusive Capitalism. Conscious Capitalism (Mackey & Sisodia, 2013)
considers the effects of business actions that benefit both human beings and the environment. A Benefit
Corporation is a new legal business entity that is obligated to pursue public benefit in addition to the
responsibility to return profits to shareholders (Hiller, 2013); Inclusive Capitalism (Robinson, 2013;
Lagarde, 2014) entails economic growth with less inequalities and more integrity in the financial system.
This is capitalism based on trust, opportunity, rewards for all within a market economy—allowing
everyone’s talents to flourish (Melé, 2016, p. 302).

Inclusive Capitalism
By the early millennium, Stuart Hart started thinking about the role that profitable, scalable, impact
enterprises could play in alleviating poverty. He and C.K. Prahalad wrote an influential article discussing
the dormant entrepreneurial and commercial potential of the world’s 4 billion poorest people, who
constitute the base of the economic pyramid. Their work highlighted an “invisible opportunity” to create a
more inclusive capitalism and they called upon multinational corporations to reassess the assumptions
they had made about these markets as viable business prospects. C. K. Prahalad defined “inclusive
capitalism” as “the idea that corporations can simultaneously create value and social justice.” xvi

Prahalad uses the term “inclusive capitalism” to invite readers to “commence talking about
underserved consumers and markets. The process must start with Bottom of the Pyramid consumers as
individuals. New and creative approaches are needed to convert poverty into an opportunity for all
concerned. That is the challenge” (Prahalad, 2005, p. xvii). The pyramid represents capitalism and those
benefiting from it are the majority of people at the bottom who are all poor.

Hammond (2001) describes how technology in the 1990s has led many people to experience greater
wealth and allowed for their overall quality of life to improve. He also notes that billions of people
continue to live in poverty in countries developing their capitalistic society. In order to address this
exclusiveness of capitalism a new capitalistic model should be used, argues Hammond. “What is needed
instead is a bottom-up model that makes credit, communications, information, energy sources, and other
self-help tools. The idea behind this new development model is that basic services should generally be
provided by businesses -- sometimes directly, sometimes in partnership with governments or networks of
non-governmental organizations (NGOs)” (Hammond, 2001, p. 98). Privatizing public services is a
central idea of inclusive capitalism, suggesting government policies have largely failed poor people and
businesses and non-governmental organizations should assume a greater role in poverty alleviation.

15
 Prahalad and Hammond co-published a 2002 article in the Harvard Business Review that advanced
their ideas of using market-based solutions for poverty alleviation through a hypothetical case study of
development in India (Prahalad & Hammond, 2002). In 2004, they advanced their ideas in another co-
authored publication, this time highlighting three misconceptions of poor people commonly held by
companies. The first is that poor people have little buying power when in fact “low-income households
collectively possess most of the buying power in many developing countries” (Hammond & Prahalad,
2004, p. 32). The second is that low-income people do not like change when in fact they often receive
little opportunity to choose among a variety of products and services. The third is little money can be
made by selling to the poor. The “world's poor-families with an annual household income of less than
$6,000-is enormous. The 18 largest emerging and transition countries include 680 million such
households, with a total annual income of $1.7 trillion - roughly equal to Germany's annual gross
domestic product” (Hammond & Prahalad, 2004, p. 32).

In 2007, Hammond and a team of researchers from the Inter-American Development Bank, the
World Bank Group’s International Finance Corporation and the World Resource Institute concluded that
poverty afflicts four billion people worldwide, many of whom are living in capitalistic countries or
countries transitioning towards capitalism (Hammond et al., 2007). Poverty is defined as “those with
incomes below $3,000 in local purchasing power” (Hammond et al., 2007, p.3). Based on this evidence,
the lived experiences of most human beings is that they are living in countries practicing different degrees
of capitalism, which has proven itself to be highly exclusive. The opening pages of the 2007 report by
Hammond et al. reveal additional funding for the report came from Intel, Microsoft, Royal Dutch Shell
and Visa International. This suggests that crony capitalism and inclusive capitalism may have overlapping
interests.

Inclusive Capitalism and Intentional Public Policies

Hammond and Prahalad champion information and communication technologies (ICTs) such as cell
phones, computers and the Internet as powerful tools for poverty alleviation. Ethnographic data from
anthropologists and sociologists reveal that widely available and affordable ICTs provide qualitative
improvement in the lives of low-income people, but not quantitatively improve their livelihood and
wealth (Slater & Tacchi, 2004; Horst & Miller, 2006). The research of these anthropologists and
sociologists indicates that measurable improvement in poor people’s lives is not likely to occur without
comprehensive government policies that simultaneously encourage living wages, affordable housing,
access to nutritious and low-cost food, high quality and inexpensive schooling, health care and public
transportation. While these public policies may be delivered by businesses and NGOs, government
oversight does not need to be removed for a more inclusive capitalistic economy.

In today’s interconnected world, blogs Mark Weinberger, CEO, Ernst & Young, our challenges are
so great and so complex that no single organization can address them alone. That means if businesses
want to drive more inclusive capitalism, the first, most important step is to build strong partnerships with
as many stakeholders as possible. Achieving more inclusive capitalism will require all hands on deck -
and once you start looking, it is possible to find allies almost everywhere. They can be your employees,
shareholders, lenders, communities, suppliers, partners, regulators, or government officials. As long as
they have a stake in our shared future, it is up to us to seek them out and get them engaged.

Christine Lagarde, Managing Director, International Monetary Fund, London, in an Address titled
“Economic Inclusion and Financial Integrity” (May 27, 2014) at the Conference on Inclusive Capitalism
said: “The concentration of capitalism comes during the 19th century. With the industrial revolution came
Karl Marx (1867) who focused on the appropriation of the means of production - and who predicted that
capitalism, in its excesses, carried the seeds of its own destruction, the accumulation of capital in the

16
hands of a few, mostly focused on the accumulation of profits, leading to major conflicts, and cyclical
crises.”

So is “inclusive capitalism” an oxymoron? Or is it the response to Marx’s dire prediction that will
lead to capitalism’s survival and regeneration - to make it truly the engine for shared prosperity? If so,
what would be the attributes of inclusive capitalism? Trust, opportunity, rewards for all within a market
economy - allowing everyone’s talents to flourish. Certainly, that is the vision. Most recently, however,
capitalism has been characterized by “excess” - in risk-taking, leverage, opacity, complexity, and
compensation. It led to massive destruction of value. It has also been associated with high unemployment,
rising social tensions, and growing political disillusion – all of this happening in the wake of the Great
Recession.

Continues Christine Lagarde: “So the big question is how can we restore and sustain trust in a
troubled world of turbulent markets? First and foremost, by making sure that growth is more inclusive
and that the rules of the game lead to a level playing field - favoring the many, not just the few; prizing
broad participation over narrow patronage. By making capitalism more inclusive, we make capitalism
more effective, and possibly more sustainable. But if inclusive capitalism is not an oxymoron, it is not
intuitive either, and it is more of a constant quest than a definitive destination.”

Conscious Capitalism
Whole Foods co-founder John Mackey, writing with economist Raj Sisodia, offers a persuasive
argument for justifying and praising free enterprise capitalist system (FECS) in their Book (2013)
Conscious Capitalism: Liberating the Heroic Spirit of Business. “In the long arc of history, no human
creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism,” -
a statement that serves as a good summary of this book. Mackey insists that a goal of the capitalist need
not be profit maximization and that self-interest can be broader than the mere individual self. Mackey
combines a strong sense of social service with the thought that there are goals beyond mere money for the
successful investors. As the book progresses, Mackey’s vision becomes more singular, with sharp attacks
on crony capitalism - the unholy wedding of big government with certain strands of big business - side
arguments on animal welfare, and heightened consciousness and a well-reasoned critique of the vaunted
“triple bottom line.” Mackey presents a reasonable and mostly unobjectionable defense of capitalism at a
time when, thanks to the excesses of the wealthy, it needs defending.

There is a growing network of people - including the leaders of companies such as the Container
Store, Starbucks, Trader Joe’s, Patagonia, and Whole Foods Market - building their companies based on
the idea that business is about more than making a profit. It is about higher purpose. The CEOs of these
companies are a part of this group, and host a set of conferences each year to share the guiding principles
and best business practices that they have come to call “conscious capitalism.” The terms seems to be an
oxymoron, undoubtedly an unusual juxtaposition of words. The word “conscious” has many connotations
for people. Conscious capitalists define it as being mindful and awake, seeing reality as it is rather than
as what we wish it to be, recognizing and being accountable for all the consequences of our actions,
having a better sense of what is right and what is wrong, rejecting violence as a way to solve problems
and being in harmony with nature.

This group defines Capitalism in simple and benign terms: it is simply the co-existence of free
markets and free people, or economic and political freedom. Unique among all the species on this planet,
we human beings are wired to create value and trade with each other. This is in our very nature. The
evidence is overwhelming that whenever in history humans have enjoyed unencumbered freedom to do
just that, we have prospered, our numbers have grown, and we have lived longer, happier and more

17
peaceful lives. When our natural urges to interact and trade freely with others have been suppressed, we
have regressed. We therefore hold these truths to be self-evident: business is good because it creates
value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our
existence and it is heroic because it lifts people out of poverty and creates prosperity. Free enterprise
capitalism is the most powerful system for social cooperation and human progress ever conceived. It is
one of the most compelling ideas we humans have ever had. But we can aspire to even more.

“Conscious Capitalism” is a way of thinking about capitalism and business that better reflects where
we are in the human journey, the state of our world today, and the innate potential of business to make a
positive impact on the world. Conscious businesses are galvanized by higher purposes that serve, align
and integrate the interests of all their major stakeholders. Their higher state of consciousness makes
visible to them the interdependencies that exist across all stakeholders, allowing them to discover and
harvest synergies from situations that otherwise seem replete with trade-offs. They have conscious leaders
who are driven by service to the company’s purpose, to all the people the business touches and to the
planet we all share.

Conscious businesses have trusting, authentic, innovative and caring cultures that make working
there a source of both personal growth and professional fulfillment. They endeavor to create financial,
intellectual, social, cultural, emotional, spiritual, physical and ecological wealth for all their
stakeholders. Evidence is mounting that such businesses significantly outperform traditional businesses in
financial terms, while also creating many other forms of well-being. Ultimately conscious businesses
create lasting value as the world evolves to even greater levels of prosperity, helping billions of people
flourish and lead lives infused with passion, purpose, love and creativity - a world of freedom, harmony,
prosperity and compassion.

For most business decisions their social costs and benefits are sufficiently clear and documented, and
hence, teleological analysis should be relatively direct and easy. If distributive spread of costs and
benefits is also spelt out, then distributive and corrective justice related ethical analysis should be also
objective. However, deontological analysis that investigates intentions and motivations underlying
executive decisions, the rights and duties they either uphold or violate, is a challenging venture. Lastly, a
virtue-ethics based perspective of assessing the effects of one’s decisions on the physical, functional and
moral well-being of affected populations can be a daunting if not an insurmountable task.

Economically, the United States has been a grand success. Part of this triumph has resulted from
natural resources; part from America’s being one of the largest free-trade areas; and part from the
economic system, called ‘capitalism’, by which we have governed ourselves. As the ‘standard of living’
usually is measured, the United States ranks one of the highest among great nations. In general, this
wealth and this productivity are widely and equitably shared. Hence, capitalism in America has survived
and been a triumph. But there are problems, mostly man-made, of greed, envy, immediate gratification,
wanton consumption, overspending and chronic indebtedness, and the like that have shown the darker side
of capitalism.xvii

The Dharma of Capitalism

Author of The Dharma of Capitalism (2012) and Co-founder of the Dow Jones Dharma Index and an
ethics and investment consultant, Nitesh Gor shows how Eastern culture is reshaping Western ideas about
social responsibility and “doing the right thing.” This Book is a practical, anecdote-illustrated guide to a
decision-making process that merges concepts from East and West to more predictably “good” outcomes
in business and in life that are both profitable and practical. xviii

18
 In Buddhist (c. 500 BC) culture, dharma describes the moral and religious precepts set down around
500 BC by Gautama Buddha, a Nepalese-born teacher and philosopher. In Hindu culture, dharma refers
to the search for life’s universal truth and higher purpose. The Dharma of Capitalism blends Hindu and
Buddhist traditions with our current way of life in free enterprise capitalist systems (FECS).

Dharma, individually or socially, is a moral imperative that evolves as we journey through life. Its
common usage implies righteousness, justice, wisdom, rightful or correct action, behavior codes, ethics,
and so on. Dharma relates to a sense of higher purpose. It is a fluid concept, dependent on the context.
There is material dharma as opposed to spiritual dharma. There are different dharmic expectations
depending on whether one is young, single, male or female, married, older, and so on. All these different
dharmas share a common purpose – to help people remain mindful of the motivations and consequences
of every decision they make, no matter how minor (Gor, 2012, p. 17).

Every choice we make has a motive and an outcome, and the two are often at odds. Understanding
our true motivations and owning responsibility for outcomes is at the core of the Dharma of Capitalism.
When we allow our choices to be driven by motivation or passion and thereby ignore to foresee or
investigate outcomes, the results are too often flawed or unintended.

“While morality deals with the right course of action, ethics is concerned with character. One could
be moral and do the right thing, and yet be a person of poor character and ethically lacking” (Gor, 2012,
p. 16-17). Hence, we need a new construct to combine character and motive, ethics with morality. That
is, it is not enough to do just the right thing, we must do it for the right reasons and intentions
(motivation) and do it rightly with proper moral and spiritual dispositions (character). We do not do the
right thing or shun from violating rules and laws to avoid guilt, shame or punishment (a negative
approach), but in order to do good, be good, and become good (a positive approach). This is intrinsic
motivation. We must remain mindful of the motivations and consequences of every decision we make, no
matter how minor. Our worst instincts are not sins bur our natural tendencies to be acknowledged and
tamed in the service of wise, compassionate thinking and behavior. Rather than the concept of evil, the
Hindu and Buddhist scriptures speak of our struggle to consistently be good.

The East can teach the West. By some estimates, one in ten professors of the top MBA schools of
USA is Indian in heritage. In 2010, Harvard University named Mumbai-born Nitin Nohria to become the
tenth dean of the prestigious Harvard Business School. Indian born businessmen and business consultants
are playing a growing role in shaping best practices in the West, teaching corporate executives to take a
more holistic approach that puts purpose before goals and stakeholders before stockholders (Gor, 2012, p.
24). This is doing right things rightly.

The Dharma of Capitalism believes in the “universal truth that all people and cultures are connected
by money and commerce and that there is a higher purpose to economic activity than the short-terms
goals of profit, wealth-creation, and personal gratification” (p. 6). The dharmic concept of higher purpose
transcends short-term quick-fixes and profits, regional and national boundaries, and even goes beyond the
aspiration for people and institutions to act charitably or altruistically. Dharma as a philosophy looks at
every decision from both ends – what our real motivations behind these decisions, and how conscious and
caring are we regarding outcomes (as opposed to outputs).

In this seamless world, we need a practical and universal value framework for evaluating business
and life decisions across borders and cultures to increase the chances that good intentions yield good
results. The future of humanity may one day hang in the balance (p.12-13). “Selfishness as the basis for
happiness has been debunked and the soul of capitalism is in the process of being redefined” (Gor, 2012,
p. 9). People, nations and businesses today feel the pressure and the imperative to “do the right thing.”

19
The movement towards compassionate commerce and individual integrity has been a global social
revolution bubbling up from below in thousands of places in thousands of forms” (Ibid, p. 11).

Concluding Remarks
For most business decisions their social costs and benefits are sufficiently clear and documented, and
hence teleological analysis should be relatively direct and easy. If distributive spread of costs and benefits
is also spelt out, then distributive and corrective justice-related ethical analysis should be also objective.
However, deontological analysis that investigates intentions and motivations underlying executive
decisions, the rights and duties they either uphold or violate, is a challenging venture. Lastly, a virtue-
ethics based perspective of assessing the effects of one’s decisions on the physical, functional and moral
well-being of affected populations can be a daunting if not an insurmountable task.

Most corporate decisions are influenced by two vectors: a) the value or “to be” vector and b) the issue
or “to do” vector. The value vector involves a hierarchy from safety, security, equality, trust, cooperation,
social values, ecological values to universal values. The issue vector is also hierarchical: individual
issues, family issues, neighborhood issues, state issues, country issues, regional issues, continental issues,
global issues, and cosmic issues. If these two vectors can be projected along the X axis (say, issue vector)
and the Y axis (value vector), then sustainable social progress is a vector of institutions that may be
placed along the 45 degree line: the higher the position on this social progress vector the more ethical,
moral, human and spiritual is this institution. The corporate challenge of this book is how we can
streamline our market systems, family systems, education systems, religious systems, law and order
systems, civilian systems, technological systems, business systems, corporate systems, entrepreneurial
systems, creativity-innovation systems and political systems, to empower humanity to march upwards
along the vector of sustainable social progress.

20
 Table 4.1: Basic Assumptions of the Free Enterprise Capitalist System
Assum- Buyers
ptions
1 All individuals are self-
interested by nature.
2 All individuals are, by nature,
deliberate and calculating in
pursuit of self-interest.
3 Hence, all individuals should be
free to pursue self-interest.
4 Most individuals are, by nature,
unmotivated unless awakened
by appealing information,
products and services.
5 Thus, the moral rule of
promoting self-interest
(Egoism) overrides the moral
rule of promoting interest of
others (altruism).
6 However, individual self-
interest should promote
common good, without being
subservient to it.
7 Individuals know best what
they want and can best achieve;
hence individual egoism should
automatically promote social
well-being at the collective level
by the theory of the “invisible
hand” (Adam Smith).
8 Hence, the moral supremacy of
the moral principle of
enlightened egoism over that of
enlightened altruism.
Sellers
All corporations are self-
interested by nature.
All corporations are, by nature,
deliberate and calculating in
pursuit of self-interest.
Hence, all corporations should be
free to pursue self-interest.
Corporations should inform,
instruct and motivate consumers
regarding their products and
services. This justifies corporate
advertising.
Thus, the moral rule of promoting
self-interest (Corporate Egoism)
overrides the moral rule of
promoting interest of others
(corporate altruism).
However, corporate self-interest
should promote common good
without being subservient to it.
Corporations know best what
they want and can best achieve;
hence corporate egoism should
automatically promote social well-
being at the collective level by the
theory of the “invisible hand.”
Hence, the moral supremacy of
the moral principle of enlightened
corporate egoism over that of
enlightened corporate altruism.
21
Market Institutions
All market institutions composed
of buyers and sellers are, therefore,
self-interested by nature.
All market institutions are, by
nature, deliberate and calculating
in pursuit of self-interest.
Hence, all market institutions
should be free to pursue self-
interest.
Corporations should inform,
instruct and motivate consumers
regarding their products and
services. This justifies market
institutional advertising.
Thus, the moral rule of promoting
self-interest of businesses (Market
Egoism) overrides the moral rule
of promoting interest of others
(market altruism).
However, market institutional self-
interest should promote common
good without the latter dominating
the markets.
Market institutions know best what
they want and can best achieve;
hence market egoism should
automatically promote social well-
being at the collective level by the
theory of the “invisible hand” and
“the State of Nature” (T. Hobbes).
Hence, the moral supremacy of the
moral principle of enlightened
market egoism over that of
enlightened market altruism.
 Table 4.2: Regulatory Financial Framework for
Turbulent Market Stabilization and Market Sustainability
Dimension Induced Turbulent Market
Stabilization
Post crisis situation of calm;
A brief spell of quiet after economic and financial
turmoil;
Definition A respite after market turbulence.
A market state temporally freed from free-fall or
disruption via expensive government-based
bailouts.
Time frame Short-term, quick-fix, and temporary
Mostly local; Wall Street and the financial
institutions. Government bailout systems. This is a
Domain
silo (non-systems) approach.
Taxpayer- A quick-fix symptomatic solution;
A stop-the-bleeding emergency care;
financed bail-
It is a hit-and-miss tactical solution
out Solutions
Is skeptical about market stabilization. After 10
years of the 2008 financial crisis, market
stabilization is still not certain, especially in
The public housing, and derivatives.
The public (e.g., investors, consumers) have lost
confidence in the Wall Street and the financial
institutions as also in the governments.
Market turbulence has hurt the ordinary consumer
under various forms of joblessness,
underemployment, home foreclosure, asset
The consumers depletion or currency depreciation, personal
insolvency and bankruptcy.
Can market stabilization counteract and
compensate consumer damage?
Market stabilization can be legislated; but it is best
done through self-regulation.
Legislation
SEC is ineffective; it is prone to corruption;
FINRA, CFTC, FDIC, … need to be beefed up and
enforcing;
Make financial market exchanges transparent;
Resolution
Reduce buyer-seller information asymmetry;
Regulate speculative markets such as derivatives,
hedge funds, and private equity funds.
Predict, monitor, control market behavior in order
to prevent future financial crisis.
Resolution Continuous market stabilization
Outcomes
22
Natural Turbulent Market Sustainability
via:
A market state that prevents crisis;
A market state that protects from crisis;
A market state that has just procedures for preventing and
protecting the economy from crisis.
A market that can effectively sustain itself with fairness and
equity without government interventions or de-regulation.
Long-term, self-governed control over market inputs,
processes and outputs
Globalization: Should be global in a globalized world;
financial stability should follow from product/goods global
markets stability; the latter should follow from continuous
creative destruction or creative innovations.
Non-political interventions: Government bailouts are
ineffective in sustaining markets for the long-term; we need
solutions that can stabilize the markets over a long period
(e.g., at least 6-8 quarters).
Market-Demand: The public (demand side) should feel
compelled to contribute to the market sustainability process
by supply side substantial adjustments in terms of
transparency, fraud-prevention, information asymmetry
reduction, and fair procedures for market exchanges
Enhanced consumer confidence: Market sustainability implies
a long-term confidence of the public and consumer in the
markets in general, and financial markets in particular.
Market sustainability should imply full employment, steady
wealth accumulation, persistent and consistent innovation,
regular job retraining and reengineering, and cultural
stability.
Market sustainability cannot be legislated. It is a desired
outcome of government/business cooperation, persistent
creative innovation and continuous growth in GDP.
Consumer Finance Protection Agency should ensure:
Distributive justice – fair distribution of market opportunity;
Corrective justice – periodic correction of abuses and frauds;
Retributive justice – punishment of the wrong doers;
Compensatory justice – restoring the wronged and damaged
to their original status
Protective justice – protect all people from financial harm;
Preventive justice – prevent all people from financial harm;
Procedural justice – set up transparent and fair procedures for
ensuring distributive, corrective, protective, preventive and
procedural justice.
A step further – Beneficent justice – do good to all the public
and consumers by win-win exchanges
Prolonged market sustainability
 Table 4.3: Corporate Strategies to Revitalize FECS as
Derived from the Laws of Systems Thinking
Systems Law Corporate Strategies that Transform FECS:
Thinking Statement Radical innovations and
Laws game-changing breakthroughs
that will transform FECS
“Today’s Problems Yesterday’s product solutions
come from should not create problems
1 yesterday’s for FECS’s today or
Solutions.” hereafter.
“Harder you push, Desist from pushing your
harder the system past innovations into FECS’s
2 pushes back.” future lest they backfire.
“Behavior grows Radical innovations should
3 better before it sustain FECS as a viable
grows worse.” community in the long-term.
“The Easy Way Out Avoid easy innovations that
4 usually Leads back backfire to endanger FECS’s
in” future.
“The cure can be Avoid easy product
worse than the innovations that lead to
5 disease.” addictive and dangerous
behaviors in FECS
Faster is Slower Do not promote faster and
6 heavier consumption of your
innovative products
Cause and effect are Prevent “effects” of your
not closely related in innovations on FECS that
7 Time or Space. you cannot control in time
and space
Small Changes can Innovate products that
8 produce big Results generate high-leverage to all
FECS stakeholders
You can have your Offer low-cost but high-
cake and eat it too – quality innovative products
9 but not at once. that stimulate the FECS
economy
Dividing an Elephant Offer holistic innovative
in half does not product solutions that keep
10 produce two FECS united despite diverse
Elephants cultures
Given innovation
There is no blame responsibilities 1-10, share
11 praise/blame with all FECS
people
Entrepreneurial talent that can be
identified, developed and retained for
catapulting FECS into an exponential
growth path
Yesterday’s entrepreneurial talent
should not create problems for
FECS’s present and future.
Desist from pushing your
entrepreneurial mental models into
FECS’s future without reexamining
them.
Entrepreneurial talent should sustain
FECS as a viable community in the
long-term.
Avoid easy entrepreneurial solutions
that backfire to endanger FECS’s
future
Avoid entrepreneurial solutions that
lead to addictive and dangerous
consequences for FECS
Do not always measure
entrepreneurial success by faster and
larger productivity rates.
Prevent “effects” of your
entrepreneurship on FECS that you
cannot control in time and space.
Entrepreneurs should innovate
products that generate high-leverage
to all FECS stakeholders
Entrepreneurship should generate
low-cost but high-quality innovative
products that stimulate the FECS
economy
Entrepreneurship should generate
holistic innovative product solutions
that keep FECS united despite
diverse cultures
Given entrepreneurship
responsibilities 1-10, share
praise/blame with all FECS people
23
Organizational and cultural change
agents that transform FECS into a
sustainable and competitively strong
corporate community
Yesterday’s organizational routines
and best practices should not create
problems for FECS of tomorrow.
Desist from pushing your
organizational routines and best
practices into FECS’s future lest they
backfire.
Radical innovations should sustain
FECS as a viable community in the
long-term.
Give up old organizational routines
that backfire to endanger FECS’s
future
Avoid old organizational routines and
practices that lead to addictive and
dangerous FECS behaviors
Do not foster organizational changes
that cause speedier and heavier
consumption of your local resources.
Prevent “effects” of your
organizational changes on FECS that
you cannot control in time and space
All organizational changes should
generate high-leverage to all FECS
stakeholders
Organizational changes should
generate low-cost/ high-quality
innovations that stimulate the FECS
economy
Organizational changes should
stimulate holistic innovations that
keep FECS united despite diverse
cultures
Given organizational change
responsibilities 1-10, share
praise/blame with all FECS people
End Notes

i
Citation for Benjamin Franklin in Berghella, V. (2014). Happiness: the scientific path to achieving well-being. Lulu. com and
citation for Barack Obama in Lichtenstein, N. (2012). A Contest of Ideas: Capital, Politics and Labor. University of Illinois
Press. Also available at http://timelines.latimes.com/second-presidential-debate/

ii
Karl Marx and Friedrich Engels referred to the capitalistic system in this sense, and to the capitalist mode of production in his
Das Kapital (1867). The use of the word "capitalism" in reference to an economic system appears twice in Volume I of Das
Kapital (German edition, p. 124), and in Theories of Surplus Value, Tome II (German edition, p. 493). Karl Marx did not
extensively use the form capitalism but instead those of capitalist and capitalist mode of production, which appear more than
2600 times in the trilogy Das Kapital.
iii
According to the Oxford English Dictionary (OED), the term capitalism first appeared in English in 1854 in the novel The
Newcomes, by novelist William Makepeace Thackeray, where he meant "having ownership of capital." Also according to the
OED, Carl Adolph Douai, a German-American socialist and abolitionist, used the phrase private capitalism in 1863.
ivItalian Dominican theologian St. Thomas Aquinas was one of the most influential medieval thinkers of Scholasticism and the
father of the Thomistic school of theology. He was born circa 1225 in Roccasecca, Kingdom of Sicily, Italy. Combining the
theological principles of faith with the philosophical principles of reason, he ranked among the most influential thinkers of
medieval Scholasticism. An authority of the Roman Catholic Church and a prolific writer, Aquinas died on March 7, 1274, at the
Cistercian monastery of Fossanova, Italy. A prolific writer, St. Thomas Aquinas wrote or dictated close to 60 known works
ranging in length from short to tome-like compositions. Handwritten copies of his works were distributed to libraries across
Europe. His philosophical and theological writings spanned a wide spectrum of topics, including commentaries on the Bible and
discussions of Aristotle's writings on natural philosophy. His major work called Summa Theologica has been preserved in four
volumes designated as Book 1: Volume I, Book 2: Volume 1 or (I-II), Book 2: Volume 2 or (II-II), and Book 3: Volume III). For
citations presented here, see Aquinas, Thomas (1981[1273]), The Summa Theologica. New York: Benziger Brothers.
vAquinas, Thomas (1981[1273]), The Summa Theologica. New York: Benziger Brothers. An interesting insight on private
property regards its voluntary transference. On their part, authors of the School of Salamanca, also aligned with Aquinas,
justified private property arguing for its potential to promote better use of material goods while at the same time contributing
to an ordered, hospitable and peaceful community. In reply to the voices which defended common property by suggesting that
‘‘mine and yours’’ led to many disputes and fights, Domingo de Soto declared that he did not consider this a convincing
argument, since there would be many more disputes and fights if the things were possessed in common (Alves, A. A., &
Moreira, J. M. (2013). Business Ethics in the School of Salamanca. In C. Luetge (Ed.), Handbook of the philosophical
foundations of business ethics (pp. 207–225, 213): Heidelberg: Springer); See also, Alves, A. A., & Moreira, J. M. (2010). The
School of Salamanca, New York: Continuum; Melé, Domènec (2016). Re-thinking Capitalism: What We can Learn from
Scholasticism? Journal of Business Ethics, 133, 293–304.
viThe School of Salamanca includes authors from the University of Salamanca, Spain, and others (from e.g. Alcala, Spain and
Coimbra, Portugal), and was another brilliant Scholastic movement, with Dominicans such as Francisco de Vitoria (1483/1486–
1546), an advocate of universal human rights and considered the father of international law. See Mele´, Domènec. (1999). Early
business ethics in Spain: The Salamanca School (1526–1614). Journal of Business Ethics, 22, 175–189; also, Melé, 2016
vii
Summa Theologica, First Part of the Second Part (I-II), Question 94 Reply Obj. 2; Question 94, A.3; Q62a2; q91 a; see also
Pojman, Louis (1995), Ethics: Discovering Right and Wrong, Belmont, California: Wadsworth Publishing Company.
viii
Hobbes, Thomas (1928). Elements of Law. edited by Ferdinand Tonnies, Cambridge University Press, p. 1-3; Hobbes, Thomas
(1958). Leviathan. edited by Herbert W. Schneider: Bobbs-Merrill, New York, p. 53, 252. See also Barach, Jeffrey A. & Elstrott,
John B. (1988). The Transactional Ethic: The Ethical Foundations of Free Enterprise Reconsidered. Journal of Business Ethics,
7(7), 545-551.
ix See Hirschman, Albert O. (1976). The Passions and The Interests. New Jersey: Princeton University, 112.
x For ethical defenses of market capitalism, see Acton Institute’s journal, Markets and Morality; also review Gregg (2007),
Novak (2001); for the ethical deleterious effects of capitalism see Budde and Brimlow (2002), Ma (2006), and Miller (2003). For
various economic views on the benefits of Capitalism or the free market system see Acton (1971), Benne (1981), Boulding
(1970), Chamberlain (1959), Dalton (1974), Dorfman (1972), Dublin (1979), Eckstein et al. (1974), Edwards et al. (1978),
Friedman (1962), Gutman (1966), Rodgers (1978), Schumpeter (1934), Sedlacek (2011), and Warren (1930). .

24
xi Soon after the Depression, in the mid 1930s, John Maynard Keynes suggested that to avoid depressions in the future the
government should employ strong fiscal and monetary policies (e.g., deficit government spending by increased government
expenditures or reduced taxes, coupled with increased money supply (via reduced interest rates, reduced capital gain taxes, and
liberalized credit terms). If current government spending is very large and if the money credit system is sufficiently flexible and
federally controlled, then Keynesian remedies may work. Nevertheless, with deregulation and continued privatization of hitherto
government controlled industries, and with gigantic banks controlling credit and money supply, even the U.S. federal government
may be incapable of fighting the evils of monopolistic capitalism. If free enterprise system cooperates (e.g., via business
expansions, more employment, price decreases, and the like) with federal liberating fiscal and monetary policies, then recession
or depression may be controlled. Otherwise, federal deficit spending and easy credit may generate inflation followed by
recession, or stagflation. Keynesian optimism works with competitive capitalism, but not with monopolistic capitalism (Sweezy
in Eckstein et al., 1974). [See also Kahn et al., 1976; Palusek, 1977].
xiiFor a discussion on the social costs of Capitalism or the free market system see (Ackerman & Zimbalist, 1978; Baron &
Sweezy, 1966; Braverman, 1974; Buchanan, 1962; Cox et al., 1965; Dalton, 1974; Daniels, 1970; Eckstein et al., 1974; Edwards
et al., 1978; Galbraith, 1956, 1958, 1967, 1973; Heilbroner, 1970; Hook, 1967; Lasch, 1978; Marx, 1959; Moyer & Hutt, 1978;
Novak, 1982; Okun, 1975; Packard, 1957; Price, 1964; Pursell, 1979; Schumacher, 1973; Weber, 1930). Critics of the classical
liberal market system note that the optimistic faith in the free market system did not actually lead to the prosperity of all
individuals and of all nations. Within the nations, the masses became impoverished. Internationally, liberalism led to an
intensification of colonialism on the one hand and the hegemonic competition of the great European imperial powers, on the
other. The result was the great world economic crisis of 1929 with its concomitant mass unemployment, and two World Wars.
xiiiThe invisible hand is a term used by Adam Smith to describe the unintended social benefits of individual self-interested
actions. The phrase was employed by Smith with respect to income distribution (1759) and production (1776). The exact phrase
is used just three times in Smith's writings, but has come to capture his notion that individuals' efforts to pursue their own interest
may frequently benefit society more than if their actions were directly intending to benefit society. Smith may have come up with
the two meanings of the phrase from Richard Cantillon who developed both economic applications in his model of the isolated
estate.
xivMcRae, H. (2003). Like them or not, supermarkets have improved our quality of life. The Independent; Klein, N. (2000). No
Logo: Taking Aim at the Brand Bullies (Flamingo, London); Whitley, R (1992). Societies, firms and markets: the social
structuring of business systems. in R. Whitley (ed.), European Business Systems: Firms and Markets in their National Contexts
(Sage, London); Wray-Bliss, E., & Parker, M. (1998). Marxism, Capitalism and Ethics. In M. Parker (eds.), Ethics and
Organizations. (Sage, London), p. 30-52; Monbiot, G. (2000). Captive State: The Corporate Takeover of Britain, Macmillan,
London); Monbiot, G. (2004). The Age of Consent (Harper Collins, London); Parker M. (ed.) (1998). Ethics and Organization.
(Sage, London); Pearson, G. (1995). Integrity in Organizations: An Alternative Business Ethic (McGraw-Hill, Maidenhead), and
Pearson, G. & M. Parker (2001).The Relevance of Ancient Greeks to Modern Business? A Dialog on Business and Ethics.
Journal of Business Ethics, 31, 341-353.
xvThe modern idea of system was first presented by Churchman (1968) and von Bartalanffy (1969), and further developed and
applied by several philosophers and scientists and scholars such as Carson (1962), Ackoff and Emery (1972), Capra (1982,
1997), Senge (1990, 2006), and Bradbury (2005).
xviC.K. Prahalad is the Paul and Ruth McCracken Distinguished University Professor of Strategy at the Ross School of Business,
University of Michigan, Ann Arbor, Michigan. Prahalad opens his 2005 book, The Fortune at the Bottom of the Pyramid:
Eradicating Poverty Through Profits by asking “Why can’t we create inclusive capitalism” (Prahalad, 2005, p. xv). Allen
Hammond is Vice President of Special Projects and Innovation at the World Resources Institute: a Washington, DC-based, non-
profit, environmental, think tank created in 1982 through a $15 million donation by the John D. and Catherine T. MacArthur
Foundation of Chicago (World Resources Institute website 2008). One of Hammond’s earliest publications that discuss the idea
of inclusive capitalism without explicitly mentioning the term is a 2001 article titled “Digitally Empowered Development”
published in the journal Foreign Affairs (80, p. 2). Other related articles are: Hammond, Allen L., & Prahalad, C.K. (2004).
Selling to the Poor. Foreign Policy, 142, 30-37; Prahalad C. K. & Hart, Stuart L. (2002). The Fortunes at the Bottom of the
Pyramid. Strategy+ Business, (26), First Quarter; Prahalad, C.K., & Hammond, Allen (2002). Serving the world's poor,
profitably. Harvard Business Review, 80(9), 48-58; Hammond, A. L., Kramer, W. J., Katz, R. S., Tran, J. T., Walker, C. (2007).
The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. Seemingly, two contemporary scholars who
have popularized the term “inclusive capitalism” individually and through collaborative publications are C. K. Prahalad and
Allen Hammond.

xvii
For a sample of recent chronologically presented scholarly treatment of the ethics of capitalism see Russell, Kirk (1982). Is
Capitalism still viable? Journal of Business Ethics, 1(November), 277-280; Barach, Jeffrey A. & Elstrott, John B. (1988). The
Transactional Ethic: The Ethical Foundations of Free Enterprise Reconsidered. Journal of Business Ethics, 7(7), 545-551. De

25
George, R. T. (1999). Business Ethics (5th ed.), Englewoods Cliffs, NJ: Prentice-Hall; Anderson, E. (2004). Ethical assumptions
in economic theory: Some lessons from the history of credit and bankruptcy. Ethical Theory and Moral Practice, 7(4), 347–360;
Bahramitash, R. (2005). Liberation from liberalization. London: Zed Books; Parker, Martin & Pearson, Gordon (2005).
Capitalism and its Regulation: A Dialogue on Business and Ethics. Journal of Business Ethics, 60, 91-101; Baumol, W. J., Litan,
R. E., & Schramn, C. J. (2007). Good capitalism, Bad capitalism and the economics of growth and prosperity. New Haven: Yale
University Press; Cudd, A. E., & Holmstrom, N. (2011). Capitalism, for and against: A feminist debate. New York: Cambridge
University Press; Cudd, Ann E. (2015). Is Capitalism Good for Women? Journal of Business Ethics, 127, 761–770; Melé (2016).
xviii
See Nitesh Gor (2012). The Dharma of Capitalism: A Guide to Mindful Decision Making in the Business of Life. McGraw-
Hill. Nitesh Gor has served in executive, leadership, and consulting roles in asset management, investment banking, and the
natural resource exploration industry. As co-founder and CEO of Dharma Investments, he oversaw development of the Dharma
Indexes, introduced under license by Dow Jones. He holds an MBA from the London Business School and a BA from the
University of London. Gor is the chair of the I-Foundation, a charity establishing the first state-funded schools in the UK based
upon dharma principles. He lives in London with his family and two sons. For other views of Dharma see: Das, Gurcharan
(2012). The Difficulty of Being Good: On the Subtle Art of Dharma. Penguin Books; Pattanaik, Devdutt (2013). Business Sutra:
A Very Indian Approach to Management. New Delhi: Aleph Book Company.

26
 Chapter 05
The Destruction of Free Enterprise Capitalist System when
Infected by Fraud, Corruption and Bribery

Executive Summary
When FECS spins out of human intervention and regulatory control, then it can easily harm and
constrain the markets as it happened on Black Friday of October 1929 resulting in the Great Depression,
and the September-October 2008 Financial Cr1sis when some seventeen mega global investment banks
ran out of control and lost close to a trillion US dollars in market capitalization. This Chapter defines,
analyzes, classifies and morally assesses occupational and corporate fraud, corruption and money-
laundering, and their other evil forms. When we allow our choices to be driven by passion, choosing
thereby to ignore or fail to investigate outcomes, the results are too often flawed and unintended, as the
cases of Lehman Brothers, AIG, Freddie Mac, and Fannie May that collapsed around September-
October 2008 would attest. While we should condemn abuses within the FECS, one can also seek to
understand the origins and originating systems of fraud, corruption and various forms of deceptions and
chicanery, and search for remedial strategies for eradicating these ills of FECS. Several contemporary
market cases of fraud, corruption and bribery will be identified to illustrate the contents of this chapter.

Case 5.1: The Enron Corporate Fraud

A series of fake transactions between Enron and investment partnerships executed by Andrew Fastow led to its
filing for Chapter 11 bankruptcy protection in June 2001. In October 2001, Enron was suspected of a massive
financial statement fraud. Chairman Kenneth Lay, former President Jeffrey Skilling, and former Chief Financial
Officer Andrew Fastow, among others, were accused of shielding debt from public view, and overstating revenues
and earnings, thus giving the impression of rapid profit growth. The same year, Enron declared bankruptcy, then the
largest corporate failure in U. S. history. Its stock price plummeted from $90 in 2000 to $ 0.26 per share, just a few
days before filing the bankruptcy petition in June 2001.

Enron Corporation was an Energy, Commodity and Service Company based in Houston, Texas, USA.
Incorporated in 1930, Houston Natural Gas, the predecessor of Enron, was established in Omaha, Nebraska. Enron
soon became a multinational company that specialized in electricity, natural gas and energy markets and other
physical commodities, and was re-established in 1985 from the merger of Houston Natural Gas and Inter North of
Omaha, Nebraska. In the year 2000, Enron employed 61,000, operated in over 40 countries, and reported revenues
of $101 billion, and was ranked seventh among Fortune 500 companies that year. Enron grew from revenues of $20
billion in 1997 to $100 billion in 2000 with a tenfold increase in profit of $979 million in 2000. Enron, however,
was involved in a series of fake transactions with dubious limited partnerships, called Special Purpose Entities
(SPEs), and created by accounting loopholes and poor financial reporting. Enron’s Board of Directors was accused
of shielding debts from public view and understating debt, overstating revenues and earnings, thus giving the
impression of rapid profit growth.

By October 2000, Enron became the pioneer and trend-setter of energy sector corporate aggressive accounting
and insider trading irregularities. Among accounting scandals were the numerous “round-trips” it engaged in, and
which soon became the industry “norm” for similar scams. For instance, Denver-based Qwest Communications
used bandwidth to manufacture illusory revenue streams in its recent deal with Enron. According to investigators,
Qwest agreed to pay Enron $308 million for the use of “dark fiber” (or unused fiber optic) capacity. In exchange,
Enron agreed to pay Qwest between $86-195 million for access to active sections of Qwest’s network. Both deals
turned out to be fake allowing both companies to record fat revenues for the period, and particularly helping Enron
avoid reporting a loss for that period (Pizzo, 2002).

Andrew Fastow, a Harvard Business School graduate and Chief Financial Officer (CFO) at Enron, wore two
hats. As CFO, he negotiated and set up outside partnerships to conduct Enron business. As the principal in these
partnerships, however, Fastow also negotiated with Enron on behalf of the partnerships. This is obviously conflict

1
of interest: which entity did Fastow favor in these deals? Enron’s policies prohibited employees from wearing two
hats, but Enron’s Board of Directors exempted Fastow from this rule. The result was a series of money-losing
transactions for Enron, and consequently, Enron’s stockholders, creditors and employees all emerged as heavy
losers.

Accountants generally classify most of the corporate accounting irregularities under two heads: a) fake
transactions like “round-trip” sales, and b) manipulation of debts and assets to overstate the value of the company. i
While this kind of trading was not illegal as per then extant accounting procedures (e.g., Generally Accepted
Accounting Practices (GAAP) of USA), it could still manipulate the power or energy market, which is illegal. An
inflated balance sheet from round-trip trading misleads investors about the true nature and volume of the company's
business. Large volumes of "wash" trades raise paper revenues but have no effect on earnings.

Enron had such a strong following on Wall Street that its CEO Jeffrey Skilling could bluff his way around
tough questions about the company’s operations. Yet what happened to force this giant icon to come down in 2001
when its stock plummeted to $0.26 and the company faced almost extinction? On August 2001, Daniel Sotto, an
energy market expert, changed his recommendations on Enron Stocks from ‘Buy’ to ‘Neutral’, encouraging
investors to sell.

Investors have sued Enron ever since, with the accumulated damage to them estimated at over $25 billion. New
York-based Amalgamated Bank, which lost millions in the Enron fraud, sued 29 top Enron executives. Enron
restated its financial statements, citing accounting errors, and cut profitability for the past three years by about 20
percent, or by around $586 million. Lawsuits against Enron claimed that its top executives reaped enormous
personal gains from “off-the-book” partnerships. Meanwhile, Enron’s auditor, Arthur Andersen, allegedly
instructed employees to shred critical documents involving fraud. Enron fired Fastow; he was later prosecuted, and
later (September 26, 2006) was sentenced for a six-year prison sentence. Kenneth Lay is dead, and Jeffrey Skilling
is currently serving a two-year prison sentence. This tragedy of enormous human, social, economic and monetary
losses could have been prevented had Enron applied strict internal cash and accounting controls (Carse & Horngren,
2004).ii

Ethical Questions:
1. Andrew Fastow masterminded the Enron fraud. How could you have identified, diagnosed, detected and prevented
this crime much before it happened?
2. Among accounting scandals, Fastow was known to pioneer “round-trip” sales that apparently did not violate the
GAAP codes of those days. Today, it violates the Sarbanes-Oxley Act of 2002 that USA promulgated to prevent such
scams. Discuss the unethicality and immorality of round-trip sales and their dangerous economic harm.
3. The retirement funds (401K) of more than 45,000 Enron’s American employees that were forced to be invested in
Enron’s stock have been wiped away. Explore the ethics of compensatory injustice in this deal.
4. Insider trading irregularities date from the origin of stock markets. But they took a dangerous scale at Enron.
Explain the unethicality and immorality of such irregularities, and their dangerous economic harm.
5. By co-opting Arthur Anderson, an accounting firm that also provided consulting services, an obvious conflict of
interests, Enron was able to spin out shell companies and special purpose vehicles (SPVs) to hide its fatally positioned
and flawed business and its escalating losses. Assess the economic, financial and ethical violations of Arthur
Anderson, and the shell companies and SPVs that it spun for Enron.

Case 5.2: Sherron Watkins Whistle Blows on Enron

Sherron Watkins, Vice president and CPA at Enron, found a massive accounting discrepancy at Enron in the
year 2001. In summer of 2001, Sherron Watkins switched jobs within Enron to work for Andrew Fastow, CFO. In
this new back office role, a non-commercial one, Watkins examined assets that Enron had for sale. Basically, she
examined a spread sheet that had book values with estimated gains or losses on sales. It is here that she stumbled
upon what she thought was an accounting fraud. Fastow hedged a number of assets with several entities called the
raptors, apparently fraudulent structures or shell companies. Millions of dollars of losses that should have been
borne by the raptors were fed back to Enron instead. The interesting part of the story is not the pseudo raptors but
the real person behind this game plan.

2
 Andrew Fastow, Jeffrey Skilling and Kenneth Lay were the key schemers in this whole gambit. They did
everything possible to hide the truth. But Sherron was convinced that everything was not OK at Enron. Did
Skilling resign after seeing that the things were already out of hand and it is better to leave the ship before it sinks?
Why did not Kenneth Lay take steps to correct the whole misdeed? Ironically, even when the company was
incurring massive losses these three individuals were drawing money in millions for their personal use. The board
of directors was equally responsible for the predicament of the thousands of Enron’s employees and shareholders.
They allowed Fastow to go ahead with the shell companies by removing and freeing Fastow of the ‘conflict of
interest’ clause from Enron’s Code of Conduct.

In 1999, the BOD of Enron made an unprecedented move of waiving the company’s Code of Conduct to allow
Fastow to start his own investment partnership, named LJM (named after his wife and children, Lea, Jeffrey and
Mathew). Fastow raised $600 million from Enron for this limited partnership. This entity worked exclusively with
Enron – to buy assets, and on hedging contracts. All losses of LJM came back to Enron but not its profits. The
CEO, Jeff Skilling, concurred with Watkins that LJM was a shady deal; he resigned on August 14, 2001, barely six
months on the job. Meanwhile, Enron’s cash flow had dried up by May 2001 as the government regulators stepped
in and put price caps. Also, Enron Broadband tanked and the telecom sector was in real trouble. Watkins wrote an
anonymous letter to Kenneth Lay, the new CEO of Enron. Ken Lay, however, did not hire independent inspectors to
investigate the allegations of Watkins about LJM and other aggressive accounting structures at Enron. Instead, Ken
began to unwind these structures and forced a write down (non-recurring expenditures) of a billion dollars in the
third quarter of 2001, completely wiping previous year’s net income of $979 million.

Much of this loss could be attributed to Enron’s foray into unrelated businesses, especially water business, and
broadband business. Moreover, the trading customers got very skittish. Enron had about $18 billion of energy
contracts as receivables and $16 billion as trade payables. Within 6 weeks, Enron lost $4 billion in receivables as
some of its trading customers went in for closures. On the other hand, most of its $16 billion dollar creditors
demanded to be paid during the same time. Enron had no option but to file for bankruptcy by September 2001.

In the last few months, working again in Andrew Fastow’s Global Finance, she had run over 'the most
exceedingly awful bookkeeping misrepresentation ever seen'. Odds and ends of this story were beginning to break
out to the press. On the off chance that the full story ever got out, Sherron was persuaded it could rapidly prompt
Enron's destruction.

Until August 14, 2001, Watkins had viewed this result as an issue of time. So long as Jeff Skilling was Enron's
CEO (Skilling accepted this position in February 2001), she felt there was minimal chance that Enron would make
the radical strides important to reconstitute its funds. Skilling had been the senior empowering influence of Enron's
forceful bookkeeping and Special Purpose Entity (SPE) bargains. Andrew Fastow was Skilling's protégé.

Sherron understood what was going on in the company. She had three alternatives each loaded with high risk:
a) report her concerns about Fastow’s deals to Kenneth Lay, CEO of Enron; b) discuss these concerns with her boss,
Andrew Fastow, CFO of Enron, or c) do nothing, but let thereby thousands of innocent people suffer huge losses.
Under (a) and (b), there was a high chance that Watkins could be ignored or resisted and penalized for blowing the
whistle, but there was also a small chance that she could be heard and corrective action taken immediately. Under
(c), Watkins would avoid confrontation with Lay or Fastow, but the public (investors, creditors, employees,
customers) would suffer if they relied on faulty data. Watkins blew the whistle, reported the matter to the CEO and
was severely penalized, but enough damage had already been done to Enron that the company filed for Chapter 11
bankruptcy protection from its creditors in September 2001.iii

Ethical Questions:
1. What conditions are needed to legally justify whistle blowing?
2. Additionally, what conditions would you require to justify it ethically and morally, and why?
3. When is whistle blowing ethically obliging, and why?
4. When is it moral and a moral imperative, and why?
5. How is whistle blowing different from one’s fiduciary duty to the company, and why?
6. Why is whistle blowing legal and legally protected in the USA, and now in India, and with what
results?

3
 7. How does whistle blowing help society, especially, shareholders, employees, customers and local
communities?
8. Hence, was Sherron Watkins right and justified in whistle blowing at Enron?
9. Did she act too late or too slow? What other more effective alternatives could she have chosen to
expose and remediate the crimes of Enron?
10. Even though whistle blowing is legal in the USA and now in India, has this threat stemmed the tide of
fraud, corruption and money-laundering in the business world, and why?

Introduction
Currently, in the wake of cases of massive fraud, corruption and money-laundering, every corporate
executive must reflect on certain critical questions such as:

❖ What sort of corporate executive should I be?

❖ What is the “right thing” I should do in order to totally stay away from corporate crime?
❖ Are there universally accepted and admired corporate executive virtues?
❖ What moral qualities, virtues and attitudes should best characterize the corporate executives and
corporate governance?
❖ What sort of corporations and corporate executives should best manage a given country?
❖ Does the current free enterprise capitalist system (FECS) with its socio-political environment
and corporate governance structure determine or encourage which virtues an executive should
value most?

These are some of the central questions discussed today in corporate and political Asia, Europe and
America, in institutions of learning, and particularly, in schools of business throughout the world. Similar
were the questions discussed by Greek moral philosophers starting from Socrates (470-399 B.C.), Plato
(427-347 B.C.) and Aristotle (384-322 B.C.). Similar are the questions addressed today (MacIntyre,
1987; Bollier, 1997; Vaitheeswaran, 2012). History repeats itself.

This chapter provides a conceptual framework for discussing and addressing some of these questions.
It deals with concepts, definitions and models of ethical-moral reasoning that can empower business
management students, managers and corporate executives in morally assessing their decisions, actions,
and outcomes. Specifically, all of us need training:

❖ In discerning what is ethically and morally good from evil, right from wrong, and just from
unjust, prior to making any business executive decisions and choices, and

❖ In assessing the ethicality and morality of such corporate decisions, choices and actions in
relation to their consequences.

Corporate Fraud and Corporate Damages

The top giant five fraudulent companies, Enron, WorldCom, Tyco, Qwest, and Global Crossings,
destroyed a combined capital of $460 billion in shareholder value in 2001-2002 while moving inexorably
toward bankruptcy (Stoller, 2002, USA Today, October 10, 2002). The cascade of corporate accounting
and securities scandals has rocked major security markets of the world, especially the New York Stock
Exchange (NYSE) and the NASDAQ markets. Losing investors’ confidence in the securities market can
be disastrous. The United States of America is the economic engine of world commerce and the
cornerstone of the world economy, and accordingly, American corporate frauds and scams have affected
the stock markets around the world. However, not all of the stock fallout associated with the offending
companies has suffered in other markets the way it has in the United States.

4
 The American Institute of Certified Public Accountants (AICPA) introduced a new Code of
Professional Conduct in 1988, which has been mostly bypassed, but has not stopped the corruption
cascade. In the wake of Enron scandals and those of a host of other Fortune 500 companies, the
Sarbanes-Oxley Act of 2002 (USA), often called the SOX Act, was carefully crafted precisely to combat
fraud and corruption and other financial and accounting irregularities; but the SOX Act has not been very
effective in combating the fraud and corruption crisis.

Around this time, the Association for the Advancement of Collegiate Schools of Business (AACSB),
a global accrediting body for celebrated B-Schools of the world, started stressing the importance of
beefing ethics education in the business school curriculum, knowing full well that most of the financial
and accounting scams were perpetrated by professionals who had graduated in some of the most
prestigious business schools of USA (Porter & McKibbin, 1988). The Journal of Business Ethics, among
other journals, featured several excellent articles focused on accounting and business ethics.iv

Apparently, we need to go beyond academic literature, legislative vigilance, and industry codes of
conduct to the very heart and mind of the corporate manager to stem the tide of fraud, corruption and
organized financial crimes. This Chapter hopes to make a dent in this regard. To start with, we will
analyze some notorious accounting scandals of the last decade, and seek to learn from their mistakes what
ethical and moral imperatives could heal the business world of this endemic moral disease.

Contemporary Versions of Fraud, Corruption and Bribery

In general, more recent corporate fraudulent business practices have precipitated cash crises and
subsequent bankruptcies. For instance, consider Enron, WorldCom, Global Crossing, Qwest
Communications, Tyco, Satyam, and the Sahara Group. Fraudulent practices in the broad areas of
accounting and financial management virtually destroyed their brand image and brand equity, their high
stock prices plummeted down to a few cents, and their customers, suppliers and employees quickly
switched to their competitors. All these companies had deployed enormous investments over many years
building their company reputation, brand image and equity, customer goodwill and loyalty, and supplier-
employee long term relationships. All these fizzled out within months and the companies sought Chapter
11 bankruptcy protection. This chapter deals with corporate fraud, particularly in terms of its origination
and proliferation. Detecting fraudulent accounting practices and insider securities trading irregularities in
time, and preventing or forestalling them is an important duty of managers and corporate executives
today. For all practical purposes, corporate scandals represent the level of corporate greed (under various
forms of vices) that left unchecked will destroy firms, industries, markets and our business system in
general.

Fraud exists even today and can occur anytime and anywhere in an organization. At the same time,
there is no special recipe or checklist for detecting and preventing corporate or personal fraud at all times.
No such thing exists and no such thing is truly capable of being developed to monitor and control all
forms of fraud (Silverstone & Davia 2005, p. 5-6). Managers should be aware of fraud, deal with the
human factors that generate fraud by hiring honest people and keep them honest by instituting strong
deterrents of fraud, and deal with the environmental factors that cause crime by enforcing adequate
monitors, controls, policies and procedures. Regardless of whether corporate scams have peaked or not,
their intensity, frequency, and magnitude over the last fifteen years since 2000, should be a moral and
ethical wake-up call for all and must be seriously scrutinized, objectively analyzed, effectively monitored,
and expeditiously controlled.

In reality, creative accountants fooled the markets – they cleverly inflated reported cash flow from
operations by reclassifying items among the operating, investing and financing sections of the statement

5
of cash flows – all this, presumably, well within the boundaries of the then generally accepted accounting
principles (GAAP) or GAAS. For instance, in acquisitions, cash paid for working capital could be shifted
to the investment section rather than shown as a reduction in cash flow from operations (Mulford &
Comiskey, 2005, p. xi).

Investigating Fraud, Corruption and Bribery

• In general, fraud is a deliberate misrepresentation.
• Specifically, fraud is a deliberate misrepresentation of subjects, objects, properties and events
(SOPE) of one’s organization to one’s internal or external stakeholders.
• Corruption is fraud with moral depravity; it is deliberate misrepresentation with guile.
• Bribery is money or equivalent offered to process a corrupt action in favor of the giver.
• Defined thus, corruption is a subset of fraud, and bribery is a subset of corruption.

The Association of Corporate Fraud Examiners (ACFE) in 1996 defined an occupational fraud as
“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of
the employing organization’s resources or assets” (ACFE, 1996, p. 4). This definition has remained more
or less the same in 2004: an occupational fraud is “the use of one’s occupation for personal enrichment
through the deliberate misuse or misapplication of the employing organization’s services or assets”
(ACFE Report 2004). That is, the 2004 definition replaces the term “services” for “resources” in the 1996
definition.

Thus, ACFE defines occupational fraud against one’s organization. ACFE (1996, p. 9) also defines
fraud as an activity that is:

1. Clandestine (i.e., covert, non-transparent, hidden or deceiving),

2. Which violates the employee’s fiduciary duties to the organization,
3. Which is committed for the purpose of direct or indirect financial benefit to the employee and
4. Costs the employing organization assets, revenues or reserves.

The term “employee” in this definition includes employees of all categories: blue- and white-collar
labor, managers, corporate executives, including CEOs, CFOs, board members, and presidents. Fraud can
encompass any crime that uses deception as its primary method or modus operandi.

Based on Webster’s Dictionary (4th edition, 2002) we may identify the following fraud synonyms or
equivalents:

▪ Deception: The act or practice of deceiving. The fact or condition of being deceived. Something that
deceives, as an illusion, or is meant to deceive, as a fraud.
▪ [In marketing, the word deception has been defined as those instances in which consumers change
their behavior for reasons not grounded on “fact” or “reality” but on beliefs and impressions made
on them by the influencer (such as advertising, marketers, sales representatives) (Gardner, 1975).
Often, consumers are influenced by non-substantial attributes and features of a product (such as
style, appearance, color, sheen, display) at the expense of disregarding the intrinsic aspects of the
product” (Gardner, 1975, p. 43)].
▪ Misleading: To lead in a wrong direction, error of judgment or into wrongdoing. This may or may
not be intentional.
▪ Obfuscation: to confuse or obscure the mind or a topic so as to stupefy or bewilder people.
▪ Subterfuge: An artifice or stratagem used to deceive others in order to evade something or gain
some end.
▪ Trickery: Implies the use of tricks or ruses in deceiving others.
▪ Chicanery: Implies the use of petty trickery and subterfuge, especially, in legal actions.
▪ Beguile: To mislead people by one’s charm or persuasion of cheating or tricking.

6
 Seduction: In a marketing context, seduction “means interactions between marketer and consumer
that transform the consumer’s initial resistance to a course of action into willing, even avid, compliance”
(Deighton & Grayson, 1995, p. 660). In this sense, seduction follows deception. It is “the enticement of a
consumer into an exchange where ambiguity is resolved by a private (non-institutionalized) social
consensus that the consumer plays a part in constructing” (Ibid 668). Seduction is a strategy whereby
consumers are induced to tolerate or overlook unsustainability, or even to connive in denying it. In this
sense, seduction is more voluntary than fraud and more collaborative than entertainment - a playful,
game-like social form (Ibid 661).

Thus, deception is a broader term that applies to anything that deceives, whether by design (fraud), by
delusion (trickery or illusion) or by device (subterfuge and chicanery). A fraud is a deliberate
misrepresentation or nondisclosure of a material fact made with the intent that the other party will rely
upon it. If the party did in fact rely upon such a misrepresented statement, and if this causes injury, then
the person may bring an action to rescind the contract.

Statements of opinion, however, may not be usually used as a basis for fraud or misrepresentation. If
the seller says, “This car is the best buy in town,” such a claim is treated as a statement of personal
opinion or puffery, but not a statement of organizational or corporate fact. However, if the person making
such a claim has "superior knowledge" having specific expertise in the field, and the buyer relies on this
expertise in the actual purchase, then such a claim may be equivalent to a misrepresentation.v The
misrepresentation must be of a present or a past fact. False statements regarding the future are not
actionable. In addition, in general, silence or nondisclosure is not fraudulent, unless nondisclosure relates
to “material” facts regarding an inherently dangerous product. If the manufacturers/sellers, however,
choose to speak, they must tell the whole truth. Deceptive partial disclosures often amount to fraudulence.

A lie is not the same as deception or fraud. The Oxford English Dictionary defines: “A lie is a
deliberate false statement that is intended to deceive others.” Deception does not always need a false
statement to deceive. A lie is a deliberate false statement that is either intended to deceive others or foreseen
to be likely to deceive others (Brandt & Preston, 1977; Carney, 1972). Most frauds in the form of creative
accounting practices are “lies” in this sense.

From a legal perspective a lie is:

a) A deliberate withdrawal of
b) Material information from
c) A person (presumably non-humans do not have “rights and duties”),
d) Who had a right for that information
e) At the time of the withdrawal.

In general, all five elements are required to constitute a lie. The “deliberate withdrawal” of rightful
information can also be a deliberate false statement or non-disclosure or under-disclosure or over-disclosure.
Thus, lie is a form and subset of deception. Deliberate information overload as a ruse for material
information withdrawal is a lie.

Embezzlement means to take willfully, or convert to one’s own use, another’s money or property of
which the wrongdoer acquired possession lawfully, because of some office or employment or position of
trust. Embezzlement, therefore, implies three elements: a) fraudulent appropriation or conversion of
money, b) that the wrongdoer acquired because of his office or position, and c) that the said money
belongs to the employer or employing company. Thus, embezzlement is a special type of fraud.

Fraud is different from robbery. The latter uses physical force on someone to give the robber what he

7
wants. Fraud deceives or tricks you out of your assets. Robbery often involves force and violence. Fraud
involves surprise, cunning, deception and trickery by which one violates someone’s confidence, and gets
an advantage by false misrepresentation. Fraud betrays trust of one’s customers or clients.

Fraud is different from larceny, which is a form of stealing. The legal term for stealing is larceny.
According to Black’s Law Dictionary, larceny is felonious stealing, taking and carrying, leading, riding,
or driving away another person’s personal property, with the intent to convert it or to deprive the owner
thereof (Black, 1979, p. 792). Thus, the essential elements of a larceny are a) an actual or constructive
taking away of the goods of another, b) without the consent or against the will of the owner, and c) with a
felonious intent. Obtaining possession of property by fraud, trick or devise with preconceived design or
intent to appropriate, convert or steal is larceny. Thus, larceny is a subset of fraud.

Fraud is different from bribery or corruption. Bribery in the USA is giving or receiving of anything
of value by a subcontractor to a prime contractor. Black’s Law Dictionary (1979, p. 311) defines bribery
or corruption as “an act done with intent to give some advantage inconsistent with official duty and the
rights of others. It is an act of an official or fiduciary person who unlawfully and wrongfully uses his
station or character to procure some benefit for himself or for another person, contrary to duty and rights
of others”. vi Fraud differs from skimming: a subtle practice of stealing a small portion of a resource (e.g.,
money, commodity) that presumably will not be noticed. Skimming is a subset of larceny.

Summarizing and synthesizing most of the above definitions of deviant behaviors, Table 5.1
characterizes major physical transactional abuses in terms of their inputs, processes and outputs. These
physical abuses include coercion, con games, theft by stealth, theft by fraud, theft by force, and larceny.
Table 5.2 characterizes non-physical transactional abuses such as verbal pressures of exaggerated
financial statements, aggressive ads and other deceptive promotional tools such as trickery, chicanery,
beguile and seduction.
[Table 5.1 about here]
[Table 5.2 about here]

Types of Corporate Fraud

Albrecht and Albrecht (2004) define and classify occupational frauds as using one’s occupation to
cheat ones organization or for the benefit of one’s organization. Table 5.3 lists commonest frauds by type,
perpetrators, and methods, victims, and costs of deception. The fraud types listed in Table 5.3 are in the
descending order of the magnitude of fraud losses in relation to money, market valuation, brand equity,
supplier goodwill and customer loyalty, cash crisis, insolvency and bankruptcy. Hence, our list heads
with management fraud followed by securities scams or insider trading, investment scams, tax fraud,
racketeering, vendor fraud, employee fraud, computer fraud, bribery, and customer fraud. Other things
being equal, historically, the magnitude of money and non-monetary damages of frauds could be
estimated along the rank order suggested in Table 5.3.

[Table 5.3 about here]

The most common occupational frauds on behalf of one’s organization are those of the top
management that result in false financial reporting. Financial statement frauds occur in companies that
are experiencing net losses or have profits much less than forecasts or expectations. Such frauds make
corporate earnings look better and thus, increase the stock’s price. Often, executives misstate corporate
earnings in order to draw larger year-end bonuses.

8
Basic Instruments of Market Turbulence as Corporate Frauds
Several types or patterns of corporate financial scandals are reported (e.g., See Yahoo! Finance,
various reports):

1. Unscrupulous brokers: sale of fictitious limited partnerships to boost revenues.

2. Wash Trades: sale of a product to another company with a simultaneous repurchase of the same product at the
same price; these swindles uniquely inflate sales by units and dollar volume without recording any profits.
3. Oil and gas schemes (scammers speculate on oil shortages or a rise of natural gas prices).
4. Equipment leasing (scammers sell interest in pay phones, cash machines or Internet kiosks to seduce thousands
of investors).
5. Affinity frauds (scammers use their victims’ religious or ethnic identity to buy or gain their trust and then steal
their life savings).
6. Promissory notes (e.g., short-term debt instruments sold by independent insurance agents and issued by little-
known or non-existent companies promising no-risk high returns).
7. Prime-bank schemes (e.g., scammers promise investors triple-digit returns through access to the investment
portfolios of world’s elite banks such as Rothschild banking family or Saudi Royalty).
8. Aggressive accounting (e.g., converting long-term debts to assets, purchase intentions to actual purchases,
future orders to current ones).
9. Analyst research conflicts (e.g., Merrill Lynch issued misleading research reports, and had to pay $100 million
fine in May 2002, in New York, and had to institute several significant changes in the way it does business).

All nine corporate scam-types involve selling or buying under fraudulent conditions, and hence, fall
well within the domain of fraudulent marketing. The U. S. Federal Energy Regulatory Commission
(FERC) defines “wash trading,” also known as “round trip” trading or “sell/buyback” trading, as the sale
of a product to another company with a simultaneous purchase of the same product at the same price.
Essentially, wash trading is a false trading because it boosts the companies' trading volume, or even sets
benchmark prices, but shows no gains or losses on the balance sheets. While this kind of trading may not
be strictly illegal, (possibly, they are too recent frauds to receive federal scrutiny), it can manipulate the
power market, which is illegal and it is downright unethical. An inflated balance sheet from round-trip
trading misleads investors about the true value and volume of the company's business. Misled investors
may tend to invest more, thus jacking up the corresponding stock price. Large volumes of "wash trades”
raise the revenues but have no effect on earnings.

For example, in the energy industry, round-trip trades involved the simultaneous purchases and
sales of energy at the same quantity between the same parties; they inflated revenues in both companies
but added no profit. For instance, in the energy trading market controlled by fraudulent energy companies
such as Enron, CMS Energy, Duke Energy, Dynergy, and Reliant Energy, each company indulged in the
same basic type of wash trading and thereby seriously affected market prices and shortages (see
Forbes.com’s accounting tracker Internet service). Wash trading also affects final consumers. For
instance, wash energy trading created false congestions and the perception of energy shortage in the
Californian market in 2001, and the price of electricity paid both by the industrial and home users
skyrocketed (USA Today April 4, 12, 2002). vii

According to the 2002 Report of the Association of Certified Fraud Examiners (ACFE) on
Occupational Fraud and Abuse, on an average, U. S. organizations lose about six percent of revenues
owing to dishonesty from within. When adjusted to U. S. Gross Domestic Product, the cost of
occupational fraud and abuse amounts to over $600 billion annually. The ACFE had conducted a similar
study in the mid-1990s based on voluntary reports of over 2,600 frauds, estimating losses to $400 billion
annually, or about $9 per day per employee (ACFE, 1996). Such abuses may include everything from
disorders in the mailroom to the boardroom, from employee theft, purchasing managers’ kickbacks to
corporate embezzlement, but corporate fraud takes the lion’s share of organizational fraud and abuse
(Albrecht & Albrecht, 2004, p. viii). These numbers understate the real damage, as it is impossible to

9
know what percentage of fraud is really discovered, what percentage of fraud is reported or registered,
and what percentage of fraud perpetrators are eventually caught and brought to justice. In addition, many
frauds that are discovered are handled out of court clandestinely and never made public (Albrecht &
Albrecht, 2004, p. 3).

Market Turbulence of Capitalism as Boundary Thinking

The abuse of capitalism and its financial crises are caused by reductionist or compartmentalized view
of the world. If basically capitalism seeks to maximize short-term profits using capital (money) and
resources (land, labor, minerals, water, energy) as isolated tradable and exploitable commodities while
combating competition, with little or no regard to nature, ecosystem, and nature’s resources, then it spells
disaster. Capitalism then smacks of boundary thinking wherein one defines and maintains artificial
boundaries between various components of the system, mostly to devour them in isolation without any
regard for other intended or unintended consequences.

Financial crises, fraud, corruption, bribery, money laundering, embezzlement, racketeering and
deception are all symptoms or short-term deleterious effects of boundary or non-systemic thinking. The
promotion of an uncontrolled risk-taking culture (reinforced by the generous payment of enormous short-
term bonuses) that produces great financial returns in the short term, but large-scale bankruptcies in the
long term (e.g., Barings Bank in 1995; Enron in 2001, Lehman Brothers and Merrill Lynch in 2008), is
also boundary short-term thinking at the expense of large costs to the rest of the planet. The global
financial crisis of 2008 was man-made, a result of narrow, short-term boundary thinking.

When the company as a whole, with its various subsidiary, departmental, divisional, or sub-divisional
heads, define their own interests, formulate their own short-term profit-maximization strategies, and strive
for their own specific success agenda, with no regard to conserve, develop, and enhance nature, the
planet, and the cosmos, and their resources, this is the pinnacle of boundary or exclusive thinking that
inevitably spells local, regional and cosmic disasters. Even by placing a boundary around the planet,
according to the Gaia theory, human activities could destroy the planet’s self-regulatory mechanisms, thus
making the planet more and more uninhabitable. Such examples include carbon and global warming
emissions (Berners-Lee, 2010), nuclear waste, misuse of pesticides (Carson, 1962), overuse of antibiotics,
deforestation, overfishing and uncontrolled population growth (Fisher et al., 2013).

The Inherent Social Contradictions of Capitalism

In his book, The Cultural Contradictions of Capitalism, Daniel Bell (1973) states his central thesis that
capitalism has some inherent cultural contradictions. For instance, capitalism emphasizes and glorifies
accumulation of wealth or capital as an end in itself and not as a means for higher ends such as civilization
and virtue. Capitalism fosters individualism since much of capitalist accumulation is for individualist ends,
with very little geared for social and collective betterment. Hence, the very culture that capitalism creates
can sometimes backfire, leading to its eventual destruction (Bell, 1973, 1976). Galbraith (1976) agrees with
Bell’s (1973) thesis and further expands it. That is, capitalism that fosters individualism could be a major
source and motivation of fraud, corruption and bribery. It is “wealth without work” (MK Gandhi).

Others feel that capitalist business, which is the groundwork for American business, seems to be
inherently immoral - this is because its task presupposes the legitimacy of the private pursuit of at least
economic self-interest, and this pursuit may be immoral or may lead to immorality (Machan & Uyl, 1987).
If business ethics is understood as a science of socio-economic values, and a science for identifying what
business executives ought to do and ought not to do in promoting common socio-economic good, then
capitalism that is ex professo fueled by private self-interest may be geared to do the opposite (Bell, 1973;

10
Galbraith, 1956, 1958).

Obviously, capitalism-fed corporate greed can also dominate executive thinking. Several theories
explaining or justifying market inequities and injustices have been suggested. For instance,
Machiavellianism believes that "might is right" and thus, one grabs the largest share one can get regardless
of inputs and efforts (Christie & Geis, 1970). Niccolo Machiavelli (1469 - 1527) was an Italian (Florentine)
statesman and political theorist. Based on his writings, Calhoon (1969, p. 211) defined a Machiavellian
executive as one who "employs aggressive, manipulative, exploiting and devious moves in order to achieve
personal and organizational objectives."

Darwinian Justice or Spencer's Social Darwinism (Hofstadter, 1955) advocates natural selection by
"survival of the fittest" corporations. The philosophy of Justified-self-interest distributes goods proportional
to what the distributor wants - self before others; particularly, distributor's needs come first when goods are
scarce. The theory of “the bigger the better” control proclaims that larger sales and revenues yield larger
market shares and profits, which in turn generate better scale economies, optimal size, expansion
opportunities, increased market power and control (Schumacher, 1973).

Capitalist business can be a corrupting influence on social life and values. By commercializing
everything from Christmas to the professions, businesses can have immoral influence (Jung, 1983).
Advertising and marketing creates trivial, frivolous and extravagant needs in peoples that would never have
risen without media influences; allegedly, media advertising siphons off scarce consumer resources that
could have been better spent on other real needs (Galbraith, 1976).

Thus, if a capitalist system by its very nature institutionalizes selfishness as a virtue (Rand, 1964) and
exploits opportunities to advance corporate goals and personal wealth, then the business executive who
works within that capitalist system could get unwittingly caught up in this race, be fired by and committed
to its ideology, and propelled to work hard, especially when rewards are ultimately conditioned on and
determined by higher levels of profitability (Molander, 1980). In particular, big business corporations
controlled by a self-perpetuating, irresponsible power-elite are charged with the exercise of concentrated
economic and political power contrary to the public interest (Jacoby, 1973).

Other Social Externalities of Capitalism

In a competitive free market economy, the presence of myriad financial institutions and the decisions
of thousands of small or big business participants, create the free markets, determine the prices, determine
revenue sharing, market sharing, profit sharing, and wealth sharing. The “invisible hand” of the markets
and the visible hand of the governments can both shape capitalism, and if done well, can save the world
from chronic indebtedness that perpetuates poverty and can save the world from depressions, recessions
and wars. But often, under the guise of obtaining welfare and security for the marginalized, the
bureaucrats and incumbent politicians also obtain security and kickbacks for themselves by regulating and
repressing the free markets. The final victim is the free market and the poor who look for better
opportunity (Rajan & Zingales, 2013, p. 293).

Despite increasing buying power and improved lifestyles, by and large, we are gripped by fear and
frustration, exploitation and oppression, fraud and corruption, a culture of exclusion and discrimination,
death and destruction, with terrible damage to human rights and dignity. All these are effects of free
enterprise capitalism, unbridled greed and avarice, black money and white money, tax evasion and money
laundering. More than two-thirds of the world population is impoverished and marginalized, excluded
and disenfranchised. The other third part of the world has been desensitized and rendered progressively
incapable of feeling compassion at the outcry of the poor, and a globalization of exclusion and

11
indifference has developed. The culture of prosperity has deadened us. Stark poverty, destitution and
squalor of the third part of globe fail to move us. This is social violence. Poverty is social violence. This
is rejection of God and morality, ethics and humanism. This is capitalism at its worst. This is the result
of the absolute autonomy of the marketplace and financial speculation.

Meanwhile, the world of the poor and the marginalized is getting to a point of felt oppression,
suppression and frustration that it is seeking to get its outcry heard and responded. Several social
activists, NGOs and other advocacy and supportive groups are empowering them to voice their concerns
in groups and unions. Often, driven by sheer desperation, some groups might be forced to have recourse
to violence, social violence, retribution, and even revolution. The world of the rich is quick to denounce
the marginalized and accuse them of and suppress their violence. But recourse to arms and weapons will
not be able to silence the long excluded, deprived and impoverished masses. “Until exclusion and
inequality in our society and between peoples are reversed, it will be impossible to eliminate violence,”
said Pope Francis (Evangelii Gaudium (2014), # 59). When more than two-thirds of the global population
that is marginalized is forced to be on the fringes, no political program of law enforcement, oppression,
suppression or imprisonment will be able to achieve global peace, harmony and solidarity.

What can Turbulent Markets do to Combat Fraud?

What could we expect some ten years after the 2008 financial crisis, say in 2018 and 2019? So far,
the majority of federal effort has been focused on stabilizing the volatile financial markets for preventing
a market free fall and potential depression similar to the 1930s. Currently, besides federal bailouts of the
major banks, the Capitol Hill is offering seemingly attractive incentives to the consumers by way of tax
credits for home buyers, cash for gas clunkers (CARS), and federal rebate checks. It is estimated that the
monetary sum of USA government intervention over the twelve months of October 2008 – September
2009 would have clearly exceeded all government monetary interventions over the past two hundred plus
years of American history (including the Louisiana Purchase)!

All these bailout efforts, however, represent quick-fixes of “stopping the bleeding.” By most
accounts, economic policy makers think that the short term stop-the bleeding efforts of governmental
interventions have been fairly successful. Presumably, with such incentives, the U.S. markets, (industrial,
commercial and residential), might actually start to lead the world out of the downturn in the very near
future. Nevertheless, the continued high rate of unemployment and underemployment, lack of GDP
growth, impending inflation fears, continuing deterioration of the U.S. housing market, de-leveraging of
investment and commercial banks, and the struggles of the domestic auto industry and massive layoffs
almost everywhere, made the market outcomes of 2009-2018 very low and economic outlook for 2018-
2020 nothing better. The government, with the collaboration of business and household communities,
must seek longer term sustainable measures than those adopted in 2008-2018.viii

Despite financial crisis, economic recession, market turbulence and economic market chaos, some
companies will always do better than others. Their secret is not divestiture, diversification, risk-taking or
market withdrawal, but vision, creativity, imagination, innovation and forward thinking. Jim Collins and
his colleague, Morten Hansen, have proved this stunning result in their latest book, Great by Choice
(2011), a massive research study that spanned over nine years of the 2000s. Creativity and innovation
management will always be an ongoing solution to all our economic, market, political and social crises.

The USA financial services industry is the largest and most sophisticated in the world. Yet the
October 2008 crisis made it clear that the financial system is riddled with perilous gaps (or overlaps) in its
regulatory structure. Reform means smarter financial regulation, not over-regulation. October 2009,
2010, 2011 were three successive anniversaries of the financial crisis of October 2008. That was the time

12
for moral reflection and fair reckoning. What have we learnt one year, two years and even ten years after
the September-October 2008 crisis triggered deep, worldwide recession? What have we learnt from our
mistakes now that we are heading to the tenth anniversary month coming October 2018? Have the
financial markets stabilized, despite federal bailouts? Is market and global sustainability better since the
crisis of October 2008? [See Table 4.2, Chapter 04, for some corrective approaches].

During 2008-2009, the fed had taken some regulatory steps, but mostly to avoid catastrophe. We
need to modernize our outdated and opaque financial market regulatory structure. We a need a structure,
regulatory or self-regulatory, and a renewal focus on the essential tasks of building a stronger, more
durable, more stable, more sustainable, more transparent, more imaginative, creative and innovative and a
more just system that the rest of the world will be proud of and glad to follow. Short-term fiscal or
regulatory measures should not be detrimental to long-term market sustainability.

Market stabilization can be legislated; but it is best done through self-regulation. Similarly, market
sustainability cannot be legislated. It should be the desired outcome of government/business cooperation,
persistent creative innovation and continuous growth in GDP.

Fraud is failure of Corporate Accountability

Deliberate accounting irregularities are failures of corporate accountability. As responsible
ambassadors and representatives of the corporation, and of its mission, products and services, corporate
executives in general, and accounting executives in particular, must represent integrity, honesty and
corporate responsibility to customers, shareholders and other stakeholders.

The Enron bankruptcy raised questions about the validity of the independent audits and of the
business practices of the accounting industry itself. It is clear that the auditors failed to pinpoint the
accounting irregularity problems with companies involved in corporate scams. Given the fact that the
accounting practices are relatively simple, it is hard to believe how easily the accounting firms disguised
the truth, presumably in collusion with the audit and accounting branches of the implicated firms. It is just
hard to accept that the accountants did not assess the magnitude of these frauds. Clearly, the accounting
principles and rules were either not followed or they are not strong enough to detect and avert financial or
accounting irregularities.

There were systems level failures at several points that allowed many corporate frauds and scams to
remain undetected until they were so large that they bankrupted large companies, with billions of dollars
of loss in shareholder equity. Some of the biggest and most prestigious U. S. accounting firms (e.g.,
Arthur Anderson, Deloitte &Touché, Ernst & Young, KPMG, and Price Waterhouse & Coopers) offered
consulting services to the same companies they also audited. This is gross conflict of interest. Most of
these have resolved the conflict of interest by breaking into two or more companies for doing these
functions independently.

How do we Combat Corporate Fraud?

Our main argument is that ethics can combat corruption. Additionally, we believe that excessive
regulation and its complex interpretation/enforcement process generates ambiguity that, in turn, breeds and
feeds corruption. We also theorize that there is a supply side versus demand side of corruption, especially
in India. However, how and under what circumstances can ethics reduce corruption? We suggest two
approaches:

1. Much of corruption thrives on uncertainty or ambiguity of the law, licenses, and other excessive regulation

13
 and its enforcement mechanism. There is much information asymmetry between the buyer and the seller
of excessive regulation services. Ethics should focus on reducing uncertainty, ambiguity and buyer-seller
information asymmetry (BSIA) in the entire corruption phenomenon wherever it occurs. This is something
within our control.
2. Second, some form of buyer-seller and boardroom transparency must be legislated. This is what the
Sarbanes-Oxley Act (SOX) sought to do, but its successful compliance record in USA is low. We need
stricter rules of disclosure and transparency, especially in relation to international commercial
transactions. We need stronger transparency constructs and measures that can be uniformly applied
across multinational firms and government exchanges.

In order to do this, we breakdown the phenomenon of corruption into inputs, process, and outputs,
and distinguish the supply side and demand side under each. For a proper focus, we concentrate only on
the government as the supply side and business houses as the demand side – G2B domain.

Other things being equal, uncertainty/asymmetry in relation to inputs may be regarded as complexity,
uncertainty in the process may be construed as ambiguity, and uncertainty in the outputs as risk – all this
both on the supply side and demand side. Table 5.4 is a representation of uncertainty involved in the G2B
(supply) and B2G (demand) sources and sub-sources of corruption. When specifically applied to each cell,
ethics can piecemeal combat corruption.

[Table 5.4 about here]

Why does Corporate Failure in Ethics Occur?

Currently, corporate grey areas relate to corporate scams that are often the results of short-term profit
maximizing strategies. There is an almost obsessive desire among many managers to show improvements
in the bottom line, year after year, by finagling, creative accounting, aggressive financing, takeovers and
mergers, acquisitions and speculations. Outrageously high executive salaries, bonuses and perks are often
pegged to executive profit performance. In the anxious process of demonstrating short-term profitability,
corporate executives, additionally motivated by money greed, tend to cut corners and often overstate
earnings or understate debt, thus padding financial statements (Boyle, 2002). Further, there is always the
pressure to please the Wall Street analysts in order to meet their expectations and thus, score better stock
and bond ratings (Pelofsky, 2002).

Corporate psychologists connect corporate creative accounting irregularities to boredom and not
money, to loneliness and not wealth, to insecurity and not power, to unrealistic fantasy and not greed, to
negative self-images (low self-esteem) and not corporate egos (see Horowitz, 2002). In any case, this
grey area needs serious research; the earlier the causes of corporate fraud are identified, the better they
may be treated, and further disasters to the organization, economy and stakeholders might be averted.

Reduce Fraud by Reducing Legal and Occupational Ambiguity

Fraud as deliberate misrepresentation is a function of situational ambiguity. Legal and occupational
ambiguity feeds fraud and crime. Ambiguity is lack of clarity, specificity, and transparency in vision and
mission, goals and objectives, ends and means in relation to a given task, program or project.

The situational ambiguity can occur in one or more of the following constitutive components:

❖ Task inputs (e.g., vision and mission, aspirations and ideals, shared values and beliefs, ethical and moral
principles, laws and regulations, assessing fixed assets (land, building, machinery, brands) and variable assets
(work-in-progress and finished inventories, competencies and expertise, specialized skills and regular

14
 manpower, patents and technologies, brands and intellectual capital);

❖ Task processes (e.g., capital budgets and expenditures, borrowing capacities and strategies, interest payments
and amortization, job descriptions and working conditions, reporting hierarchies and communication networks,
boardroom dynamics and cultures, interpersonal and inter-task dependencies and interdependencies,
distribution and logistics, purchasing, trade credit and payables, selling, consumer credit and receivables,
supplier/creditor satisfaction and retention, suppliers and creditor selection, development and retention policies
and procedures, codes of conduct and expected behavior, organizational routines and best practices, reporting
accountabilities and responsibilities, debt/equity ratio, debt and equity restructuring, bonds and bond-ratings);

❖ Task-related desired or planned outputs (e.g., task revenue goals and objectives, task market share targets and
outcomes, project profitability and returns, growth and development, justice and opportunity equality, financial
outcomes such as ROE and ROI, ROA (ROBA, ROMA, ROCE or ROIC), EPS and P/E ratio, customer
satisfaction and retention, market capitalization and brand equity value).

Lack of clarity, precision, transparency, dialog and discussion along any of the variables or factors
listed under inputs, processes and outputs can cause much confusion and ambiguity, force varied
interpretation, and all these are loopholes and opportunities for fraud, corruption and bribery. Given low
versus high task-ambiguity coupled with physical versus nonphysical pressure, Exhibit 5.1 summarizes
and synthesizes most deviant behaviors. As portrayed in Tables 5.1 and 5.2, most fraud, corruption and
bribery breed in a situation of turbulent market ambiguity.

Exhibit 5.1: A Simple Taxonomy of Business Deviant Behaviors Based on Task

Ambiguity

Task Execution Task Ambiguity

Low High
Non-Physical: Discrimination Trickery, Beguile
Corruption Chicanery, Conning,
Persuasion, Bribery Seduction, Deception
Forced Fraud Money-laundering;
consensus Theft by Fraud Racketeering;
Theft by Stealth
Physical: Much Larceny Terrorism
Stealing Ethnic Cleansing
Force and Robbery Genocide
Undue Power- Felony/misdemeanor Preemptive Wars
pressure Theft by Force Aggressive wars

Exhibit 5.2 characterizes non-physical transactional abuses such as verbal pressures via exaggerated
financial statements, aggressive ads and other deceptive promotional tools. Exhibit 5.2 distinguishes
between fraud, corruption and bribery. This Exhibit assumes that corruption and bribery are subset of
frauds as deliberate misrepresentation.

Each cell of Exhibit 5.2 is a remediation point for corporate ethics failure. Accounting and financial
fraudulent practices (e.g., inflating sales, overstating accounts receivables, understating debt, and illegal
security trading) have currently infested several industries like energy, gas pipelines, communications,
information technology, retail, healthcare, and pharmaceutical companies (see listings of such practices in
Fortune, 2002; Forbes, 2002).

There are many ways to inflate revenues, and almost all of them involve savaging the GAAP system.
The financial impact of such practices on their brand equity, market value and customer goodwill has
exceeded well over a trillion dollars.

15
 Hence we suggest that the system (e.g., government or corporation) seeks to reduce task ambiguity
to the minimum. Most of the complicated tax legislations of India provoke tax evasions, tax fraud, and
other ways of avoiding taxes. Most of the ambiguities in more recent legislations regarding The Land Bill
are indirectly encouraging rather loose interpretations that, in turn, trigger crime.

Exhibit 5.2: Distinguishing between Fraud, Corruption, and Bribery

Fraud as Fraud as Deliberate Misrepresentation that thrives on:

Deliberate Ambiguity that breeds
Misrepresentation Deception
that thrives on
Ambiguity in:
Corruption as Deception:
Past Data, Facts, Deceptive accounting;
Income smoothing;
Figures and Padding expenses and skimming;
History Ghost or shell companies;
Ghost employees or accounts;
Restating annual financial statements
Ambiguity that breeds Conspiracy
and Covert Joint-Action
Corruption as Accounting Bribery:
Kickbacks;
Wash Trading or Round Trip sales;
Accounting abuses (e.g., over-invoicing, under-
invoicing, dumping, understating debts,
overstating earnings; tax write-offs)
Leverage buyouts (LBOs);

Corruption as Deceptive Corruption as Financial Bribery:

Current and Advertising: Insider Trading;
Lies, Cheating, Subterfuge in ads; Active or passive bribery;
Future Under- disclosure or Over-disclosure Excessive executive compensation;
Decisions, (Information under-load or overload); Seduction in recruitment, marketing, soliciting
Strategies and Planned buyer-seller information customers;
asymmetry for exploitation; Planned market dominance via mergers and
Actions Promoting non-existent patents or acquisitions or joint ventures;
products/services; Promoter dominance and hostile takeovers;
Hyping IPOs without products or Undue market entry barriers;
patents; Exorbitant pricing or price wars;
Covering or disguising product/service Dumping, international dumping;
defects; Dishonoring warranties and guarantees

Corporate Corruption as Deceptive Corruption as Abusive Reporting:

Financial Reporting: Over-borrowing based on inflated collateral;
Announcing new products and brands Covering very high debt-equity ratios via
Statements, but not delivering; excessive borrowing;
Announcements Understating Debt, risk and liability; Tax Evasion gimmicks;
and Annual Overstating revenues, earnings and Inflating bad debts, theft, wastage and other
profits; damages for tax exemptions and insurance
Reports Paying dividends from debts; claims
Overvaluing tangibles/intangibles;
Massive write-downs

Throughout history, if there are profits to be made, some type of scheme attempts to circumvent the
law or even cross boundaries. It is a choice between short-term gain and long-term stability. It is often
some form of self-indulgence. Obviously, ethical dilemmas are not always black and white. There are
shades of grey between black and white, between good and evil, between right and wrong, between truth
and falsehood, and between just and unjust. The sweatshops of China represent grey areas even to this
day for a lack of a proper and universally accepted definition. Similarly, when can supplier gift-giving in
India be considered bribery? When is competition good or bad? When are market-entry barriers good or
bad? Is evil counter-intuitive? If so, why do some leaders involved in highly publicized business or
government scandals seem still unrepentant, refuse to admit wrong-doing, even publicly rationalize their

16
decisions after they have been caught, castigated, and were forced to pay billions of dollars in punitive
damages? A few of them are even repeat offenders.

The situations that can lead corporate executives to hard choices can be as complex as the options
themselves. Some companies therefore struggle with how to manage and measure ethics and particularly
in cases where they have worldwide offices that operate in diverse cultures. Those decisions have a direct
bearing on their public identities and will affect their share prices. But with each passing scandal, new
rules and codes emerge that surpass those of the past. And while Enron will not be the last case of
corporate malfeasance, its tumultuous tale did initiate a new age in business ethics. Ethics and integrity
are at the core of sustainable long term success; without them, no strategy can work as Enron has
demonstrated.

Concluding Remarks
Whether corporate scams are described as accounting frauds, deceptive accounting practices, inflating
revenues, round-trip trades, understating debts, overstating financial worth to boost stock prices and
consequent corporate insider trading, or just, “cooking” the books, they are all corporate failures of public
trust. They are failures of corporate accountability and social responsibility. In the wake of these
escalating corporate scandals, several ethical and moral questions arise. Are these corporate accounting
frauds legal or quasi-legal? Further, even if these are legal and, therefore, non-criminalizable, are these
practices ethically and morally justifiable? How could these frauds occur in such exemplary corporations
traditionally known for their corporate executive virtues of honesty and integrity? As frontline
ambassadors and representatives of the corporation, its products and services, how could corporate
executives in general, and accounting, financial and marketing executives in particular, represent the best
of themselves and their companies through such frauds?

There are three dimensions to any corporate fraud: the human, the technology, and the legal
dimension. The most important one is the human. People will always try to find ways to get around any
regulatory system if it is to their advantage to do so. Any legal or technology system is only as good as
the people that designed it. Consequently, there will always be someone smarter and more knowledgeable
who is willing to take the risk of exploiting the system for one’s own benefit.

17
 Table 5.1: Characterizing Physical Transactional Abuses

Physical Level of Inputs Process Outputs Remarks

Transaction Ambiguity
Abuse
Compelling Ambiguously All transparent Perfect information; Compelling but A Win-Win
physical non- Fair products and full awareness and fair trade with bilateral exchange
violent services motivation to act; no mutual gain. in the standard
persuasions physical inducements There is much microeconomic
other than puffery and scope for sense
persuasions marketing here.
Con Game Inherently High buyer-seller The victim’s response Con Game: the Personal fraud and
Ambiguous information to the evidence is not victim plays scam one gets
with social asymmetry simply to misread it along, but suffers involved in
consent (BSIA); the thief but go along with it. loss without consciously or
commands but the knowing it. unconsciously.
victim plays along.
Skimming, Ambiguously Belief you are not Every day theft of Could add up to Often, occult
Pilfering unfair noticed small items from the sizeable amount compensation for
organization over many and one’s low wages
frequent
occurrences
Theft by Unam- One-sided The victim is Theft by stealth: The thief is
Stealth biguously intervention to physically absent or the victim suffers cunning, contriving,
unfair and theft. The victim is psychologically loss without stalking, scheming,
one-sided unaware or absent. unaware of the action knowing it. and vigilant for the
of the thief. right occasion to
steal.
Theft by Inherently High information The action is noticed Theft by Fraud: Corporate fraud,
Fraud ambiguous asymmetry; the but misinterpreted. The victim suffers corruption and
with no thief commands. Pure embezzlement. loss by misreading bribery are here
consent evidence. under various
forms.
Theft by Unam- Force, physical or Coercion is the only Theft by force. The thief knows
Force biguously mental or reason why Transaction for more than others in
unfair psychological; transaction occurs; the thief; loss for the forced
threatening and parties no longer the others. No transaction. The
intimidating Pareto informed; the marketing needed felon’s
elements; high victim is physically here, other than overwhelming
information deterred from bullying and superiority of
asymmetry; responding. coercing to give power accounts for
Pure robbery. in. the victim’s
cooperation.
Larceny Unam- Larceny is It is taking and Larceny is a It is a transaction
biguously felonious stealing carrying, leading, cunning way of with minimal
unfair using tricks, riding, or driving taking goods consent from the
frauds, chicanery, away another person’s against the will or victim, who may be
obfuscation, and personal property. consent of the silent and non-
the like. owner but with a resistant out of fear
felonious intent. of attack. Fraud is a
subset of larceny.

18
 Table 5.2: Characterizing Non-Physical Transactional Abuses

Type of Level of Inputs Process Outputs Remarks

Verbal Ambiguity
Abuse
Promotional Ambiguity is Pre-existing It works within the Persuasion results Most advertising is
Persuasion moderate consensus. The logic of the prevailing given enough prior persuasive in this sense.
value of the consensus, and defines consensus between PR is also persuasive
transaction can no new symbols or buyer and seller. when you fit news
be established signs. material into a prior
within it. consensus.
Trickery Ambiguity is No pre-existing Implies the use of You unconsciously Is a con game in
moderately social buyer- tricks or ruses in capitulate to the disguise where the
high seller consensus. deceiving others. wiles of advertising victim is drawn into a
social consensus
Chicanery Ambiguity is No pre-existing Implies the use of You are charmed Is a con game in
high social buyer- petty trickery and by glossy disguise where the
seller consensus. subterfuge, especially, brochures; victim is drawn into a
in legal actions. social consensus

Beguile Ambiguity is No pre-existing To mislead people by You unconsciously Is a con game in

very high social buyer- one’s charm or capitulate to the disguise where the
seller consensus. persuasion of cheating freebies and victim is drawn into a
or tricking. charms that come social consensus
inside cartons.
Seduction Ambiguity is Involves It is a strategy Enticement of a The consumer must be
highest construction of a whereby consumers consumer into an moved in stages from
new consensus, a are induced to tolerate exchange where old agreements to new.
deliberate and or overlook ambiguity is
stepwise process. unsustainability, or resolved by a
deny it. In this sense, private social
seduction is more consensus that the
voluntary than fraud consumer plays a
and more part in
collaborative than constructing.
entertainment - a
playful game form

Deception Ambiguity is Involves Consumers are Deception is when▪ Often, consumers are
moderately construction of a influenced by non- consumers change influenced by non-
high new consensus, a substantial attributes their behavior for substantials of a
deliberate and and features of a reasons not product at the expense
stepwise process. product or service. objective but on of disregarding its
beliefs and intrinsic aspects
impressions made (Gardner 1975).
on them by
promotions.

Cheating Ambiguity is No pre-existing Cheating is often Cheating is Consumers,

high for social buyer- fraudulent and trickery + customers, clients
trickery + seller consensus. dishonest exchanges deception and buyers get often
deception towards one’s tricked via
clients ambiguous marketing
promotions.

19
 Table 5.3: Commonest Frauds by Type, Perpetrators, Methods,
Victims and Costs of Deception
Type of Fraud Method of Victims of Costs of Deception
Fraud Perpetrators Deception Deception
Management Top executives Creative and Organization, Loss of market valuation, Tobin’s Q,
Fraud such as CEO, aggressive Investors, brand equity, supplier goodwill and
CFO and chief accounting such as Employees, customer loyalty and investment
accounting earnings Suppliers, opportunity; loss of earnings, share
officer (CAO) management, Customers price, and corporate image
Income smoothing Shareholders, Possible bankruptcy
Gain on sale and Creditors or lenders Loss in financial performance ratios
Wash trading such as P/E, EPS, ROIC, RONA, ROI,
ROE & total shareholder return (TSR)
Securities Top executives Illegal insider Public investors who All of the above, plus violation of insider
Fraud with insider trading do not have access to trading laws with litigation losses
information inside information
Investment Any individual Tricking or conning Unsuspecting False prizes/sweepstakes
Scams involved in such into worthless investors, especially Unnecessary magazine sales
scams investments the elderly, teenagers, Worthless buyer club fees
Telemarketing the marginalized Unrealized advance fee-loans
fraud Work-at-home schemes
Deceptive travel/vacation packages
Tax Fraud Corporate and Failure to report IRS State and local Violation of Title 26, US Code # 7201
non-corporate income from fraud tax authorities Bribes may not lawfully be deducted as
tax evaders or bribes; filing business expenses
false returns Loss of tax money to governments
Racketeering Racketeers Criminal violations Commercial Racketeer influenced and Corrupt
Corrupt of commercial exchange partners Organizations (RICO) Statute violated;
organizations exchange laws and affected by Title 18, US Code # 1961
ordinances; racketeering
Money laundering
Vendor Fraud Vendors Significant over- Government with Shipment of inferior or fake goods
Suppliers charging either defense contracts; Overcharge for purchased goods
Brokers singly or by Innocent Deprivation of goods paid for
Distributors collusion corporations and Counterfeit goods
Retailers Non-shipment of customers
goods paid for
Employee Employees Skimming, theft; Employers, Losses in cash, kind, morale, work-
fraud or At all non- Cheating on time, Shareholders, efficiency, sales and performance due to
embezzlement executive levels money, quality of Customers, occupational fraud
work Other employees
Computer Computer Illegal access to a The public, defense, Violates Title 18, US Code # 1030
Fraud hackers, code- protected computer national security and
breakers, and vaulting or all governments
classified data classified data; affected by classified
destroyers hacking data
Bribery and All those engaged Bribery & Suppliers Bribery violates Title 18, US Code # 201,
Kickbacks in bribery, kickbacks; Prime contractors of and the Foreign Corrupt Practices ACT
kickbacks, and strategies government projects (FCPA), Title 15, US Code # 78.
foreign corrupt Kickbacks violate Title 41, US Code #s
practices 51-58.
Customer Some customers Not paying for The vendors Consumer theft costs
Fraud Some borrowers goods purchased; Retailers Bad debts; consumer credit abuse;
Angered getting something Banks tricked into Violated loan covenants
customers getting for nothing; granting loans or Free rider costs; Unpaid interest
even with conning banks to funds transfers Non-amortized capital
employers make loans or
transfer funds

20
 Table 5.4: The Supply and Demand Side of Fraud and Corruption:
An Input, Process and Output Analysis

Source of Sub-Source of Structure of Corruption

Corruption Corruption Structured Inputs to Structured Processes Structured Outputs of
in B-G Corruption: of Corruption: Corruption:
Exchanges Complex People and Ambiguous Exchange Intended or
Instruments Situations Unintended Harmful
Consequences
Corrupt G2B politicians; G2B information asymmetry; Information asymmetry
Corrupt G2B government G2B opaque transactions; products;
Corrupt officials; G2B obfuscation and G2B Seduction and Deception;
People Ministers with key G2B chicanery; GEB Blackmail and beguile
G2B portfolios; G2B subtle bribery demand; set-up;
Unfair G2B lawyers and G2B Structured deception;
Supply judges G2B Excessive bribery or
robbery;
Side Excessive industry/market Overbearing G2B Government market opacity;
(Laws & regulation; bureaucracy; Structured market injustices;
Governments) Corrupt Complicated industry Ambiguous law interpretation; Loss to the government ex-
Instruments excise/tax haven laws; Many G2B authorization checker;
Complex mining licensing requirements; Lost business opportunities;
or Means systems; Ambiguous G2B bid Tax Losses – govt. deficit
Complex Public bidding process/selection; budgets;
tenders; Consequent loss in GDP
growth;
Unethical/immoral Tax evasion; bribery- Loss in taxes to the exchequer;
executives; proneness; Loss in bribery payments to
Overbearing middle Export duty violation; the industry;
Corrupt managers; Import-quota violation; Loss in market capitalization;
Unscrupulous accountants; Over-Maximizing profits; Loss in brand image and
People Corrupt internal auditors; Low ethical and moral equity;
Corrupt external auditors; thinking;
B2G Corrupt B2G distribution Bribing government Weakened B2G creativity;
and retail managers; distributors and retailers; Delayed R&D and innovation
Demand Corrupt B2G supply chain Bribing or pressurizing G2B owing to corrupt B2G deals;
managers; suppliers; Stalled and stagnant business;
Side Banking and credit opaque Bribing and buying G2B bank Losses due to G2B and B2G
(Business Corrupt B2G instruments; credit; delays;
Houses) Instruments Financial analyst (e.g., BSE) Deceiving financial analyst by Loss in sustainable competitive
pressurized demand; fraud; advantage (SCA) to
or Means Institutional Shareholder Silencing institutional governments and businesses;
demands; shareholders by promises; Consequent loss in market
Customer Buying business licenses and share;
demands/complaints; project approvals via B2G Loss in RE & corporate
bribes; growth for the nation and
industries;
Loss in GDP, EBIT, EPS, ROI;

21
Endnotes
i The U. S. Federal Energy Regulatory Commission (FERC) defines wash trading, also known as "round trip" or "sell/buyback"
trading, as the sale of a product (e.g., electricity, optical fibers) to another company with a simultaneous purchase of the same
product at the same price. Essentially, wash trading is false trading because it boosts the companies' trading volume, or even sets
benchmark prices, but shows no gains or losses on the balance sheets.
ii Latest Updates on the Enron Case: Andrew Fastow, the former CFO of Enron, admitted to the wrongs he committed, but also
blamed the accountants at the defunct firm Arthur Andersen, in a speech at the Association of Certified Fraud Examiners’ Global
Fraud Conference (June 2013), (Source: http://www.accountingtoday.com/news/Former-Enron-CFO-Andrew-Fastow-Meets-
Fraud-Examiners-67263-1.html). Andrew Fastow is teaching a yearly ethics course at University of Colorado, and periodically
gives lectures at Harvard and Stanford (Source: http://www.houstoniamag. com/news-and-profiles/business/articles/andrew-
fastow-plots-an-afterlife-january-2015. The Supreme Court of USA overturned the conviction of auditing firm Arthur Andersen
(levied against them or charges relating to obstruction of justice) in 2005. [Source: https://en.wikipedia.org/wiki/
Arthur_Andersen_LLP_v. United States]. Kenneth Lay, the past chairman of Enron, passed away in June 2006, before his prison
sentence could begin. Thereafter, his conviction was vacated - Source: https://en.wikipedia.org /wiki/Kenneth_Lay #Vacating of
conviction]. Jeff Skilling, the past CEO of Enron, had his prison sentence reduced by 10 years from the existing 24 years. He
began his prison term in December 2006. He has been housed at a low security prison in Ohio. Skilling has most recently been
housed at a low-security prison in Littleton, Colo. [Source: http://www.cbsnews.com /news/ex-Enron-CEO-Jeff-Skilling-to-
leave-prison-early].

iii
Key Developments since 2002 Specific to Sherron Watkins: 1) 2002: Watkins named Person of the Week by Time Magazine,
one of three whistleblowers selected. [Source: http://content.time.com/time/nation/article/0,8599,194927,00.html]. 2) 2004:
Watkins releases a book about her time at Enron, the issues surrounding US corporations, and their culture, titled “Power Failure:
The inside Story of the Collapse of Enron” [Source: http://merage.uci.edu/ResearchAndCenters/;D/Resources/
Documents/(2003)%20Former%20Enron%20vice%20president%20Sherron%20Watkins.pdf]; 3) 2004 –Present: Watkins gives
speeches and talks at various business schools around the United States, about ethics and corruption. [Source:
http://www.sherronwatkins.com/sherronwatkins /Appearances.html

ivFor instance, Dellaportaa, 2006; Douglas, Davidson, & Schwartz, 2001; Finn, Chonko, & Hunt, 1988; Hiltebeitel & Jones,
1992; Hise & Massey, 2010; Karcher, 1996; Kerr & Smith, 1995; Loeb, 1991; Loeb & Rockness, 1992; Moberg & Calkins,
2001; Westra, 1986.
v The "Recovery Theory" in the U. S. Law is also based on the definitions of "fraud" and "misrepresentation." A misrepre-
sentation occurs when a person, by words or acts, creates in the mind of another person an impression not in accordance with the
facts. Example: If the seller of a passenger car expressly states that the auto has been rebuilt to meet tougher road conditions,
when it has not been, and if the buyer relies heavily upon this statement (hence a "material fact") in deciding the purchase, then
the latter’s decision was not freely and voluntarily made, but triggered by misrepresentation. A fact is "material" if the person
trying to avoid the contract will not have entered into it had he/she known of the misrepresentation. The buyer may ask a court to
free him/her of the contractual obligations of the purchase contract.
viBribery violates Title 18, US Code # 201; punishable by up to 15 years in prison + fines of 3 times the value of the bribe +
bribing officer is disqualified. Bribery also violates Foreign Corrupt Practices ACT (FCPA), Title 15, US Code # 78. Bribery in
the form of kickbacks violates Title 41, US Code #s 51-58; up to 10 years in prison.

vii
Also, on September 23, 2002, Allegheny Energy, a Maryland electric utility company, sued Merrill Lynch for $605 million and
more unspecified punitive damages in a New York state court. The charge stated that Merrill Lynch inflated revenues of Global
Energy Markets (GEM) through a series of “round-trip trades” with former industry giant Enron, before selling it to Allegheny
for $490 million in 2001. The lawsuit also accused Merrill for misrepresenting the qualifications (e.g., age, experience) of Daniel
Gordon, GEM’s head (Yahoo! News, Thursday, September 26, 2002, 9:25 am, EST).

viii
The IMF (International Monetary Fund) forecasted that the overall world output in 2009-2010 will grow only 2.2 percent (IMF
defines a global recession as growth below 3 percent), and the predicted outcomes have been realized. Consumer confidence in
the U.S. and Europe has fallen to record lows. Philippe Gijsels, senior equity strategist at Fortis Global Markets in Brussels,
predicted that 2009 will be a big shakeout year, a year of financial Darwinism, where the weak get weaker and the strong get
stronger. People with cash and balance sheet strength will be able to do what they want. In the long run, consolidation will help
to create the conditions for the next bull market as capital is redirected to its most efficient uses. According to Mr. Gijsels, the
world market could stabilize by late 2009 if there was clear evidence that the current financial crisis was ending and there were
signs that the U.S. housing market crash was nearing an end (Jolly, 2009). But nothing has been recorded yet in terms of financial
market stabilization.

22
 Chapter 06
The Turbulent Market of Modern Debt-Overleveraged and
Promoter Dominated Corporations
Executive Summary
Before the September-October 2008 Financial Crisis, investment banks were hooked on debt. In 2007, a year
before its failure, Lehman Brothers held equity just 3.3% of its balance sheet (that is, its debt/equity ratio well
exceeded twenty-nine); virtually all the rest was financed by borrowing. Leverage is an elixir that makes profits
soar when times are good, but magnifies losses when the economy sours. Currently in India, several companies
have seen their balance sheet out of shape because of over-leverage, but banks continue to be benevolent, often
forced by political interventions (See Cases 6.1 and 6.2). Most of these business groups are nearly dead, with their
equity almost wiped out. There is little chance they will survive but for their banker’s largesse. Ever-greening of
loans is keeping them alive, but what could be the end game? For instance, just a year before economic
liberalization in India, a few enterprising men invested in the steel business. They borrowed monies from the
banks and banks continued to finance their operations, and now they are realizing that the promoters cannot
meet with their debt obligations. The banks, however, did not want to accept financial loss and hence commonly
agreed to ease the payment obligations so that the loans remained good and not degenerate to non-productive
assets (NPAs). This is tantamount to refinancing to service your loans. But now the banks overwhelmed with
accumulated non-productive assets (NPAs) are trying to sell debt. How do you legally, ethically, morally and
spiritually (LEMS) justify share-market concentration in the hands of very few promoter investors? What are
their long-run unintended economic, legal, ethical and moral consequences, and why? This Chapter studies this
market turbulence and the role of bankruptcy laws and court systems in bringing about some change in the debt-
overleveraged corporations.

Case 6.1: RBI refers Bhushan Steel, Essar Steel and Electro Steel to NCLT
over Overleveraged Debts
A forum of lenders, led by the State Bank of India (SBI), India’s largest bank, on Thursday, June 22, 2017
refer three large non-performing accounts — Bhushan Steel, Essar Steel and Electro Steel — to the National
Company Law Tribunal (NCLT) for further action under the Insolvency and Bankruptcy Code (IBC). A reference
to NCLT is the first step towards initiation of bankruptcy proceedings. Once admitted by the tribunal, the board is
dissolved and insolvency professionals take charge. Lenders are then given 180 days to resolve the loan, with a 90-
day extension possible. If a package is not possible, NCLT is empowered to allow liquidation of assets. Banks refer
Bhushan Steel, Essar Steel, Electro Steels NCLT for recovery of bad loans under the Insolvency and Bankruptcy
Code.

Indian banks have initiated a big crackdown on bad loans armed with the Insolvency and Bankruptcy Code
(IBC). The attack on the non-performing assets (NPAs) began first in 2015 when the Reserve Bank of India (RBI)
stipulated norms for early recognition of stressed assets in the banking sector. Subsequently, the RBI came with a
March 2017 deadline for banks to clean-up their balance sheets by disclosing all the hidden NPAs. While this
exercise pushed banks to account for a big chunk of impaired assets, the recovery of money still remained a major
concern for the sector and the policymakers.

But, the passage of bankruptcy code came with the promise of a major change in banks’ NPA battle. Under
this, if the majority lenders agree, banks can take companies to National Company Law Tribunal (NCLT) with a
request for time bound resolution plan. If the resolution process fails within a maximum of 270 days, insolvency
process is initiated against the concerned company. Under a mutually agreed framework between banks and other
stakeholders in the firm, the proceeds from the liquidation process will be shared.

Sources said SBI will take the two companies Bhushan Steel and Essar Steel with combined loans of Rs.
85,000 crore to the joint lenders forum and formal action is expected to be initiated by July 2017. The decision was

1
taken at a marathon meeting chaired by the SBI. While Bhushan Steel is in default of Rs 44,478 crore to banks,
Essar Steel owes Rs. 37,284 crore and Electro Steel owes Rs. 10,273.6 crore. These three borrowers are among the
12 accounts identified by the Reserve Bank for immediate reference to NCLT.

While unlisted Essar Steel had a consolidated debt of Rs. 37,284 crore, Bhushan Steel’s debt stood at Rs.
44,478 crore at the end of 2015-16. The latest financial numbers of both companies are not available as yet, but
bankers said the debt would have gone up in the last one year. Kolkata-based Electro Steel had a debt of Rs. 10,274
crore at the end of March 2016.

These 12 accounts alone constitute a quarter of the over Rs.8 trillion of non-performing assets (NPAs). Some
of these stressed borrowers include Amtek Auto, which is in default of Rs.14,074 crore, Alok Industries (Rs.22,075
crore), Monnet Ispat (Rs.12,115 crore) and Lanco Infra (Rs.44,365 crore). Era Infra (Rs.10,065 crore), Jypaee
Infratech (Rs. 9,635 crore), ABG Shipyard (Rs. 6,953 crore) and Jyoti Structures (Rs. 5,165 crore), according to
reports in Live Mint – e- paper, June 22, 2017.

The internal advisory committee (IAC) of the RBI after its meeting on 13 June, 2017 had recommended 12
accounts totaling about 25% of the gross NPAs of the banking system for immediate reference under Insolvency and
Bankruptcy Code. These 12 accounts referred by the RBI have an exposure of more than Rs. 5,000 crore each, with
60% or more classified as bad loans (NPAs) by banks as of March 2016.

Lenders led by SBI are set to initiate action under the Insolvency & Bankruptcy Code (IBC) against Bhushan
Steel and Essar Steel, which will join companies such as Electro Steel, Monnet Ispat, Alok Industries and Jyoti
Structures. In case of the other stressed companies, SBI plans to approach the National Company Law Tribunal
(NCLT) by June 30, 2017.

Separately, Punjab National Bank is initiating action against Bhushan Power and Bushan Steel. The two
Bhushan Group companies with combined debt of over Rs. 80,000 crore are seen as examples where the lenders
were more than liberal in sanctioning loans and are among the most capital-intensive steel plants, at least in India.

Bankers, led by IDBI Bank, will be meeting on Friday (June 23, 2017) to decide on Bhushan Power & Steel
which has been in default of Rs. 37,248 crore to the lenders.

On Saturday, June 24, 2017, Lanco Infratech said the Reserve Bank of India (RBI) has directed its lead banker
IDBI Bank to initiate insolvency procedure for the company. Once a case is referred to NCLT, there is a 180-day
time line to decide on a resolution plan though 90 days can be given in addition. If a plan is not decided, then the
company will go into liquidation.

References:
Bad loans: Lenders refer Bhushan Steel, Electro steel, Essar to NCLT. (2017, June 23), Deccan Chronicle, 11:13 IST.
Banks including SBI take Bhushan Steel, Essar Steel to NCLT over loans. (2017, Jun 22, Thursday), Live Mint - e-Paper, Last
Updated 22:16 IST.
Chatterjee, D., Lele, A., & Dutt, I. A. (2017, June 23). Insolvency: Lenders take Bhushan, Essar and Electro steel to NCLT’
Three steelmakers have combined debt of nearly Rs 1 lakh crore. Business Standard, Mumbai/ Kolkata, Last Updated at 09:12
IST.
Lenders drag Essar Steel, Bhushan Steel, Electro steel to NCLT. (2017, June 22), Press Trust of India, Mumbai, Last Updated at
20:42 IST.
NPA crackdown: Read here for financial details of these 12 big loan defaulters likely to go for bankruptcy. (2017, June 19),
First-Post.
Sahu, Prasanta (2017, June 21). Narendra Modi government set to shut down 5 sick PSUs, PEC, Bharat Wagon, Elgin Mills on
list. The Financial Express, New Delhi, Published at 08:07 AM
SBI-led lenders to offer prescription to Essar Steel, Bhushan Steel, Electro steel; refer them to bankruptcy court. (2017, June 23),
India Today.
Sidhartha (2017, June 23). Essar Steel, Bhushan face bankruptcy proceedings. The Times of India, 10:08 IST.

2
Case 6.2: The Modern Debt-Stressed Corporation
Since the 2008 crisis regulators have cranked up their supervision and control of banks and ordered them to
hold more equity than debt (See “Free Exchange: Miraculous Conversion,” The Economist, May 16, 2015, p. 63).
On a similar note, Business Outlook (a prominent business magazine in India) featured a front page article: “Bad
Debt or Death Bed?” (December 11, 2015, pp. 26-40). Recently, HDFC Bank sold its Essar Steel exposure of Rs
550 crore (about $85 million) to an asset reconstruction company (ARC) at a 40% discount, while a SBI-led joint
lenders’ forum restructured the company’s Rs 30,000-crore (about $4.615 billion) exposure. Industry insiders
believe that refinancing and rolling-over are going to be commonplace in the Indian banking system which is short
on innovative ideas but big on its set of NPA problems.

In a study of highly leveraged Indian business groups, analysts at Credit Suisse say that $15 billion worth of
long-term debt is due in 2017 and would need to be refinanced. Additionally, another $20 billion short-term debt
would need to be rolled-over. The total outstanding debt among these over-leveraged firms is at a staggering Rs
730,000 crore (over $123 billion). With some of the banks already stretching to meet the Basel-III capital
requirements, feeding these groups would put additional burden on their capital base. Rating companies, however,
keep the industry debt-rating of these stressed-out business groups at BB and better.

The genesis of the debt over-leveraging problem is politically directed loans made in 2009 and 2010 and
genuine errors of judgment made in 2008, opines Saurabh Mukherjea, head of institutional equities at Ambit Capital.
Over the past eight years, according to a study conducted by the Credit Suisse, the House of Debt report, corporate
debt of some ten over-leveraged corporate industry groups covered by the study ballooned by an explosive 730%,
from a borrowing of Rs 100,400 crore in FY 2007 to Rs 733,500 crore in FY 2015 (See Business Outlook,
December 11, 2015, p. 28). Apparently, the Indian promoter community realized that foreign investors were
providing generous equity funding to Indian industry groups and they had to match it by equally generous funding
from public sector unit (PSU) banks based on the premise that it is the only way long-term infrastructure funds could
be funded. Based on this pretext, politically directed loans were made with very little prospect of repayment,
observes Saurabh Mukherjea.

Business Outlook conducted a similar study towards the middle of 2015 from the Bombay Stock Exchange
(BSE) universe of companies that met with several filtering stringent criteria. The first criterion was debt/equity
ratio > 2.5. Within this filtered group the study selected companies that verified three more debt-related criteria: a)
interest coverage ratio ≥ 1.5; b) [(opening cash + CFO)/interest cost] ≥ 1.5; and c) market capitalization/debt <
100%. Twenty companies got netted in this group (incidentally, six of these also belonged to the stressed
corporations group of Credit Suisse “House of Debt” study). The total outstanding debt of these companies in 2015
was Rs 406,000 crore ($73.818 billion). Twelve of these 20 were infrastructure companies (e.g., power,
construction, and road business) and accounted for 77% of the total outstanding debt. Other companies in this list
were in textile, aviation, steel, and telecom. Technically, these twenty companies are the most vulnerable to debt
troubles, as they face a highly challenging environment in meeting their debt obligations (Kripalani & Gupta, 2015,
p. 26). However, the rating companies and the banking systems in India did not ring their alarm bells on these
heavily debt-burdened companies. For instance, for twelve of these debt-stressed companies, ratings scores did not
go below BB; in fact, ten of these companies scored investment grades BBB and above. Only six companies were
rated D (that is, at default).

According to Pradip Shah, Chairman of IndAsia (who while at Crisil introduced the concept of credit rating to
India), some of the Indian credit rating agencies award ratings without much due diligence (cited in Kripalani &
Gupta, 2015, p. 28). If ratings reflect your capacity to pay back loans or debts, then higher ratings may give false
information to the investors. Experts do not seem to think that a benign inter rate cycle is going to help improve
matters. RBI cuts (e.g., Repo, CRR) are not going to help matters much as far as improvement in fundamentals is
concerned, says Sanjay Bakshi, a widely followed value investor in India as also adjunct professor at MDI, Gurgaon,
India.

Deep N. Mukherjee, visiting faculty, IIM Calcutta, believes there is no reason to expect the debt woes to
mitigate unless all the stakeholders (i.e., policy-makers, banks and promoters) are willing to end the charade. The

3
only endgame is that FII debt providers or FDI would come in over the next two to three years. They could if, for
instance, can say that their cost of debt is 4-6% and they could afford to infuse debt at 2-3% above the 10-year bond
yield of 7.7%. That is, you could infuse new money to turnaround the distressed companies. Analysts add that 17%
of the total loans are stressed, and of this 5% are non-productive assets (NPAs). So some provisioning is done for
them; but the balance of loans need haircuts if they stand any chance of recovery. But currently, it does not look
bright. Three to four years have passed already and in India, the cost of waiting is close to 12-13%, which is the
additional interest rate that you will need to pay on the debt because of the delay, adds Mukherjee (Business
Outlook, December 11, 2015, p. 40).

Meanwhile, the government is planning to introduce a bankruptcy Code by the end of December 2015 to help
bankers recover their investments faster so that there is efficient flow of capital across the economy. But if the Code
does not have teeth, then it may not deter erring promoters. Moreover, the Code when notified and enforced may
not be fully complied with for the next two to five years. That the Code will enable economic growth and efficient
capital flows come back is anybody’s guess, especially if there are external shocks (e.g., another financial crisis,
another war) that bring about further deterioration.

One wonders the “morality” of borrowing indiscriminately, of over-leveraged companies, of banks trying to
feed the debt-ridden business groups, of politically pressured public sector bank loans to the floundering companies,
and the morality of rating agencies that continue to rate such companies with investment grade (i.e., BBB) and
above. This is the market turbulent challenge of corporate morality today; this is the nightmare of corporate ethics.
Most Western countries and economies sweeten the cost of borrowing. This is bad economic idea; it is also
ethically and morally questionable. It is bad intersection of corporate morality and political morality. Despite the
fact that the world is mired with debt, governments make borrowing costs tax deductible, cheapening debt and
encouraging borrowers to borrow more. In contrast, the dividend payments and retained earnings that flow to
shareholders are taxed in most places (See “A Senseless Subsidy,” The Economist, May 16, 2015, p. 15).

References:
Bad Debt or Death Bed? Several Companies are nearly dead, with their Equity almost Wiped out; there is little Chance they will
survive but for their Banker’s Largesse. (2015, December 11), Business Outlook, 26-40.
Briefing Ending the Debt Addiction: A Senseless Subsidy. (May 16, 2015), The Economist, 15-18.
Free Exchange: Miraculous Conversion. (May 16, 2015), The Economist, 63.
Kripalani, J., & Gupta, J. K. (2015, December 11). Ever-greening of Loans is keeping several Over-leveraged Companies alive.
What could be the Endgame? Business Outlook, 36-40.
Mahalakshmi, M. (2015, December 11). House of Cards. Editor’s Note, Business Outlook, 5.
The Great Distortion: A Dangerous Flaw at the Heart of the World Economy. (2015, May 16-22), The Economist, 7, 15-18, 63.

Ethical Concerns
1. Discuss the morality of the 12 corporations listed by RBI in 2016 that borrowed indiscriminately.
2. Discuss the morality of these over-leveraged companies that have neared insolvency or bankruptcy.
3. Discuss the morality of rating agencies that continue to rate failing companies with positive investment grade (i.e.,
BBB and above).
4. Discuss the ethics of public sector banks (like SBI, PNB, BOM, IOB) trying to feed debt-ridden business groups.
5. Discuss the ethics of politically pressured public sector bank loans to these floundering companies.
6. Study the ethics of creditor banks (e.g., SBI and other public sector banks) referring sick steel companies to the
National Company Law Tribunal (NCLT) for further action under the Insolvency and Bankruptcy Code (IBC).
7. Study the ethics of NCLT in dealing with the debt-pressed units referred by RBI-authorized banks for further action
under IBC.
8. In the absence of a clear cut Indian Bankruptcy Law and professional bankruptcy attorneys in India to what extent
would the action of NCLT be legally effective, ethical and moral?
9. To what extent would this referral by banks to NCLT lead the Indian steel sector to emerge strong in the long run?

4
Case 6.3: Why does India need a Bankruptcy Law?
In the context of debt-over-leveraged companies (as illustrated in cases 6.1 and 6.2), India needs desperately a
bankruptcy law, and hence, bankruptcy courts and bankruptcy attorneys universally applicable and deployable
throughout the country and all its states.
The Rajya Sabha (House of Lords!) on Wednesday, May 11, 2016, passed the Insolvency and Bankruptcy Code
2016, a vital reform that will make it much easier to do business in India. Once the President signs the legislation,
India will have a new bankruptcy law that will ensure time-bound settlement of insolvency, enable faster turnaround of
businesses and create a database of serial defaulters. The bill, which received the Rajya Sabha’s nod on Wednesday,
was passed by the Lok Sabha (House of Commons!) last week. A majority of the parties in both Houses supported this
legislation after all the amendments proposed by a joint parliamentary committee were accepted by the government.

The Insolvency and Bankruptcy Code 2016 (IBC 2016) is the bankruptcy law of India which seeks to consolidate
the existing framework by creating a single law for insolvency and bankruptcy. The IBC was introduced in Lok Sabha
in December 2015. It was passed by Lok Sabha on 5 May 2016. The Code received the assent of the President of India
on 28 May 2016. Certain provisions of the Act have come into force from 5 August and 19 August 2016.

The Code seeks to repeal the Presidency Towns Insolvency Act, 1909 and Sick Industrial Companies (Special
Provisions) Repeal Act, 2003, among others. The Code outlines separate insolvency resolution processes for
individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors. A
maximum time limit, for completion of the insolvency resolution process has been set for corporates and individuals.
For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of
the creditors agree. For startups (other than partnership firms), small companies and other companies (with asset less
than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended
by 45 days.

The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the
country and regulate the entities registered under it. The Board will have 10 members, including representatives from
the Ministries of Finance and Law, and the Reserve Bank of India. The insolvency process will be managed by
licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.

The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and
companies: (i) the National Company Law Tribunal (NCLT) for Companies and Limited Liability Partnership firms;
and (ii) the Debt Recovery Tribunal (DRT) for individuals and partnerships

The bill proposes the creation of a new class of insolvency professionals that will specialize in helping sick
companies. It also provides for creation of information utilities that will collate all information about debtors to prevent
serial defaulters from misusing the system. The bill proposes to set up the Insolvency and Bankruptcy Board of India to
act as a regulator of these utilities and professionals. It also proposes to use the existing infrastructure of National
Company Law Tribunals and Debt Recovery Tribunals to address corporate insolvency and individual insolvency,
respectively.

The new code will replace existing bankruptcy laws and cover individuals, companies, limited liability
partnerships and partnership firms. It will amend laws including the Companies Act to become the overarching
legislation to deal with corporate insolvency. It will also help creditors recover loans faster. Regarding resolving
insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve a case of
bankruptcy in India, according to the World Bank. The code seeks to reduce this time to less than a year.

Incidentally, the bankruptcy law provides for even suppliers to initiate insolvency proceedings. If no resolution
is arrived at within 180 to 270 days, the assets have to be auctioned off to recover dues.

The move is also expected to help India move up from its current rank of 130 in the World Bank’s ease of doing
business index, since all reforms undertaken by 31 May are incorporated in the next ranking. But implementation will
remain the key, analysts point out, as the new code is presaged on the creation of a complementary eco-system
including insolvency professionals, information utilities and a bankruptcy regulator.

5
 Stressed assets, i.e. bad loans and restructured loans, totaled 20% of the total loans in the system, according to
the Economic Survey 2017. Many of these are long-term loans from banks which depend mostly on short-term
funds. The banks, also blamed for ignoring the need to match asset and liability, may have to halt long-term loans,
and wherever they do, may have to sell them off quickly.

Ashwin Bishnoi, a partner at law firm Khaitan and Co., said the insolvency code proposes a vast change and its
implementation will take time. “The code has set the framework for bringing in changes in the debt recovery tribunals,”
he said adding that India has many professionals who can easily step into the role of insolvency professionals.

The bankruptcy code has provisions to address cross-border insolvency through bilateral agreements with other
countries. It also proposes shorter, aggressive time frames for every step in the insolvency process - right from filing a
bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals, National
Company Law Tribunals and courts.

The code assumes the existence of institutional infrastructure like information utilities and insolvency
professionals, information repositories like stock depositories; a new regulator, without the failings of existing
regulators; and a high-quality adjudication infrastructure. Unless these four pillars are in place, the Code will fail
because of the huge dependencies faced in the debt recovery tribunals.

To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from
the provident fund, the pension fund and gratuity fund should not be included in the estate of the bankrupt company or
individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a
company, ahead of secured creditors.

Responding to the debate in Rajya Sabha, Minister of State for Finance, Jayant Sinha said the government will try
to go through a stage-wise process to ensure smooth implementation, “notifying provisions as and when the necessary
infrastructure is ready”.

Along with the proposed changes in India’s two debt recovery and enforcement laws, it will be critical in resolving
India’s bad debt problem, which has crippled bank lending.

Bankruptcy applications will now have to be filed within three months; earlier, it was six months. There are also
provisions that disqualify anyone declared bankrupt from holding public office, thereby ensuring that politicians and
government officials cannot hold any public office if declared bankrupt.

Sinha said the code seeks to protect interest of workers who are the most vulnerable. “It enables workmen to
initiate the insolvency process and they will be first in line to get the proceeds of liquidation,” he said.

After a public consultation process and recommendations from a joint committee of Parliament, both houses of
Parliament have now passed the Insolvency and Bankruptcy Code, 2016 (The Code). While the legislation of the
Code is a historical development for economic reforms in India, its effect will be seen in due course when the
institutional infrastructure and implementing rules as envisaged under the Code are formed.

References:
Legislative Brief of the Code (PDF). (2016, August 18). PRS India. Retrieved from
http://www.shanlaxjournals.in/pdf/COM/V5N3/COM_V5_N3_010.pdf
Lok Sabha passes bill to fast track debt recovery. (2016, August 2), The Economic Times.
India Overhauls Century-Old Bankruptcy Laws in Win for Modi. (2016, May 11), Bloomberg.
India: The Insolvency And Bankruptcy Code, 2016 - Key Highlights. (2016, May 18), Trilegal.
Insolvency and Bankruptcy Code (PDF). (2016, May), Gazette of India. Retrieved from
http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf.
Notification (PDF). E-Gazette. (2016, August 22), Gazette of India. Retrieved from http://www.cbec.gov.in/resources//htdocs-
cbec/customs/cs-act/notifications/notfns-2016/cs-nt2016/csnt113-2016.pdf.
Vikraman, Shaji (2015, November 5). Explaining the Bankruptcy law - and the need to have one. Indian Express.

6
Ethical Concerns
1. Discuss the morality of not having a formal bankruptcy Law in India.
2. Discuss the morality of over-leveraged companies that have neared insolvency or bankruptcy and who yet lobby
against Bankruptcy Laws for India.
3. Discuss the legality, ethicality, morality and spirituality of NCLT or IBC as substituting a formal bankruptcy
Law for India.
4. If formal bankruptcy law in India can improve the index of safety and security of doing business in India, is
India morally obliged to provide such security and safety to foreign investors (e.g., NRI, FII, MNCs)? Discuss.
5. Study the ethics of politically pressurized loans of commercial public sector banks to already over-leveraged
companies like those 12 referred by RBI to NCLT.
6. In the absence of a clear cut Indian Bankruptcy Law and professional bankruptcy attorneys in India to what
extent would the action of NCLT and INC be legally effective, ethical and moral in the long run?
7. To what extent would this referral by RBI to NCLT lead the Indian infrastructure (e.g., oil, gas, steel, energy)
companies to emerge strong and self-dependent in the long run? Discuss.

Ethics of Promoter Dominance in Modern Corporations

Currently in the USA, promoters can legally invest in as many shares as they want in a firm.
Moreover, the law entitles the promoters to have one representative on the board for every 17 percent
shares that they hold in that firm. As it often happens, if a group of promoters with vested interests buys
17% and more of shares, then each 17% share entitles them one board membership. Hence, if they
collectively owned a total 68% or 85%, then they can control the company management with four or five
members on the board, and that can enable them to dictate managerial policy for the company as a whole.
If promoters are primarily interested in getting high and immediate returns on their invested capital, then
that can constrain long term new product and new market development policies of the managers. This
empowers the promoters over the traditional customer-employee based management system, whereby the
promoter can force the management to increase the return on their investment by whatsoever means it
takes. That is, the promoters could enforce a dubious ethical system which affirms that means justify
ends, and not vice versa.

This also may lead to the culture of allotting ESOPs to the top and mid-level managers. This can be
painfully detrimental to the long term future of the firm, because the management tends to get more
concerned about maximizing profits, increasing net worth and enhancing share prices to meet targets.
They can completely ignore “ends” in the form of vision and missions, values, goals and objectives and
even jeopardize long run growth and profitability of the firm. This phenomenon will also jeopardize the
contribution and responsibility of the corporation to the country in terms of new product and services
development, employment, CSR, ecology and sustainability. Moreover, what happens in today’s
corporate world is that whatever target gets achieved becomes a standard, and the next quarter’s targets
are made more stringent. This leads to a tendency amongst the employees to manipulate cash flows,
inflate earnings, to deflate debts, and thereby forging profits, showing better return on assets, higher net
worth of the firm, all of which can increase share prices and market capitalization.

This is ethically and morally wrong. And this is happening due to the fact that there is a lot of
pressure on the employees from the board of directors. The directors’ panel, as we have discussed above
under Case 6.3, consists of the representatives of the Investment Banking firms in majority. They have
nothing to do with the vision and mission of the firm. Their sole target lies in maximizing the returns on
the investment of their respective investment banks. They do not care whether the company is following
an ethical path in doing so or not. The company management tries to bypass through the loopholes in the
laws and the legislations to reach their short term targets. Or else, the managers who want to be ethically
correct in their approach leave the corporate and move to startups where they receive a handsome pay
package which is in equivalent terms with that of the corporates, and, apart from this, they get a whole lot

7
of independence and autonomy in the decision making process. Thus, they get a better work environment
in the startups rather than the corporates. A top level manager leaving a company is not a good sign for
the firm as it leads to reputational loss for the company and its share prices can see a downhill turn if the
news of a rift between the employees and the board of directors reaches the market.

In the long run, this kind of approach is really very unhealthy for the firm as we can take example
from the cases of Enron and Satyam where in order to increase share prices, the processes and the cash
flows were manipulated so as to mislead the market in increasing the net worth of the companies. But
what happened at the end is tragic - both these companies went bankrupt and the respective chairmen
were under imprisonment. So basically in the long run it leads to a dead end, where the person involved,
the firm, the investors and the millions of people who invest in the firm’s shares have nowhere to go.

Such scenarios must be avoided. Playing with the lifetime savings of so many people is not at all
justified. It might be legally acceptable at that particular juncture of time, but, deep within the conscience
a person knows that whatever he is doing is wrong on his part. The best question one can ask to himself at
that point of time is: would I do the same thing if my family members were at the receiving end of my
deeds? Then the concerned person will take a morally, ethically and spiritually correct decision - he will
do something which he ought to do. He will not just get away with something that he should do. This kind
of critical, visual and moral based thinking will help a person in taking the right decision at the right time,
at the right place, and involving the right reasons and principles.

The legal system in any country as we know is mostly reactive and retroactive. Laws are made once
a wrong deed has already happened. It is almost impossible to pre-empt the effects of an action and
making a law to prevent it. So we cannot blame our legislatures and law-makers for not coming up with
some proactive laws and legislations well before the crime or the scam happens. It will be like a bonus if
the senators or the MPs come up with laws which would prevent wrong doings. But as a person, we all
must be aware that whatever we are doing is ethically and morally correct or not, and how many people
will be affected by this one decision made by me. If we reach at a conclusion that a lot of people will be at
the losing end due to our action, it is our moral responsibility not to take that decision or action. If we fail
to do so, we must be rest assured that one day or the other, a law will be made which would make our
actions illegal and that we would be convicted and prosecuted at that point of time, as in the case of Enron
and Satyam.

The Morality of Promoter Dominance

Looking into the long term economic effect of this share concentration within top promoters in
investment banking firms, and its ill-effects on the thinking, ethicality and morality of the firm’s
managers, the thinking process of the employees will turn more short-term based and there is a high
probability that their decision making may turn myopic with long-term benefits taking a severe backlash.
Other unfortunate consequences of this phenomenon could be that there will be scarcity of visionaries in
the corporate world. The growth of the corporates will become directionless due to the lack of visionaries
and there will be a downfall in the valuation of the corporates. And once the devaluation starts for the
corporates, there will be a high probability of attrition among the employees as they would be unsure
about the future perspectives of their careers. This will lead to further degradation of the firm’s reputation
which in turn will lead to further devaluation of the share prices.

Thus, it is a vicious circle where the companies are getting trapped into, just due to a set of immoral
practices of making faster money. Moreover, this kind of management system will encourage more
practices like those of Enron and Satyam, and more and more managers will try to find loopholes and
shortcuts in the legal system to maximize profits. This will lead to a number of immoral practices

8
growing in the corporate and one day or the other some whistle-blower’s conscience will wake up and
would bring the firm shattering to the ground. This would not only pose a threat to the individual firms
only, but to the nation’s economy on the whole as well. The failure of one company can lead to the
downfall of an entire economy and its bond value, the credit ratings of the nation as in the case of Brazil.
Same was evident in the case of the Volkswagen scandal in which one bad call by the company’s
management not only destroyed the reputation of the company, but also initiated a downhill turn for the
finances of the company. Moreover, the reputation of Germany which is known for its extremely
advanced automotive engineering and technology got a bad hit and the goodwill of other German
carmakers like BMW, Audi and Mercedes was also impaired. Thus Germany which was the savior of the
European Union was all of a sudden finding itself in a situation of crisis. Therefore, a set of morally
incorrect judgments can not only be devastating for the company, it can lead to the downfall of an entire
nation’s economy.
Share market concentration in the hands of a few promoter investors might be legally correct at this
point of time. But it is morally, ethically and spiritually wrong. And taking into consideration the
competition and the profit maximization goals, there is a high probability that people will resort to much
worse practices in order to retain their jobs or get promotions. This can even lead to the downfall of great
economies or at-least dent the growth pace of a developing economy. Hence, we predict that the
government will come up with legislations that will fix the upper cap of shareholding in a firm as
suggested by Dr. Raghuram Rajan, the then governor of the Reserve Bank of India - he has asked for an
upper limit of 20% shareholding by a single promoter in a corporate firm. Thus, given this legislation,
promoter concentration could be illegal as well in India.
As a first step in ethical analysis, let us study the undergirding distribution of wealth in the world.
Exhibits 6.1 and 6.2 record the distributions.

[Exhibit 6.1 about here].

[Exhibit 6.2 about here].

Exhibit 6.1: Wealth Distribution by Type of Asset (in 2007)

[Source Wolff 2009]
Investment Asset Type Top 1% Next 9% Bottom 90%

Business Equity 62.4% 30.9% 6.7%

Financial Securities 60.6% 37.9% 1.5%
Trusts 38.9% 40.5% 20.6%
Stocks and Mutual Funds 38.3% 42.9% 18.8%
Non-Home Real Estate 28.3% 48.6% 23.1%
Total Investment Assets 49.7% 38.1% 12.2%

Exhibit 6.2: Investment by Deposits, Pension Accounts, Liquid Assets, Housing, and
Debt (Data: 2007: Source: Wolff 2009)
Investment Asset Type Top 1% Next 9% Bottom 90%

Deposits 20.2% 37.5% 42,3%

Pension Accounts 14.4% 44.8% 40.8%
Life Insurance 22.0% 32.9% 45.1%
Principal Residence 9.4% 29.2% 61.5%
Total Other Assets 12.0% 33.8% 54,2%
Debt 5.4% 21.3% 73.4%

9
 Given the uneven possession of financial wealth in the world as seen from these Exhibits, the
promoter concentration of investment share of the stock market seems to be a logical consequence and
economically consistent. But how did the former (i.e., financial wealth possession inequality) come
about? From income inequality, from social inequality, or from economic inequality? All three sources
of inequality are unjust, even though some form of income inequality seems to be justified given
individual different skill abilities and intellectual capacities for gainful work and differentiated incomes.
Hence, currently, almost everywhere in the world, ownership and investment by the big firms remain the
single most popular way of financing new ideas.

Share market concentration within the hands of a few promoter investors can be advantageous as
well as disadvantageous, legally, ethically and morally:

• Legally, it is the choice of the promoters of a particular corporation to decide to hold shares within a
few hands or release an offering and go public. Thus justification in legal terms for concentration of
shares in a few hands is not really a concern. The role of justifying in terms of legality comes when
the firm has violated some laws that have led to the firm as a whole coming under the scanner. It is
not uncommon, especially for private firms, to fiddle with their balance sheets and P&L statements
to paint a bright and colorful picture in place of gloomy scenery. The case of Satyam, where the
owners themselves fudged the books to maintain the investor confidence is a perfect example of a
firm cheating with its investors. The long-term unintended consequences can be severe in case one
violates the legal terms the firm is bound to follow. Firms have ended up paying hefty fines in such
cases and even faced closures and bankruptcy.

• Ethically, the outcome of having few promoters investors depends upon how aligned their thinking
is with what the firm plans to achieve and what principles it plans to follow. Since the power of
critical decision making lies with these few people, their understanding of the firm’s goals and their
thinking process for arriving at the implication of their decisions affects the whole organization.
Ethical standards often define organizations, examples of which can be, from a single sector, the
community builder TATA Steel and the profit maximizing Jindal Steel. In terms of the future, firms
with weak ethical grounds might be successful and profitable in the short run, since they are quickly
able to change and adapt to profit maximizing strategies without thinking the long term
implications of their actions. On the other hand, firms with a strong focus on building and adhering
to strong ethical standards will always, despite small periodic losses, ensure that the firm has a long
future ahead of it and will continue to reinvent itself as per the changing times.

• Morally, the fate of an organization lies in the hands of a chosen few investors, and this is wrong.
The organization consists of lots of individuals and it is of huge importance for the firm to
functional normally, that the goals of an organization and their thinking capability match with what
the firm plans to do. Thus resting power with a few can be dangerous where the investors sway from
their paths and start fudging with the image brand. An example of this can be again, the Satyam
debacle, where the choices of a few individuals led to the closing of the entire organization.

Collectively analyzing these areas, one can look at the unintended economic consequences that such
a firm has. It might look easy for a firm to break away from these standards and earn a quick profit, but it
is only those strong organizations that foresee the loss about to happen, prepare themselves to steer
comfortably in such conditions. Severe unintended consequences can be the plea by a firm to accept
certain ‘face saving’ details resulting in a legal trial of the firm ultimately leading to closure.

The Morality of Tax Subsidy and Debt Distortion

A vast distortion in the world economy today is wholly man-made. A major distortion in this regard
is tax subsidy that governments give to debt. Tax breaks for debt have two principal forms: a) interest
payments on home mortgage debt are tax deductible for personal tax purposes (this in USA, and most

10
Western European countries such as Belgium, Italy, Netherlands, Spain, Switzerland and all four Nordic
states of Denmark, Norway, Sweden and Finland); b) interest payments of debt-holders are tax deductible
from corporate taxable earnings (and this holds for corporate firms across the world). For instance, most
rich governments of the world allow their citizens to deduct the interest payments on home mortgages
from their personal taxable revenue. This subsidized cost of debt enables people to buy more property
than they can otherwise afford, raising house prices and encouraging over-investment in real estate,
instead of in assets that create employment, growth and wealth. The tax benefits are largely reaped by the
rich, thus worsening income inequality – this is a moral issue. Corporate financial decisions, accordingly,
are often motivated by maximizing tax relief on debt instead of the needs of the underlying business.
Almost all countries allow firms to write-off interest payments on borrowings against taxable earnings
(see “The Great Distortion,” The Economist, May 16, 2015, p. 7).

This cost of debt subsidy is immense. In 2007, the annual value of the foregone tax revenues in
Europe was around 3% of GDP ($510 billion), and in America almost 5% of GDP ($725 billion). That is,
these governments were spending more on cheapening the cost of debt than on defense. In America, with
interest rates close to zero, USA-led debt subsidy cost the federal government over 2% of GDP – as much
as it spends on all its policies to help the poor (see The Economist, May 16-22, 2015, p. 15-18).

Advantages of Debt

No doubt, debt has many wonderful qualities, allowing firms to invest and individuals to benefit
today from tomorrow’s earnings. Debt serves many useful economic functions. It allows money to travel
through space, time and social divides. A firm that is short of cash but which has good prospects can
raise funds and repay them in time. People who have surplus cash can lend to those who have less but
great use for it. Corporate executives like debt because it allows them to raise funds without losing
control. Savers like to own bonds or make loans to banks because of safe, steady and sure income
streams of interest payments. If borrowers get into trouble, creditors have first claim on their assets.
Banks like debt for several reasons: a) it is cheap compared to equity since bank’s creditors charge
relatively less, given that they are protected if the bank fails; b) as said before, tax breaks for interest
payments make debt cheaper and more attractive; c) issuing debt, unlike equity, does not entail any
dilution of control. On the other hand, governments prefer equity since investors can absorb losses during
downturns and thus ward off bailouts.

Logically there is no limit to the amount of debt as long as cost of debt is significantly lower than cost
of equity. In this sense, one man’s debts are another man’s assets. That is, at the global level debts
should cancel out to zero. The flip side of debt is credit, consumer or trade credit. Credit is the vital fluid
and sign of a strong commerce. It has excited credit unions, stimulated manufacturing, and expanded
businesses beyond traditional horizons. 4Without debt or borrowing, national infrastructure of energy
production and transmission - roads, rail, air transport, and shipping - would not be possible for
developing and emerging economies.

Debt is the magic ingredient that makes modern finance possible. In general, American investment
banks and financial institutions engage in producing ingenious instruments to drum up business. For
instance, risky cash flows can be neatly packaged into apparently steady payments, making it deceptively
attractive to customers. For example, arbitrage (exploiting differences in price between similar assets,
e.g., foreign hard currencies) is possible and profitable when magnified by leverage. By using layers of
debt with different seniority, risk can be transformed in almost infinite ways.

Disadvantages of Debt

But beyond a point, debt is bad for the economy. Excess of debt hurts growth in many ways: in the

11
rich worlds new debts do not finance new productive assets like factories, inventions, innovations and
technology; they either pay off debts or debt obligations (called “overhanging") or are used to restructure
or reshuffle claims on existing debts, which, in turn, is done by a complicated financial industry to
administer them and suck most of the new debts, says Stephen Cecchetti, Brandeis International Business
school, formerly an executive in the Bank of International Settlements (BIS). Debt also hurts growth by
creating fragility: of defaults among households burdened with heavy mortgage payments, and among
banks that accumulate non-productive assets (NPs) that they must sell at a discount to be operational.

But in the real world, there is a strong bias for debt. The reason: tax breaks on debt payments. That
is, government tax subsidies favor debt. In fact, tax subsidies have tilted the economy in a wrong
direction – they have created a financial system that is prone to crises and biased against productive
investments. Economies biased towards debt are more prone to crises since debt imposes a rigid regime
of amortization and interest payment obligations, whereas equity is expressly designed to spread risk and
losses onto investors. They have reduced economic growth. Subsidies that make borrowing irresistible
need to be discouraged and even phased out (as Britain did in the 1990s). Canada and Britain stopped tax
subsidies or breaks long back.

China has saved a ton over the years in dollars. In theory, China could invest its dollars buying US
multinational shares. Had it done so, China could have easily owned a fifth of the S&P 500 index and
could have had de facto control of corporate America, a politically dangerous position. So China and its
exporting firms bought safer and less controversial debt – during 2004-2008, over 75% of foreign
ownership was in the form of debt, most of that in mortgage and corporate bonds (see The Economist,
May 16, 2015, p.16).

The dotcom crash in 2000-2002 caused losses to shareholders worth $4 trillion and a mild recession.
Satyam was deeply affected by the dotcom crash that eventually led to its bankruptcy Some 18 global
mega investment banks suffered a total loss of $2 trillion in market capitalization since the financial crisis
of September 2008. A more neutral tax system would encourage firms to sell more equity and carry less
debt, as also lead to more efficient choices by savers and lenders. In rich countries today more than 60%
of bank lending is for mortgages. Without a tax break, people would borrow less to buy houses, and
banks would lend less against property. A more neutral tax policy would encourage investment in new
ideas and businesses that would enhance productivity thus boosting growth (see The Economist, May 16-
22, 2015, p. 7).

A New Breed of Hybrid Financial Instruments

Newly created hybrid products currently floating in the financial markets are called contingent
convertible bonds (“Cocos”) that turn debt into equity when a bank is struggling. Coco issuance has
soared since 2010, as investment banks keep regulators happy by bolstering their ability to withstand
losses. Apparently, these fancy bonds or Cocos enjoy the upside of debt in good times, but provide a
cushion during a crisis. Cocos usually convert when regulators decree that a bank’s capital has fallen
below some threshold during a crisis peak. But this is arbitrary and puts regulators in a bind. When and
how does the regulator identify a crisis serious enough for a Coco issuance? Moreover, when the
regulator does announce that a bank is in crisis, it may throw the bank into panic. A Coco conversion
imposes sudden losses on bondholders, who find themselves owning shares much less in value than the
bonds that spawned them. That is, Cocos support corporations and banks, but impoverish common people
as bond holders – a very inequitable proposition to begin with. If the bondholders are themselves in
distress, those losses can reverberate around the financial system (see The Economist, May 16, 2015, p.
63).

12
 To overcome these problems two finance economists, Paul Klemperer of Oxford University and
Jeremy Bulow of Stanford University, have devised a new instrument called an Equity Recourse Note
(ERN). Like Coco, ERN functions as debt in normal times. But its trigger for the conversion is the
bank’s share price, rather than a regulatory call. For instance, when the share price falls, say, to 25% of
its initial value, the bank can make repayments on the bond with new shares rather than with cash.
Suppose a bank issues a $50 million ERN when its shares are worth $100 each, the ERN would pay
interest like a normal bond at that share price. When the share price hits $25, the bank could issue new
shares at $25 each. But in order to redeem its $50 million ERN, the bank would have to issue 2 million
shares and sell them at $25 each, even if the price per share might have gone down further by that time.
But ERNs have not been tested yet. They seem to favor the distressed bank and not the innocent
bondholder – a serious moral issue again. ERNs best work for firms with debt-overhang – that is, the
banks divert new cash to pay off debts rather than fund new investments (see The Economist, May 16,
2015, p. 63).

For instance, following Case 6.1, the problem of overleveraged corporate debt cannot be seen from
the CEO’s or CFO’s individual perspectives. Debt must be understood, perceived and analyzed from
multiple viewpoints and functional platforms such as finance, accounting, investment, marketing, human
resources development (HRD), R&D, venture capital, innovation, and new product development (NPD).
On the other hand, if debt is seen only from the view of clearing critical short-term liabilities (such as
payroll and taxes), or if debt is primarily raised for servicing existing debt burdens (such as interest and
amortization), then “overhanging” debt becomes unproductive but cumulative; it spells chronic
indebtedness. Instead, if debt finances HRD and R&D, creativity and innovation, new products and
services development, new market entry and penetration, new joint ventures or acquisitions, and the like,
then debt can leverage quality and productivity, employment and HRD, ecology and sustainability,
market presence, and hence, market capitalization, corporate growth and profitability (Mascarenhas,
Wright, & Amin, 2013). In other words, debt becomes a positive force for boosting one’s net-worth,
brand image and equity. This is corporate ethics and morals – you give back to society that finances your
operations. This is corporate legitimacy and justice.

The process of cleaning up bad loans from the system received an impetus from the lenders on
Thursday, June 22, 2017, with banking behemoth State Bank of India being authorized to refer Essar
Steel, Bhushan Steel and Electro steel to the bankruptcy court, which may eventually lead to the merger
of some of these firms to bring them back to health. With SBI set to take lead in the process and act as a
main negotiator, the position of banks has been strengthened.

Restructuring of debt or a merger of the companies could be in offing. The process would involve
infusion of new capital into the company and the lenders could respond with easier loan terms. The move
will lead to the steel sector emerging strong in the long run, Jayanta Roy, senior vice-president at ICRA
told ET.

Insolvency proceedings for stressed accounts may lead to consolidation in the steel sector. As a
result, stronger steel players with healthy financial profile would have a chance to raise their market share
by bidding for these assets at attractive valuations, said Roy. Subsequently, the steel sector, facing a
weak demand and an overcapacity situation would benefit in the long run, Roy added.

Understanding Debt from Multiple Viewpoints

For instance, following Cases 6.1and 6.2, the problem of overleveraged corporate debt cannot be
seen from the CEO’s or CFO’s individual perspectives. Debt must be understood, perceived and
analyzed from multiple viewpoints and functional platforms such as finance, accounting, investment,
marketing, human resources development (HRD), R&D, venture capital, innovation, and new product

13
development (NPD). On the other hand, if debt is seen only from the view of debt, for instance, to clear
existing debt burdens (such as interest and amortization), then “overhanging” debt is unproductive but
cumulative; it spells chronic indebtedness. Instead, if debt finances HRD and R&D, creativity and
innovation, new products and services development, new market entry and penetration, new joint ventures
or acquisitions, and the like, then debt can leverage quality and productivity, ecology and sustainability,
market presence, and hence, market capitalization, corporate growth and profitability (Mascarenhas,
Wright, & Amin, 2013). In other words, debt becomes a positive force for boosting one’s net-worth,
brand image and equity. This is corporate ethics and morals – you give back to society that finances your
operations. This is corporate legitimacy and justice.

Bankruptcy in the legal sense occurs when the firm cannot pay its bills or when its liabilities exceed
the fair market value of its assets. In either of these situations, a firm may be declared legally bankrupt.
However, creditors generally attempt to avoid forcing a firm into bankruptcy if it appears to have
opportunities for future success. Edward Altman (1968) estimated the impact of five financial ratios on
the probability that a firm will declare bankruptcy.i Most external observers of a firm rely on these
financial indicators to predict decline and bankruptcy.

The failure of businesses impacts employees, shareholders, lenders, and the broader economy. In a
country like India particularly — because of delays in making decisions on the viability of businesses,
tactics employed by company promoters to delay reorganization or attempts to sell off assets, changes of
management or litigation that goes on and on— the drag on new business units, jobs, income generation
and economic growth can be significant.

India does have some laws — including one on Securitization and Enforcement of Security — and
other mechanisms, like Corporate Debt Restructuring or CDR, to address the problem of insolvency of
firms. But the fact is some of these laws, such as the Sick Industrial Companies Act or SICA, have not
worked because of inefficient enforcement and court delays.

Like in the West, a modern law with a focus on speedy closure will help firms on the brink to be
either restructured or sold off with limited pain for all involved. In some cases, if this is done swiftly,
assets can be put to good use and the firm can be revived. Delaying a decision on whether to shutter a
firm or to try to revive it causes destruction of value for all involved. Indian policymakers have
recognized this. For banks or lenders, the money recovered can be lent again, promoting efficient
allocation of resources, besides development of financial markets such as a bond market with clarity on
repayment for debtors. An efficient and swift insolvency regime ensures greater availability of credit or
funds for businesses by freeing up capital, and is thought to boost innovation and productivity.
Hopefully, the current regime of NCLT and IBC will do just this.

Ethics of Financing Decisions such as EBITDA

EBITDA is one indicator of a company's financial performance and is used as a proxy for the earning
potential of a business, although doing so has its drawbacks. Further, EBITDA strips out the cost of debt
capital and its tax effects by adding back interest and taxes to earnings. EBITDA = Operating Profit +
Depreciation Expense + Amortization Expense; hence, it is essentially net income with interest, taxes,
depreciation and amortization added back to it. EBITDA can be used to analyze and compare profitability
between companies and industries because it eliminates the effects of financing and accounting decisions.
EBITDA is often used in valuation ratios and compared to enterprise value and revenue.ii Hence, in
general, EBITDA overstates the valuation of a company.

EBITDA is calculated by taking net income (= gross profit of earnings after product costs and

14
operating costs are deducted) and adding interest, taxes, depreciation and amortization expenses back to
it. EBITDA is generally used to analyze a company's operating profitability before non-operating
expenses (such as interest and "other" non-core expenses) and non-cash charges (depreciation and
amortization). A common misconception is that EBITDA represents cash earnings. EBITDA is a good
metric to evaluate profitability but not cash flow. EBITDA also leaves out the cash required to fund
working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA
is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it is
important that investors also focus on other performance measures to make sure the company is not trying
to hide something with EBITDA.

The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest payments.
ICR is measured by EBIT/Debt: that is, earnings before interest and taxes (EBIT) for a time period, often
one year, divided by interest expenses for the same time period. The interest coverage ratio is a measure
of the number of times a company could make the interest payments on its debt with its EBIT. It
determines how easily a company can pay interest expenses on outstanding debt.

Debt/EBITDA is a measure of a company's ability to pay off its incurred debt. The ratio gives the
investor the approximate amount of time that would be needed to pay off all debt, ignoring the factors of
interest, taxes, depreciation and amortization. Commonly used by credit rating agencies to assess a
company's probability of defaulting on issued debt, a high Debt/EBITDA ratio suggests that a firm may
not be able to service its debt in an appropriate manner and warrants a lowered credit rating. For instance,
the Essar Group would have taken 11.1 years to clear all its debt in FY 2014, while it would have taken
only 8.5 years in FY 2015. The Lanco Group would have taken 24.6 years to pay all its debt in FY 2014,
while it would have taken just 23.1 years in FY 2015. The worst offender is the Videocon Group: it would
have taken an eternity of 285.5 years to clear all its debt in FY 2014, while the corresponding figure for
FY 2015 was not meaningful (NM) as it could have been either negative (if EBITDA is negative) or the
debt could have been too large to make the ratio interpretable.

Other things being equal, a declining debt/EBITDA ratio is better than an increasing one because it
implies the company is paying off its debt and/or growing earnings. Likewise, an increasing
debt/EBITDA ratio means the company is increasing debt more than earnings. Some industries are more
capital intensive than others, so companies should only be compared against other companies in the same
industry.iii

Another leverage ratio useful in this regard is the Long Term Debt to Capitalization Ratio calculated
as: Long term debt / (Long term debt + Preferred Stock + Common Stock). The denominator (long term
debt, preferred stock and common stock) contribute as the total capital of the company. This ratio allows
the investors to figure out the total risk of investing in a particular business, which can be easily
determined by the long term debt to capitalization ratio. It also shows how financially strong the company
is. This formula helps in determining the financial risks that the company has taken. If the percentage is
higher, it means that the finance of the company mainly comes from the debt which can be quite risky and
is sometimes a reason for bankruptcy. The higher ratio percentage shows how weak the company is
financially. Similarly, a decrease in the long term debt to capitalization ratio would mean that there is an
increase in the stockholder’s equity.

A long term debt to capitalization ratio which is greater than 1.0 indicates that the business has more
debts than capital which is not a good thing for a business as it can lead to lots of financial problems,
especially the company getting bankrupt. A high long-term debt to capitalization ratio would indicate the
financial weakness of the firm and the debt would most likely increase the risk of the company. The
company should make sure that their long term debt to capitalization ratio is controlled so that their debt
is under control. An out of hand debt would create problems to the company as a whole. A lower long-

15
term debt to capitalization ratio indicates that the business is not having any major financial difficulties.

Lastly, the debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of entity's
equity and debt used to finance an entity's assets. This key financial ratio is also known as financial
leverage; it is used as a standard for judging a company's financial standing. It is also a measure of a
company's ability to repay its obligations. When examining the health of a company, it is critical to pay
attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors
rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually
prefer low debt-to-equity ratios because their interests are better protected in the event of a business
decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending
capital. A debt-to-equity ratio is calculated by taking the total liabilities and dividing it by the
shareholders' equity i.e., D/E = Liabilities/Equity. Both variables are shown on the balance sheet.iv

Bankruptcy and Credit

Bankruptcy assumes credit. It is premised on the issuance of credit. We live in a market society
where extensions of credit are woven into the fabric of our everyday life. We use water, heat, electricity,
phones, and other daily utilities on credit - the bills come only at the end of the payment period. Without
credit, most of us could not afford to pay for our education, our first home, our first new or used car, that
exotic vacation or that expensive wedding. Most people pay back every penny they owe, mostly due to self-
esteem than out of fear of collection agencies or the law. Others repay debt out of a feeling of moral
obligation. Creditors seldom have to resort to the legal process. Creditors, however, would not grant us
credit if there were no mechanism by which their rights over debtors could be safeguarded. Bankruptcy
Law is one such instrument.

However, not all of us are equally honest in paying off our debts or equally smart in managing them.
Those who fail to pay their creditors are most often not those who are dishonest but rather those who find
themselves in dire financial difficulties brought about by circumstances ranging from imprudence to bad
luck. Business bankruptcies usually result from a combination of poor business management and
unfavorable market conditions (Stanley & Girth, 1971). Thus, American law has always put limits on
creditors’ ability to use the legal process. Even though in the 17th century, English law frequently treated
debtors as miscreants who deserved whatever fate befell on them, the 17th and 18th century American
lawmakers tried to balance the rights of creditors and debtors. Laws ensuring creditors’ rights to recover
money owed to them were always tempered with the concern for the debtor’s procedural and substantive
rights (Baird, 2003, p. 30-31). In general, the English Bankruptcy Law is creditor-friendly, while the
American Bankruptcy Law is debtor-friendly.

Concluding Remarks
The concept of a company being a long lasting and a stable institution is ceasing to exist. We are
now witnessing the birth of a new Corporation which is no more a colossal monster moving in torpor but
is agile and hungry. The life of a company has also come down to 20 years from 61 years. The falling of
the old corporation brings forth many moral and ethical issues. The central issue of the rise of institutional
investors changes how a company is owned and exercises decision-making chain in a company. The
silver lining is that the fast paced change, constructive break-down and the new way of doing business
provides ample opportunities for the daring and the dreamers. The tall walls that were built and guarded
by the old organizations are crumbling to the ground and making way for the new age companies.

16
 Corporations invoke chapter 7 or chapter 11 bankruptcy protections for a variety of reasons many of
which do conform to doctrinal, legal or economic predictions. Firms may choose bankruptcy for 1)
forestalling law suits, 2) to force a compensation system in place of the tort system, 3) to eliminate union
contracts, 4) to reduce a court award in a corporate takeover battle, 5) to force the government to take
over responsibility for a pension plan or healthcare coverage promised to the retirees, 6) to avoid cleaning
up a toxic waste site, 7) to alter a bargaining relationship, or 8) revenge against a competitor (Delaney,
1992, p. 161). In general, organizations with larger resources, superior public relations and legal
knowledge, and access to legal and financial specialists are able to use bankruptcy more easily than
organizations or individuals without these resources.

Whatever might be the internal reasons of the individual debtor or the corporation in financial
distress, the bankruptcy law presumes the debtors are honest but improvident and unlucky. The
bankruptcy proceedings are meant to bring timely relief to the debtors so that they have a fresh start, the
creditors have justice meted out to them, and the nation and the world at large are better off from the
future earnings of the debtors.

Ethical and Moral Concerns:

1. Promoter dominance and interference can seriously paralyze otherwise able CEOs and Managing
Directors. Investigate the social and economic implications of this phenomenon.
2. Promoter dominance and interference can seriously paralyze otherwise able CEOs and Managing
Directors. Investigate the ethical implications of this phenomenon, especially in reference to skewed
distribution of wealth as described in Exhibits 6.1 and 6.2.
3. Promoter dominance and interference can seriously paralyze otherwise able CEOs and Managing
Directors. Investigate the moral implications of this phenomenon.
4. The central issue of the rise of dominating institutional investors changes how a company is owned and
the decision- making chain in a company. Investigate the legal, economic, social, ethical and moral
implications of this phenomenon.
5. The concept of a company being a durable, robust and stable institution is ceasing to exist. We are now
witnessing the birth of a new Corporation which is no more a colossal bastion but agile and hungry. The
life of a company has also come down to 20 years from 61 years. The falling of the old corporation brings
forth many moral and ethical issues. Discuss, investigate and corroborate this event with further facts
and figures.
6. How can you legally, ethically, morally and spiritually save the corporation from promoter dominance in
the coming years?

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End Notes
i
In a model prepared by Altman (1968), five basic ratios were utilized in the prediction of corporate bankruptcy. Analyzing
empirical evidence from firms that failed, Altman (1968) estimated the impact of five financial ratios on the probability that a
firm will declare bankruptcy with the following Z scores equation: Z = 1.2 x1 + 1.4 x2 + 3.3 x3 + 0.6 x4 + 1.0 x5 where x1 =
Working capital/total assets; x2 = Retained earnings/total assets; x3 = Earnings before Interest and Taxes (EBIT)/book value of
total debt; x4 = Market value of equity and preferred stock/book value of total debt (or total liabilities) and x5 = Sales/total assets.
Variable one is a liquidity ratio; variable two is a financial gearing ratio; variable three is a profitability ratio or earnings ability;
variable four is a size of a firm’s total equity to debt leverage ratio, a liability ratio or indirectly, a shareholder wealth creation metric,
and variable five is a revenue performance ratio. The model attaches highest weights to profitability ratio (x3) and lowest weight to
shareholder value variable(x4). According to Altman, a Z score below 1.8 indicates sure failure; a score of 1.8 to 2.99 indicates
probable non-failure, and a score of greater than 3.0 indicates assured corporate health or non-failure. This model predicts
bankruptcy with 95 percent accuracy one year prior to bankruptcy and with 72 percent accuracy two years prior to bankruptcy.

The Z scores, however, are not a good predictor for more than two years before bankruptcy. In this sense, the model is not very
useful, since banks and investors, using conventional methods, can predict bankruptcy or that a firm is headed for insolvency two
years before it actually happens. One could enhance predictability by including the standard deviations of these ratios in the Z
equation. [For further improvements on predictability of Z scores, see Altman, Haldeman and Narayanan (1977); Dambolona and
Khoury (1980)].
Because it is difficult to determine the market value of private companies (see x4), this model was designed for public
companies. Altman (1983: 108) believed that the market value of a firm is a more effective indicator of bankruptcy than the
commonly used ratio of net worth to total debt. Book value may be used when calculating the X score for privately held companies.
If book value is substituted for market value, however, then the X coefficients would be changed.

Altman (1983:120-24) suggested the following revised model: Z' = 0.717x1 + 0.847x2 + 3.107x3 + 0.420x4 + 0.998 x5. A
larger area of uncertainty is associated with Z' scores, which indicates bankruptcy at a value of 1.23 (compared to 1.81 for Z
scores) and non-bankruptcy at 2.90 (compared to 2.99 for Z scores). Z or Z' scores, weights and cut-off points, however, may
differ across countries, industries and markets, will change over time as economic conditions change, and accordingly, Z scores
will differ in their predictive capacity. Hence, great care must be exercised in interpreting and drawing conclusions from the Z
scores (Slatter & Lovett, 1999). For instance, Argenti and Taffler (1977) applied Altman’s (1968) model to UK financial data
and concluded that financial gearing and profitability measures were the most significant ratios in predicting failure, and that
liquidity ratios are of less importance. Currently, with the information of data and large computer processing capacity, Z scores
for industries have been developed (e.g., Syspass in the UK, S&P in the US).
ii
EBITDA is a non-GAAP (Generally Accepted Accounting Practices) measure that allows vast discretion as to what is and what
is not included in the calculation of gross profit. This also means that companies often change the items included in their
EBITDA calculation from one reporting period to the next. EBITDA first came into common use with leveraged buyouts in the
1980s, when it was used to indicate the ability of a company to service debt. Later, it became popular in industries with expensive
assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially
in the tech sector — even when it is not warranted (for more details see Investopedia).

iii
Financial analysts like the Debt/EBITDA ratio because it is easy to calculate. Debt can be found on the balance sheet and
EBITDA can be calculated from the income statement. The issue, however, is that it may not provide the most accurate measure
of earnings. More than earnings, analysts want to gauge the amount of cash available for debt repayment. Depreciation and
amortization are non-cash expenses that do not really impact cash flows, but interest can be a significant cash-paid expense for
some companies. Banks and investors looking at the current Debt/EBITDA ratio to gain insight on how well the company can
pay for its debt may want to consider the impact of interest on debt, even if that debt will be included in a new issuance. In this
way, net income minus capital expenditures, plus depreciation and amortization may be the better measure of cash available for
debt repayment (Investopedia).

iv
Optimal debt-to-equity (D/E) ratio is considered to be about 1.0 when liabilities = equity; but the ratio is very industry specific
as it depends on the proportion of current and non-current assets. The more non-current the assets (as in the case of capital-
intensive industries), the more equity is required to finance these long term investments. For most companies the maximum
acceptable D/E is 1.5 - 2 and less. For large public companies D/E may be much more than 2, but for most small and medium
companies it is not acceptable. In general, a high debt-to-equity ratio indicates that a company may not be able to generate
enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate that a company is not taking
advantage of the increased profits that financial leverage may bring (Investopedia).

18
 Chapter 07
Artificial Intelligence and the Emergent Turbulent Markets -
New Challenges to Corporate Ethics Today

Executive Summary
Artificial intelligence (AI) is Intelligence displayed by machines, in contrast with the natural intelligence
(NI) displayed by humans and other animals. It is also known as machine intelligence (MI) and is used because a
machine mimics the cognitive functions that humans associate with human ability such as logical reasoning,
learning and problem solving. From Facebook’s automatic tagging suggestions to driverless cars, AI is rapidly
progressing, and therefore, the ethical and moral question now is not whether AI should exist or not. AI exists
and it is already helping in improving various aspects of life such as health, safety, convenience and overall
standard of living. AI can replace or substitute routine mechanical, repetitive, boring jobs to free and unleash
human creative and innovative talent to big thinking projects and humanizing work and society. Artificial
intelligence can provide digital assistance in routine day-to-day tasks, detect cancer, diagnose rare diseases and
even prevent car crashes. AI can replace jobs, however, but not human work. Work as a duty, self-actualization
and destiny will always continue, if not on the shop or office floors or boardrooms, at home, gardens, places of
prayer and worship, labs of creativity and innovation, in society and civilizations. While AI may indirectly free
human talent for more meaningful and creative work, it can rarely participate in higher purposes such as
creating bonding and belonging groups, in creating forgiving and compassionate communities, in drumming up
small business, startups and corporations, and in harmonizing and humanizing this planet and cosmos for bliss
or happiness. This Chapter on AI, while investigating its market turbulence, will go beyond the legal aspects to
ethical, moral and spiritual (LEMS) dimensions and sacred opportunities of AI.

Case 7.1: Microsoft Launches “TAY”

Besides the arguably wanton use of AI since 2011 as recorded above, there are other controversial forages of
AI. On March 23, 2016, Microsoft Corporation launched ‘Tay’, a Twitter chat bot which used artificial intelligence
to understand and make conversations with people on Twitter. It was a machine learning project which was designed
for human interactions. However, mere 24 hours within the launch of the bot, Microsoft had to start ‘making
adjustments’ to the tweets which were being posted by the bot! Why this happened?

The bot had started to make vindictive responses and derogatory remarks, learning from the conversations that
people were having with it. Microsoft kept deleting its tweets, as it became more and more racially abusive, until
they had to finally shut it down within an extremely short span of time.

Incidents like these, make us ponder, whether Artificial Intelligence is actually the boon or bane that people
consider it to be? Do we, as humans, completely comprehend exactly what lies in store in the world or machine
learning and artificial intelligence? And whether do we have a plan, in case things go kaput!?

Case 7.2: Sophia is a Citizen of Saudi Arabia

On October 25, 2016, a female robot named Sophia was given citizenship in Saudi Arabia. The creator, AI
developer David Hanson, had to make multiple iterations before Sophia could be released in the public. Sophia is
capable of understanding emotions and responding accordingly. Her objective is to protect humanity. Hanson has
also said that he will continue to work on Sophia and release subsequent robots with enhanced capabilities.

Until a few years ago, a major drawback of AI and robotics was their inability to learn from their
mistakes/experiences. While a robot would be ideal for a repetitive task such as the production line of a factory, it
would fail in more dynamic situations. But all that seems to be a thing of the past. Presumably just a PR activity by
Hanson, Sophia has evoked more anxiety in the minds of people than excitement. The world had put a ban on

1
human cloning because nobody could fully understand the consequences of it. Robots with artificial intelligence fall
right in the same alley as human clones.

Would such a citizenship entail the robots all the rights like Article 25 of the International Covenant on Civil
and Political Rights grants to every citizen – ‘take part in the conduct of public affairs,’ ‘vote and to be elected,’ and
‘have access, on general terms of equality, to public service in his country.’? Until humans have answers to every
such question, artificial intelligence, machine learning and any other such term used to describe this phenomena,
could be as controversial and enigmatic as it could be useful.

Link References
https://www.business.com/articles/john-barnett-artificial-intelligence-job-market/
https://www.economist.com/news/business/21727093-humans-will-supply-digital-services-complement-ai-artificial-
intelligence-will-create-new
http://www.nytimes.com/2011/02/17/science/17jeopardy-watson.html?pagewanted=all
http://www.alanturing.net/turing_archive/pages/reference%20articles/what%20is%20a%20turing%20
machine.html
https://www.fierceretail.com/operations/amazon-introduces-warehouse-robots
https://www.theguardian.com/technology/2017/nov/07/google-waymo-announces-fully-autonomous-ride-hailing-
service-uber-alphabet
https://www.forbes.com/sites/danielnewman/2017/09/12/your-artificial-intelligence-is-not-bias-
free/2/#27df11b66137
http://time.com/4080577/artificial- intelligence-risks/ accessed on 10th November, 2017
https://jsteinhardt.wordpress.com/2015/06/24/long-term-and-short-term-challenges-to-ensuring-the-safety-of-ai-
systems/, accessed on 10th November, 2017

Introduction
Artificial Intelligence (AI) as a science was first formally recognized in a workshop or conference on
the campus of Dartmouth College in 1956.i The term Artificial Intelligence was first coined and used by
John McCarthy in the same Conference. Even though AI is being studied since decades, humans are still
trying to understand AI because it is still largely nebulous and intriguing. People in this conference who
predicted the widespread availability of machines in less than a decade were given hefty sums to realize
the vision. The participants in this conference included Ray Solomonoff, Oliver Selfridge, Trenchard
More, Arthur Samuel, Allen Newell and Herbert A. Simon, all of whom would create important programs
during the first decades of AI research. Consequently, the years spanning from 1956-74 were a golden
period for Artificial Intelligence as the base for many of the functionalities was formed during this period.

Artificial intelligence entails the ability of a machine to think on its own. It could be something as
small as a computer using algorithms to play games to something as large as robots repairing machines in
space. AI and robotics can truly change the way we use computers and the reasons that we use computers
for. It has become all pervasive, where even every-day simple objects are being turned into computer
enabled ‘smart’ objects. Artificial Intelligence, along with the advent of ‘Internet of things’ will soon be
present everywhere around us. It would become synonymous to the atmosphere we live and breathe in.
And if not controlled properly, it would not be long before it controls and out-humans us.

Artificial Intelligence is a much more advanced form of technology which might not require any
form of coding for its functioning and could be taught or trained to perform specific functions as per
requirement. Most significant use of AI is that it performs frequently computerized tasks reliably. AI is
different from hardware or robotic automation or mechanical automation. It improvises the products and
adds intelligence to the products. Most of the AI products we use are improvised with AI capabilities. An
often cited example is Siri that was added as a new feature in Apple products. AI works through

2
progressive learning algorithms. It finds structures, regularities, and thus using algorithms it learns how to
play chess or recommends products online. It analyzes huge chunks of data that may have many hidden
layers. The models become more accurate with the help of data.

Four of the economies of the world – China, India, Japan, and USA account for just over half of the
world’s total wages and almost two-thirds the number of employees associated with activities that are
technically automatable by currently demonstrated AI technologies. Accordingly, the legal, ethical, moral
and spiritual (LEMS) responsibilities of these nations are stepped up.

By 2025, Artificial Intelligence is expected to spread in every walk of life. It has been predicted that
by 2040, artificial intelligence will become virtually unstoppable and humans could lose both faith and
control, and some may even prematurely retire out of decision making processes. Machine learning,
unlearning and re-learning capabilities would have advanced so much by then that it might be difficult
now to determine the possible changes in future. There are speculations (e.g., Elon Musk, see below) that
AI could lead to the cause of third world war. ii

AI has reduced errors in jobs where precision is a must. Their metal bodies and superior perception
make them suitable for performance in more hostile and specific environments where human effort would
not produce any effort. They are also doing away with repetitive jobs. Nowadays, call centers are being
chiefly manned by robots that are trained to respond to customer queries. The automobile industry is the
one most notably being impacted by these developments. Nowadays, self-driving trucks promised by
Mercedes and Tesla look to reduce the costs of trucking companies by a huge margin. Similarly, self-
driving cars that are being researched by Google and Tesla may also change how cab-hailing services like
Uber conduct their operations. It is also finding many uses in the medical domain, where it is taking care
of complex operations too subtle for human hands. Finally, being a machine, the advantages of no breaks
and lesser permanent costs associated with them make them a very fruitful investment for a company to
consider.

What is Artificial Intelligence?

Artificial Intelligence, as defined earlier in Chapter 01, is a branch of computer science dealing with
the simulation of intelligent behavior in computers or the capability of a machine to learn and imitate
intelligent human behavior. Although most people use artificial Intelligence, robotics and automation
interchangeably, they are very different. While robotics and automation use sensors and manual
programming for their functioning, AI mostly – but not always – uses an algorithm by which it is able to
learn a process on its own. Artificial Intelligence (AI) is Intelligence displayed by machines, in contrast
with the Natural Intelligence (NI) displayed by humans and other animals. It is also known as Machine
Intelligence (MI) since it mimics the cognitive functions that humans associate with human ability such as
logical reasoning, learning and problem solving.

From Facebook’s automatic tagging suggestions to driverless cars, AI is rapidly progressing. Hence
the question now is not whether AI should exist or not. AI exists and it is already helping in improving
various aspects of life such as health, safety, privacy, vigilance, convenience and overall standard of
living. Artificial intelligence can provide digital assistance in routine day-to-day tasks, detect cancer,
diagnose rare diseases and even prevent car crashes and corporate frauds.

The world shall face challenges in investing in solutions and technologies that benefit humanity
instead of destroying it. With a systems approach, it is acknowledged that the stakeholders in a system
need not necessarily have a linear causative relationship. The interrelationships can be circular and
complex and their influence and effects will need to be understood holistically.

3
 AI has the potential of empowering the society by using predictive analysis. Hyderabad based
Advanced Data Research Institute (ADRIN) is developing an algorithm which will help police to foresee
crime patterns by analysis of crime data. Imagine a world where the roads are safe for women, where the
automatic sensors in home send text messages to police in case of an assault on women at home in a
domestic feud. This has serious impact on women empowerment. Imagine a world where complex
technical information is passed on to students in their own native language. Imagine a world where court-
decisions are fast tracked, a world where the banks are able to sanction loans to the right person at the
right time. AI can enable all of this and help create a better society at large with happier citizens.

Undoubtedly AI is going to impact our world in various material ways, but what will be its associated
impact on human values and ethics is something which needs to be discussed at length. If an over-
empowering agent is under the control of a few, that few will have endless responsibilities. Fortunately
for AI, its partners of creation are from diverse parts of the world and AI works on the principle of
integration of data. Hence, we feel that this phenomenon is more likely going to break the boundaries of
human inequality and poverty rather than further create one. We also believe that rather than making
people stupid or lazy in the longer run due to excess leisure dependency, AI will be rather smart to guide
people to go for a run, or take an improvement course based on current performance at work (or perhaps
better teach them themselves). Since, people would be healthier and heartier, we expect them to be more
ethical in life.

The Fundamental Essence and Operations of AI

It is said that technology, or even the very system that develops out of a combination of thousands of
interacting forces, all interplaying and modulating and affecting the other’s effects often tends to bestow
upon the resulting system characteristics of their own. As a consequence, while it is true that any system,
thus developed organically, as indeed most systems are, is greater than the sum of all its parts, one can
still locate those characteristics of the parent factors within the final systems, be it in traces in many cases.
This is one important thing that we ought to keep in mind while studying such phenomena as Artificial
Intelligence.

The very foundations of civilization has required, before all, one essential thing - the coming together
of multiple individuals, as a community to live together, to participate in a cooperative system, where we
all “look out for each other” and the others do the same for us, and basically, the entire society is based
upon a system of participation at its very core. Every single individual is party to the benefits that any
society develops and therefore is expected to do the best she/he can towards contributing for the
betterment of the society. This has always been the basis of human civilization. Under such a system, one
of the most essential things was keeping of records.

The proper, smooth operation of such a society depended largely on the society being able to maintain
a record of the individuals comprising of that society. This record keeping could have been for many
purposes - for the distribution of welfare such as food or medicines, for collection of taxes, for general
census conducted by many kings or commanders of states across the tribes and societies even today. You
had to keep a record of everyone to know them, to help them, to serve them, to administer them properly,
or to invade them, or to capture them, or even to oppress them. Indeed, since time immemorial, data has
been collected about everyone and everything around us: the movement of the stars, the migratory
patterns of birds and fishes, the changes in weather, the movement of water levels in rivers and ponds, etc.
This could have been commissioned for purposes of peace, charity or general administration or even for
the purposes of inflicting harm upon one’s adversaries or oppositions.

4
 Humans have always collected data about their surroundings to make their lives a little bit better. It
could be said that this idea was the basis of Artificial Intelligence today, as quite literally, data (big data,
to be more precise) forms the very backbone of the AI industry. The ever increasing need for data and
record keeping is driven by the need of law and order, and perhaps even the demand to make the AI
better.

Data recording, as argued, was essential to let civilization happen and prosper to the heights it has
today. The better records one has of their surroundings, the more data that any system has, the better
society functions. This is true of not just the AI systems, but of everything, living or otherwise. Once this
need for data was realized, a need for two things could have happened - make the process of collecting
data easier, and make the process of analyzing that data and presenting the information in a simple form
easier.

The process of making things easier and efficient involved in large part, taking care that there be no
errors in the data collected, processed and the analysis thus derived. This meant that there had to be as
little chance of error as possible. It is common knowledge that mechanical systems, if taken care of
properly, can never falter at their job. If a machine, be it a wheel, or an airplane, has been designed to do
something, it will always do its job perfectly 100% of the times, unless there has been wear and tear
because of lack of care from the human side or if it has deliberately been tampered with. Thus, since time
of the creation of machines as simple as a lever and a fulcrum, the purpose has always invariably been
making life easier for humans. In fact, that is what makes us humans different from animals - the fact that
we can modify our environment to suit us by creating machines. The opposable thumb principle states
this exactly: the fact that we evolved into the present homo sapiens because we were able to leverage our
opposable thumbs to create tools (essentially, machines) to make our jobs easier.iii

An important objective in the field of AI was to allow communication between computers through
natural languages like English. The inputs given to the process were some nodal words such as fish,
animal, water etc. The output would be a semantic net which would be a collection of nodes and the verbs
connecting the nodes called as concepts so as to form meaningful sentences. The processes that were
employed were a few initial set of grammar rules that would link nouns and verbs and this algorithm was
used to frame sentences by linking nouns and verbs. The outputs to the process again help to categorize
the inputs quickly so that if a similar problem arises, solution is faster. Thus, the circular relationship
helps in solving the problems faster. Again, this kind of relationship between processes and output is a
necessary condition because the optimal output is a function of the kind of processes involved.

A Timeline of Major Advancements in AI

• Robotics 1972: - The world‘s first humanoid robot named WABOT-1 was completed in the year 1972 at
Waseda University, Japan. Various sensors installed in the robots allowed it to have limb movements as
that of the humans and perform a number of tasks. Its vision system allowed it to measure distances and
objects. A language processing system also allowed it to communicate with a person in Japanese.

• 1980s: Massive Public Sector Investment in AI: Massive database creation happened that would contain
information normal persons were in command. In the 1980s many governments allocated huge sums of
money to write computer codes and build machines that could carry on conversations, translate
languages, and interpret pictures and reason like human beings. For e.g., Japan set aside $850 million
to its “5th generation” project while UK assigned $350 million for the Alvey project.

• Boom of 1980-87: Artificial Intelligence programs boomed in the 1980s with the adoption of an AI
program called - expert systems. Knowledge became the focal point of all research related to Artificial
Intelligence. This period also saw the revival of connectionism in the work of several scientists.

5
• Expert Systems in 1985-87: were developed by Edward Fiegenbaum and his students. It uses logical
rules derived from the knowledge of experts to solve problems in a specific domain. One of its most
common applications (output) is the diagnosis of infectious diseases. For this, it takes spectrometer
readings as the input and then uses some logical rules and expert opinions (processes) to arrive at the
output. Their simple design made it relatively easy for programs to be built and then later modified once
they were in place. An expert system called XCON was saving about 40 million dollars annually by 1986.
Corporations around the world began to develop and deploy expert systems and by 1985 they were
spending over a billion dollars on AI, most of it to in-house AI departments.

• 1990s: Neural Networks: Two discoveries on learning paved the way for the future of AI. First of all it
was proven that a form of neural network could learn and process information in a completely new way.
Around the same time, David Rumelhart popularized a new method for training neural networks called
"back-propagation.” Neural networks became commercially successful in the 1990s when they were used
for speech recognition.

• 1997 Deep Blue: In 1997 IBM developed a computer named Deep Blue that played chess. In its first
match against the Grandmaster Gary Kasparov, it managed to defeat the grand master! Even though chess
is highly algorithmic, Deep Blue had to predict hundreds of competitive moves and doing logical thinking –
indicating that such computers could be highly ‘intelligent.’ Such super-intelligence could eventually
develop a mind of its own. No matter how we have programmed it, if it acknowledges itself, it will pretty
quickly figure out how to alter its programming and formulate its own goals. And while we will probably
never know what those goals are— and could not understand them if we did—they are pretty likely to
include a desire for more and more computing and reasoning power.

• 2000s: Medical Applications – Artificial Intelligence began to play a major role in the medical industry
especially in rural areas. For e.g., automated systems were established in remote villages where it was
difficult to provide a 24-hour regular doctor service from the cities. This machine would have the history
of the patient diseases, symptoms and their duration. So whenever, a person is ill he/she could be
recommended on the basis of the symptoms, past medical history etc. without having a medical
consultation with the doctor. Else such information could be passed down to the doctor in the city from
where he can advise the patients. This information would then be recorded in the medical history of the
patient stored in the machine. AI advanced in terms of detection, prevention and prediction of diseases
with more confidence.

• 2005: Daily applications – Smartphone is a perfect example of how we use AI. While we text or message
we automatically get suggestions based on our past input history. This reduces a lot of effort and saves a
lot of time. Similarly, if we take a picture, artificial intelligence algorithm identifies and detects the
person‘s face and tags him a Facebook.

• 2010s: Industrial applications - Artificial Intelligence is used extensively by financial institutions and
fraud detection agencies to determine the likelihood of a person committing fraud. Credit rating agencies
such as Visa, Mastercard extensively use these tools to predict default rates. As we move towards greener
equipment and technologies, companies such as BOEING and Airbus extensively use sophisticated
software to predict materials that could function as effective corrosion inhibitors for their aircraft parts.
Most food and pharma companies also use this platform to develop best quality food products and discover
newer medicines.

• 2010s: Repetitive and dangerous tasks – Many tasks on the shop-floor are repetitive and dangerous for
e.g., blast furnaces, hot steel rolling, long products, and steel press. Such tasks can be easily automatized to
improve productivity and reduce the number of accidents.

• 2010s: Further medical advances: Robotics is often used to help mental health patients come out of
depression. Another application is in radiosurgery. Radiosurgery is used in operating tumors and this can
actually help in the operation without damaging the surrounding tissues.

6
Current Wanton AI Developments
• February, 2011: IBM introduces Watson, its self-learning AI tool. It is a question answering computer
system capable of answering questions posed in natural language specifically developed to answer
questions on the quiz show Jeopardy!

• 2014: Beating the Turing Test: Advancements in the Artificial Intelligence domain have made computers
so sophisticated that they are blurring the gap between human and machine. In 2014, a computer program
that simulated a 13-year old boy and went by the name Eugene Goostman actually beat the Turing test.

• December 1, 2014: Amazon introduces robots in its warehouses after acquiring Kiva Robotics LLC in
2012. As of 2017, more than 30,000 robots work in Amazon warehouses.

• Sept 14, 2016: Self driving Uber cars are on the road taking passengers from point A to point B in
Pittsburgh, Pennsylvania. This was after Uber acquired Otto, a self-driving automobile company.

• Oct 25, 2016: Otto, the self-driving automobiles start up acquired by Uber makes its first delivery of
50,000 Budweiser beer cans over a time of 2 hours. Self-driven cars have already started to show
themselves in the streets of USA and Europe. Waymo, Google’s driverless car company, has started
running autonomous minivans around the streets of Phoenix with no human involvement whatsoever.
Waymo is also experimenting with self-driving trucks for long hauls along interstate highways. Currently,
more than 3.5 million truck drivers haul cargo on U.S. roads. Waymo’s headway in this field poses a threat
to these drivers and many more.

• April 26, 2017: Infosys launched Nia, their integrated artificial intelligence platform. This was an upgrade
to their AI platform Mana which was launched a year ago in 2016. Infosys started their foray into AI in
2014 after investing USD 5.5 billion in the high growth sector. The Mana platform leveraged AI to perform
repetitive tasks such as aftersales services, sales planning process etc. This reduced the time and man-hours
required to do these tasks for many clients in engineering, F&B and telecom sectors.

• November 7, 2017: Waymo, formerly known as Google self-driving car project becomes the first company
to provide cab hailing services without a driver to take over in case of emergency in Phoenix, Arizona,
beating Uber in the race to creating fully functional automated cars.

Advantages of AI
AI has many beneficial applications in the modern era of turbulent markets, with the most significant
ones being:
• Automate processes which require laborious and repetitive manual work with great accuracy and
precision while maintaining almost a zero error and zero defects rate.
• AI is being used for space exploration purposes in the form of rovers controlled from GS.
• Intelligent robots are being programmed and used for exploring the nadirs of the earth for mining
and exploration purposes.
• Fraud detection in smart card-based systems is possible with the use of AI in the banking sector.
• Digital Assistants and chatbots are being used by organizations to improve customer engagement.
• Smartphones are a great example of the use of AI to make our daily lives easier.
• Robotic pets can help patients with depression and also keep them active.
• In the medical field, AI is being used to replace intrusive surgical procedures and surgery simulators
are being used to train professionals.
• Self-driving cars could drive the change in the automotive sector.
• The greatest advantage of artificial intelligence is that machines do not require sleep or breaks, and
are able to function without stopping. Hence they are being employed in areas which are considered
risky and dangerous for humans.

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Disadvantages of AI
For each advantage of AI there is a corresponding cost or disadvantage that might often exceed the
advantage. Major disadvantages of AI are as follows:

• One of the main disadvantages associated with AI is the loss of jobs and economic displacement of
people affected with job losses.iv
• There might come a point where the costs of using machines might be cheaper than employing
humans. Switzerland had recently tried to introduce the concept of a universal basic income of 2500
Swiss francs. But this backfired as citizens were against it.
• One other aspect that is stressed upon is the lack of empathy and feelings in machines. They lack a
human touch and might not be able to perform jobs that require these qualities like caring nurses,
doctors, teachers, coaches, mentors and guides.
• Another factor is that when societies become too dependent on technology, humans begin to lose the
skills that technology has replaced. Prior to pocket calculators, math problems were written out by
hand. Students learned basic mathematical concepts that helped them solve complex problems. But
now students use calculators to help them achieve their answers, and they are losing the ability to use
their mathematical problem-solving skills. It does not stop there. Medical science proves that muscles
that don’t get enough exercise, break down and atrophy with time.
• Countries and Governments, if left unmonitored are highly likely to use AI for the wrong reasons.
Nations like US, Russia, Israel and China are seeking to develop Autonomous weapons technology,
capable of independently determining the course of action without human intervention.

The main advantage of automation and why it is being pursued is that it reduces costs of human
labor and increases quality of products and services. And also, it makes the life of humans easier by
making things simple. On the other hand, it robs away people’s jobs and increases unemployment and
decreases the welfare of the people.

AI will not Automate all Jobs

Automation has been a tool of growth for centuries. More recently, the fourth industrial revolution
had its base in AI and automation which fuelled growth and generated a lot of employment opportunities
as firms grew in size and required a lot of manpower to support it. Once the growth started staggering,
firms pushed for more automation leading to a reduced dependency on humans and cutting down of jobs.
Another factor stunting growth is the mismatch between skills required for further innovation and the
skilled manpower available in the market. Here the reinforcing loop is a push to AI and automation and
balancing loop is unskilled manpower. A joint effort would be required by both the government and the
private sector in terms of revamping education and training, income support and safety nets, as well as
transition support for the people dislocated i.e., a focus on the limiting factors to overcome the problem of
growth for both the firms as well as the overall economy.

Most jobs (60 percent) contain activities that can be automated, but the degree of automation potential
varies, according to the McKinsey Global Institute. Some jobs appear safer: people-managing positions
(just 9 percent automation potential), gigs that apply expertise and creativity (18 percent), and professions
involving unpredictable physical work (25 percent). The most vulnerable workers are those responsible
for data collection or data processing (64 percent and 69 percent automation potential, respectively) and
those tasked with predictable physical work (78 percent). Sewing machine operators and agricultural
product sorters and graders are deemed to be 100 percent automatable.v

Almost all jobs and occupations can be automated to some degree, says Mehdi Miremadi, partner at
McKinsey and coauthor of the reports on automation. "But just because the technology is there doesn't

8
mean that your job definitely will get automated," he says. "While it's true that, within 10 years from now,
the tasks we perform today will likely involve more interaction with robots and machines, we estimate
that it will take up to five decades before close to half of all economic activities could be automated."
(See Endnote v)

The pinnacle of human endeavor, in many forms would be the perfect marriage of data and machines:
collecting and processing unimaginable amounts of data and processing them and then designing systems
to make lives better and simpler and easier using that data, all of which is done flawlessly using machines.
This is roughly what artificial intelligence is - the perfect marriage of data and machines.

Forrester, an American market research company headquartered in Cambridge, Massachusetts in its

last year report (p. Forrester 2021) attempted to quantify how the Internet of Things (IOT), Artificial
Intelligence (AI), Augmented Reality and Virtual Reality (AR and VR) will change the world by 2021.vi
It conservatively estimates to a net job loss of 6% and identifies sectors such as logistics, transportation,
and customer and consumer services to be most prone to these job losses. Recently, the discourse on this
topic has gained much traction and the figures quoted are way higher. The resilience of the humans to
create more jobs with each rise in technology right from technology revolutions in the textile mill to
industrial revolution, computers and the rise of information technology and technological solutions also
features on the other side of this debate.

The Great Potential of AI

Table 7.1 sketches the potential and actual impact of AI on various industries. The record of
potential impact is very high; actual impact is steadily increasing, but not threatening humans. As never
before, AI is at the cusp of parting roads of dehumanization versus human civilization, wanton luxury of
the 1% versus equitable opportunity for life, liberty and the pursuit of happiness of the 99%, of a Third
World War versus global peace, division versus unity, chaos versus harmony, exclusivity versus
inclusivity, inhumanity versus human solidarity. We cannot leave this crucial choice to only business
tycoons or political powers, not even to the free enterprise capitalist systems (FECS) and the “invisible
hand” of the global markets. We must design and implement national and international and
intercontinental systems of reflection and discernment, creativity and innovation, vigilance and adventure,
wisdom and prudence, transparency and honesty, integrity and justice, legality and ethicality, and above
all, morality and spirituality.
[Table 7.1 about here]

The starting point of this game-changing epoch and strategy is education. The core challenge of any
educational institution should be to offer an education that develops intellectual rigor, academic
excellence, and personal character, without collapsing the tension between these by emphasizing one at
the expense of the other. Good education is about developing persons with the brains to make a difference
and the hearts to want to do so. Good thinking and good character are both equally important in any
education – and they are dynamite when found in the same person. The education we offer must aim to
supplement and complement knowledge of the good, the true, and the beautiful with the desire to do what
is good and true and beautiful. Education should prepare a new generation prepared to deal with tougher
times by relying on a solid foundation of values.

In this regard, education in B-schools can make a tremendous difference. Education in a B-School
should be a life-changing experience that can happen on and off campus, in and out of the classroom or
campus as students are pushed to engage new and challenging ideas, experiences, and perspectives. Who
and how we choose to be in the world is, in some sense, conditioned by what we know. It is a truism that
where we stand determines what we see, and whom we talk to determines what we hear.

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 The computing power of the machines has increased manifold and artificial intelligence is now
smarter than ever before. Cloud services can recognize patterns from extremely large pools of data and
anticipate and predict tasks, activities and events. Big data analytics will provide context awareness to
machines and cloud computing may remove the need for bulky devices – a receptor to collect input data,
a medium to transfer data to the cloud, collection of processed information from the cloud and reporting
for the user. Artificial intelligence with its large capability of machine learning and neural networks will
further enhance capabilities of machines to understand and recognize more data, observe patterns where
there needn’t have been any. Contextual intelligence can help it identify whether the connections
established through data are random, sequential, association, correlation, necessary condition, sufficient
condition or cause.

The entire automotive and logistics industry is at risk because of automation. Apart from drivers
losing their jobs, technology will affect others as well. Tesla Motors is on a path to build a vast network
of electric cars and supercharging stations. These stations, which recharge electric batteries using solar
power, will put petrol pump operators out of business in the long run. All toll booth operators might also
lose their jobs as newly produced cars come with automatic sensors to deduct the toll.

Further, in the logistics industry, few start-ups have emerged which use algorithms and AI to conduct
fleet operations. Everything from vehicle tracking, truck routes, variable load matching etc. will be
monitored and executed by a machine.

Some other common examples that we experience in our daily lives include applications such as
Amazon and Netflix. Amazon has used artificial intelligence to maximize revenues over the past few
years. Their tech team constantly refines its algorithms more and more with each passing year, allowing
Amazon to become extremely accurate at predicting consumer purchasing behavior. The next step in
innovation by Bezos is an algorithm which would ship products to customers before they even know that
they need those products. Essentially, Amazon is looking to quench the need before it even arises. Along
similar lines, Netflix uses a very powerful recommendation engine for its video streaming services. It
analyses terabytes of records to suggest films to a viewer based on previous reactions and choices. Netflix
engineers work every day to figure out better ways to capture maximum value from their viewers by
tweaking the algorithms as and when required.

The LEMS Challenge of Artificial Intelligence to Corporate Ethics

“The major challenge of the sixties is to maintain full employment at a time when automation is
replacing men,” said President Kennedy in 1961. We are facing the same situation once again, and
multiple times than before, but mankind will come out on top again. Workers have been periodically
replaced by machines because of the benefits presented – the immense time and cost saving being the
most emphatic ones. These are multiple points to ponder and discuss.

Legal Aspects of Artificial Intelligence

Artificial intelligence and its robotics and automation potential have indeed influenced human life in
numerous ways and are prognosticated to do the same in the near future and beyond, due to its potential
of creating disruption in every sphere of human life. Through innovative products – robots in different
industries like Watson by IBM in pharmaceutical industry, banking sector and similar other industries,
followed by Internet of Things (IOTs) which have changed the way humans see the world and interact
with the surroundings. These benefits come as boon to humans along with cost attached – the livelihood
of humans, through unemployment in different industries across nations.

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 The labor force can be bifurcated into two distinct categories to study the effects of artificial
intelligence – routine and non-routine; and artificial intelligence, through automation and the extensive
range of new products and services, has all the potential to take away the routine jobs. Martin Ford in his
book “Rise of the Robots” predicts a dire future of joblessness as even the complex tasks of a senior
manager can be reduced to a sum of simple routine tasks which can be performed by machines. This
particular scenario plays out negatively for the lower level non-routine tasks of cleaners and janitors as
well. However, how feasible is it, not at least in the short to medium term, as the cost is too high and
advantage not commensurate.

Artificial Intelligence follows multiple layers of machine learning, namely, supervised learning,
unsupervised learning and reinforcement learning. Except for the first of the above three options,
machines do not require, at least not in theory, further supervision. However, a pattern followed by
automation over time is the increase in number of jobs in allied sectors. With computers came jobs in
software industry, graphic design, animation, and so on. When automation sped up one aspect of the job,
workers were enabled to do better in other aspects. Automation in shopping through e-commerce websites
was expected to reduce the total job opportunities; on the contrary, the demand for a wide variety of
goods and services has increased, thus increasing the number and amount of required labor. The same
demand increase shall apply to many other data intensive scenarios such as legal history or cases. We may
not fully predict where new jobs will be created by AI technology. When cars replaced horses, a number
of horse-related jobs decreased, but the new jobs were not limited to cars directly. Hospitality industry
witnessed a boom; hotels and restaurants came up and offered more employment opportunities. A study
by the International Federation of Robotics reports that the number of robots per 1000 workers have
increased from 0.4 to 1.4 in the US. However, there is only a weak correlation between the number of
unemployed and the number of robots.vii

A better paradigm to measure the impact is the effect on tasks rather than jobs. Another study by
James Manyika for McKinney Global Institute in January 2017 estimates that only a fraction of less than
5% of tasks consist of activities that are 100% automatable. We therefore see a pattern where the
productivity effect cannot be accurately predicted and where the displacement effect is evident but not to
the scale of global unemployment; i.e., a strong correlation is observed between A (AI) and
unemployment B, but there is no obvious causal effect between A and B that is expected or strictly
predicted with significant confidence.

To get a deeper understanding of the dynamics involved with this issue, McKinsey Global Institute,
the Business and Economics arm of McKinsey Company, conducted a study to research on economic
impact of AI and innovation. This study named A Future That Works: Automation, Employment and
Productivity was published recently in January 2017. Advances in Artificial Intelligence have reached to
such a level that it has inculcated cognitive abilities too in it.

Few of the important outlines of the Study were as follows:

• Automation makes business sense by reducing error, improving quality and in some cases achieving
outcomes beyond human capabilities. It would boost the economic growth and prosperity and in
parallel help offset the impact of reduction of the working age population in any given nation.
According to the study automation could raise the productivity by 0.8 to 1.4 percent annually.

• Automation has a potential to replace 30% activities among 60% of total available occupations,
where the people employed have a total wage of $16 trillion. That is, more occupations would be
changed than automated away.

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 • Activities most susceptible to automation involved physical activities in highly structured and
predictable environments. Thus, it points to manufacturing, accommodation and food services, retail
trade and some other middle-skill jobs.

• Though the performance benefits of automation are relatively clear, yet it poses issues for the policy
makers. They must embrace the opportunities for their economies to benefit from the productive
growth potential and put in place policies to encourage investment and market incentives to promote
continued progress and innovation.

• Innovative decision making should be developed to help workers and institutions to adapt to the
impact on employment. Main focus can then be defined as education, training, income support and
safety nets, as well as transition support for those dislocated.

• Hence, at an individual level, people need to engage themselves more with the machines as part of
their day to day activities, and in parallel acquire new skills that would be in demand in new
automation era.

There are other important factors affecting pace and extent of adoption of AI into different industries
and respective activities:

• Technical Feasibility – Technology has to be invented, integrated and adapted into solutions for
specific case use.
• Cost of developing and deploying solutions – Hardware and software cost.
• Labor Market Dynamics – The supply, demand and cost of human labor affect which activities will
be automated.
• Economic benefit – includes higher throughput and increased quality, alongside labor cost savings
• Regulatory and social acceptance – Even when automation makes business sense it can take time to
implement.

Other major economic and legal benefits of AI include:

Machine Learning, and Big Data: Given that much of business and commerce has moved to the online
platform it has resulted in the availability of massive amounts of data. With the help of AI such data can
be analyzed and used to improve existing systems and processes. For example, a manufacturing plant
employing data analytics software that maps and analyses its processes can identify areas of
underutilization or redundancy and improve overall efficiency and productivity. Similarly, through data
analysis, machines that have to deal with uncertainties can be taught how to improve their functioning
through predictive learning. AI has also revolutionized advertising and marketing through customization
and customer history and demographic based personalization. This improves a consumer’s purchasing
experience and helps boost the organization’s revenues through greater consumption.

Modeling and Medical Forecasting Natural Phenomena and Epidemics: Weather predictions and
modeling tools are aided significantly by AI and data analytics. This has a direct impact on climate data
available to the public. Natural calamities can also be predicted sooner with better accuracy. Furthermore,
agriculture is reaping significant benefits when AI can accurately predict rain trends much in advance.
Drone technology is also giving meteorologists wide access to various terrains at low costs. This drone
technology can now be used to predict epidemic outbreaks. Artificial Intelligence in Medical
Epidemiology has led to the development of a platform that can predict outbreaks of fatal tropical
diseases nearly three months in advance. This is done by combining past research with data of insect-
borne disease and factors such as population density, wind velocity, amount of rainfall etc. The
probability of an outbreak is then estimated to the extent that the epicenter of the disease spread is
estimated up to a 400-meter radius.

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Medicine and Healthcare: AI has a significant impact on the various facets of medicine and healthcare.
The entire process of diagnosing and predicting diseases is changing with the help of AI. An iterative
machine-learning based diagnostic system can revolutionize healthcare due to increase in accuracy of
diagnosis, reduction in cost, and most importantly, the ability to detect chronic diseases much earlier and
accurately thereby increasing the chances of control and cure. Continuous online tracking of patients’
health and non-invasive monitoring will lead to better overall health as well as decrease mortality rates by
predicting the onset of diseases such as heart attacks through early symptoms or the ability to alert
medical authorities in case of incidents such as strokes. Mapping of genes and the ability to process
genetic data of thousands and millions of people is allowing researchers to understand the fundamentals
of human biology and research in a completely new way. Medical breakthroughs in terms of drugs and
treatments are also benefiting from AI.

Restorative Applications: AI can expedite medicinal business particularly in rural regions. For example,
mechanized frameworks can be set up in remote towns where it is hard to give a 24-hour general
specialist benefit from the urban areas. This machine would have the historical backdrop of the patient
infections, side effects and their span. So at any point, if someone is sick they could be prescribed on the
premise of the side effects, past restorative history and so on, without having a medicinal conference with
the specialist. Alternately, such data could be passed down to the specialist in the city from where he can
prompt the patients. This data would then be recorded in the restorative history of the patient, in the
machine.

Ethical Challenges of Artificial Intelligence

Today, the world is increasingly moving online and, as a consequence, Artificial Intelligence has
become an inevitable part of our day-to-day lives. Due to the extent of its integration with human lives,
various ethical issues have been identified. One major issue is the potential of artificial intelligence to
improve human lives at the cost of mass unemployment.

Optimizing logistics, composing art, detecting fraud and conducting research - AI systems are
transforming our lives for the better. All these projects in the field of AI look very beneficial for the
human race in the short as well as long run, however, at the same time there are various controversies
surrounding AI which makes it risky as well as ethically questionable.

The ethical debates surrounding AI and human unemployment are extremely intriguing due to their
double-sided nature. On the one hand, the threat of AI to substitute or replace human labor is extremely
real and large. According to an analysis by McKinsey & Co. 45 percent of the activities people are paid to
perform today could be automated by technologies currently existing today. Furthermore, with the
technologies and AI developments available today, 60 percent of all occupations could see 30 percent or
more of their constituent activities automated.

Today, however, the jobs under threat are the routine and mechanical low skill jobs where the use of
technology and robotics can lead to significantly higher productivity and efficiency. The Changing
Precision Technology Company, located in Dongguan, China, recently replaced 90% of its human
workers with robots, going from employing 650 people to a mere 60. Although a significant number of
workers suffered job losses, the shift to robot based operation led to a productivity rise of 250% with an
80% reduction in defects. A similar trend of replacements of robotics in manual, technical, and highly
knowledge-based jobs is being seen all across the world. Although this seems like a natural step by
companies to decrease costs and increase profit margins, it is a mere premonition of the shape of things to
come.

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 Other ethical issues related to AI are:

In-biasedness: Intelligent machines will embody values, assumptions, and purposes. These machines are
prone to various biases such as data-driven bias, interactive bias, emergent bias, similarity bias etc.
Therefore, it becomes imperative to think carefully and explicitly about what those built-in values are
before using expert systems in a decision making capacity. A bank loan advisor expert system, for
instance, would not be prejudiced against any specific client groups unless its data and inferential rules
were biased in the relevant way. A program could be written so as to embody its programmer's prejudices,
but the program can be printed out and examined, whereas social attitudes cannot.

Inequity and Inequality: In a scenario where tech-enabled robot works along with human workforce,
then who will get paid for the work robots will do? The entire revenue will be concentrated with a handful
of people leading to widening the already huge income gap between haves and have-nots. This will
worsen the already existing problem of inequity and inequality.

Moral Challenges of Artificial Intelligence

Any moral judgment on AI and an analysis of its moral challenges will imply some basic
understanding of the history of AI and its evolution or revolution thereafter. The fear and angst hovering
over AI is very similar to what humanity experienced when it went through the four revolutions of the
first steam engine in 1784, invention of electricity in 1870, world information technology in 1969, and the
invention and diffusion of the Internet in 1993. All four revolutions involved new machines and
technologies, more automation and robotics, more job losses and skills obsolescence. Yet humanity
bounced back from angst and temporal disruptions to new creative innovations and new job enrichments,
new products and services, new markets and industries, renewed growth and prosperity. The fifth
revolution of artificial intelligence will be handled by humanity with equal creativity and imagination,
innovation and venture, humility and magnanimity. We may need to explore and conquer higher domains
and purposes of humanity and equanimity, faith and hope in humanity, and sustainability and respect for
the planet and the cosmos, than ever before.

Each of the first four revolutions, considered first as a threat, was welcome in industries, it spurred
new industries, new products and services, generated much employment, productivity and prosperity.
Historically and morally, we should expect the same with the fourth revolution: the AI without
unnecessary panic and preoccupation. The fifth revolution of AI has come a long way since the concept
was first introduced in 1956 within a very short duration compared to the other revolutions.

When AI is deployed to specific tasks that involve human bodies and morals such as predicting sex
during pregnancy, aborting unwanted children, passive and voluntary mercy-killing or euthanasia, or
some genetic manipulation, then each case must be judged for its legalization and decriminalization, by
country and state within the country.

Further, if AI and related technologies are exploited only for cost containment and profit
maximization, then that will breed skewed wealth accumulation, disproportionate power leveraging of the
superrich, massive layoffs owing to automation and robotization, extravagant consumption by the few,
wasteful luxuries of the richest, aggressive competition among business ventures, global trade wars
(already on between China and USA), economic invasion of global markets and opportunities (as being
done by China), nuclear proliferation and global wars (as staged by USA and North Korea), ending with
gross income and social inequalities, inhuman structures of injustice, global destruction and cosmic
impoverishment.

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 On the other hand, we can all rally together to make this world a better place for all, with nobody left
behind, if we tame and control the AI revolution to put people first, global sustainability second, and
profits and wealth accumulation last. The technology in itself is not destructive; human tendency,
however, to design technology in order to harm other humans is massively destructive.

The dawn of AI civilization must decide with humanity which way to go: the path of wealth
aggrandizement in the hands of less than one percent of global population and the remaining 99%
scraping the bottom of the pyramid, or reverse the trend and progress toward a human civilization we will
be proud of to leave as a legacy to our posterity.

When two systems such as AI and non-AI are competing with each other with equal resources, one
gets better off and the other one worse off. When they compete again, one of them now has an unfair
advantage and gets better again. This goes on in a loop and one system gets better and better and other
one gets worse and worse. This creates a loop wherein if one increases the other decreases. This happens
in part because when one system does better, we tend to allocate more resources to it as it seems to better
utilize them. This phenomenon is called “escalation” fallacy. We also tend to pull resources from the low
performing system making it more inefficient over time and ultimately non-productive assets. This
problem can be solved by considering both the systems as one system and allocating resources equally so
that the whole system improves.

Mostly, the brunt of automation is being faced by those who are involved in predictable physical
activities and who do not have the resources to upgrade their skills. People who are involved in high-
skilled jobs are the ones who are going to be able to retain their jobs. Since they are going to be the most
efficient and relevant workers, they are going to be invested upon for skills up-gradation. Further these
technologies would provide services that are going to improve people’s lives but they won’t come cheap.
So, the workforce which has already been neglected will not have the means to use these services and
further worsen off and the skilled workforce will become better and better. Again, this problem could be
avoided by effective public and corporate policies formulated after carefully considering the system as a
whole and not as two isolated systems that have to compete with each other.

Most human life and welfare are at the core of every advancement in technology including
automation and AI. But we need to address the question of machine over man. Also, as this is a radical
thought, it is better to consider it apart from the question of better life even though they are well
connected.

Spiritual Challenges of Artificial Intelligence

At one of his addresses, US president Lyndon B. Johnson while talking about the impact of AI on
economy and employment declared that automation did not have to destroy jobs but “can be the ally of
prosperity if just looked ahead.” The pace, extent and impact of automation (in the long run) will be
different in different industries and activities. Many industries, namely manufacturing, retail trade,
banking, as well as those that involve collection and processing of data would require the workers to work
alongside the machines. Some forms of automation will be skill-biased, tending to raise the productivity
of high-skill workers even as they reduce the demand for lower-skill and routine-intensive occupations,
such as filing clerks or assembly-line workers. Other areas of automation have disproportionately affected
middle-skill workers. As technology development makes the activities of both low-skill and high-skill
workers more susceptible to automation, these polarization effects could be reduced by diverting human
time and efforts to spiritual and happiness enhancement.

November 4, 2017, speaking at the Web Summit in Lisbon, the now late Stephen Hawking came out

15
openly against AI. Addressing the engineers sitting in the room, while warning the whole world, Hawking
opined “We cannot know if we will be infinitely helped by AI or ignored by it and sidelined, or
conceivably destroyed by it. AI could be the worst invention of the history of our civilization that brings
dangers like powerful autonomous weapons or new ways for the few to oppress the many. AI could
develop a will of its own, a will that is in conflict with ours and which could destroy us.”viii

At the same time, Hawking also said that AI could be highly useful in reducing poverty, diseases and
restoring the environment, and that it is impossible to predict what we might achieve when our own
minds are amplified by AI.

Before Hawking, Elon Musk a revolutionary innovator and founder of several technology start-ups,
had voiced his concerns regarding Artificial Intelligence. Addressing a meeting of the governors, he said
“AI is a fundamental risk to the existence of human civilization. I have access to the very most cutting-
edge AI, and I think people should be really concerned about it.” He has also warned that Google is
creating “a fleet of artificial-intelligence-enhanced robots capable of destroying mankind.”ix

Elon Musk is concerned that AI based systems and other automation technologies are soon going to
replace most human jobs and that countries would need to adopt basic income programs in order for
people to be able to sustain their livelihoods with the advent of the AI revolution. Mass panic broke out
all over the internet following this statement as people began to understand the far reaching future
potential of developments and advancements in AI.

These individuals are not alone. Apart from them, Bill Gates, Sundar Pichai and other bigwigs of the
tech world have voiced their concerns about Artificial Intelligence. They have openly talked about how it
could be a threat to mankind if not used and controlled appropriately.

With introduction of AI, routine transactional operations have been automated and more Siris will
emerge ultimately for use. As a replacement or alternative measure, it is predicted that algorithmic skills
and right brain skills will be in demand such as Big Data, design thinking, ideation, strategic thinking,
building and ideating concepts for new product design and development, HRD coaching and mentoring
will be high on demand. The Gen X will be most impacted in this situation since they will have to adapt
to newer technologies. Thus in order to sustain in the Fourth Industrial Revolution of Artificial
Intelligence, they will have to redefine their ways of working with respect to the millennial peoples.

In this sense, market turbulence induced by AI is positive and laden with opportunity. It will force a
paradigm shift from the current transactions-exchange based management curriculum, skills, routines,
cases, models and strategies (that can be easily outsourced to AI companies), to transformation-
relationships maximization based management and dynamic humanization curriculum of new ideas,
ideologies, values and meanings, principles and convictions, mental models, mind-sets, concepts,
constructs, theories and paradigms that could not be outsourced to AI industries, at least not for the next
five to ten years (Mascarenhas, 2011).

AI will ethically, morally and spiritually impel us to return the basic classical understanding of
human dignity and its higher purpose of immanence and transcendence, humanizing and equalizing
civilizations, higher forms of social and functional equalities, better and more collaborative (than the
current competitive and aggressive) forms of human bonding and belongingness such that we move
forward to global and borderless trade and development, new products and services design that civilize
and humanize us, such that we progressively head towards higher forms of human global solidarity,
harmony and peace.

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Artificial Intelligence Contributes to Better Life
Better life is a metric that is difficult to quantify and measure, so it is being split into a few others
such as Health and Longevity, Happiness and Wellbeing: The advent of high precision robots which can
work in highly stressful environment reduces and in many cases removes the need for people to work in
dangerous situations. Also, strain associated with a physically taxing job can be removed. Accordingly, a
lot of people may reap physical health benefits from AI.

It is also to be noted that automation will help in moving towards far more efficient modes of energy
production where wastage is significantly lesser compared to the present. The utilization of the energy by
the industries would also improve significantly. Imagine a situation when the driving behaviors of every
vehicle is perfectly adherent to a fixed set of rules, this is what Artificial Intelligence in driverless cars
aims to achieve. The pollution levels will be lower in such a scenario. There shall also be a positive effect
towards the health of large sections of people especially the young and the old. There will be
improvements in the medical field by leaps and bounds. Surgeries may never go wrong due to
implementation error and drug dosage delivery would be precise to the nearest Nano gram. Longer life
therefore is assured. There is also the mental health gained when people can move out of purely
mechanical jobs which provides no satisfaction in terms of creativity as there is no room for any.

However, can the eventual health of a person or a society be predicted? Motor cars were seen as a
boon in Paris not only because of its style and speed but also because the city could move away from the
horses whose dung was polluting the city and making roads unbearable for pedestrians. The thick smoke
from the cars was felt to be lesser nuisance. So, what if all the improvements made men lose respect for
their life, what if we did not take care of our physical and mental health? Much as the thicker boxing
glove makes one throw harder punches to the head, will the added improved environment and medical
facility contribute positively to create a better human being or will it just lead to a complacent situation
where health is ignored? Both are possible and the recent consciousness towards healthy lifestyles
suggests that people will take good care of their health. Then it becomes obvious that people would
choose healthier life whether or not artificial intelligence with its cutting-edge inventions in pathology or
surgery or pollution reduction brings a positive external environment. Hence it can be concluded that
while Health (B) is correlated to the Artificial Intelligence and its automation and robotics potential (A), it
is not a causative relation.

AI will make education accessible and affordable. Technology and its efficient delivery ensures that
education reaches all levels of society at a global level. The implication and advantages of education is
manifold. We will have better citizens and better professionals who would all lead far more productive
lives without hampering the world, people and society around them. However, is artificial intelligence a
mandatory condition or even a requirement for education or its reach? Even with the present levels of
advanced communication, education can reach possibly all sections of people. AI may reduce the cost
needed to be invested in high level learning and research work. Hence, there is only an association
between Education (B) to the Artificial Intelligence and its automation and robotics potential (A) and
there is no correlation directly perceived.

Going through various views and research outcomes, it is clear that Artificial Intelligence, Virtual
Reality, Augmented Reality, Deep Learning; Big Data are the next big thing in each and every sphere of
human life, influencing the business at every step. This would ease the processes and human effort,
demanding increase in the skilled labor, while replacing middle and most of the unskilled labor. However,
this would be short run impact, while in the long run, with the implementation of the technology, there
would be demand for auxiliary works which would create possibilities of new job opportunities as has
been observed in history too.

17
 The effect of automation can be understood to be working in two opposing directions, i.e. positively
and negatively, and the cumulative effect of both these needs to be analyzed. This can be rephrased as the
productivity or creation effect wherein new jobs are created in sectors or industries due to rise in
automation (the positive) and the displacement effect where jobs are lost to machines as employers or
industries choose machines over men to improve their efficiency in terms of time, cost, accuracy, and the
like.

Concluding Remarks
From the period of Industrial Revolution (between 1760-1850) that significantly changed the
dynamics of labor, to the current scenario when about 5 million factory jobs in the U.S. have been
eliminated since 2000 (88% of which were due to automation as reported by a university study), AI has
always been a boon as well as bane for the common people.x The causes for each instance, however, were
very different. The development of trade and the rise of business were major causes of the Industrial
Revolution whereas, droughts during the Great Depression forced people to seek jobs in factories and, the
sheer nature of humans to strive for betterment has been the cause of current developments in AI.xi

Multiple experts have expressed their concern over the total loss of jobs that may occur due to the
rapid technological advancements in the field of Artificial Intelligence. Among those who are against an
unrestricted advancement of Artificial Intelligence are Stephen Hawking, Elon Musk and Peter Norvig.
The possibility that artificial intelligence may end up becoming harmful to mankind should not be
discounted; the same should be kept in mind during further developments in this area.

AI has been able to achieve incredible accuracy through deep neural networks. Google photos,
Google search, and Google maps are all based on the deep learning technique. The more you use them it
keeps on getting more accurate. For example, in the medical field, image procession and object
classification is now used to find cancer in MRI scans with same accuracy as that of highly trained
radiologists. More than technique, data plays a major role. Data itself has become an intellectual property.
By just applying AI algorithm one can get hidden answers from data. Having best data in industry is of
utmost advantage at this peak time because the one with best data is ultimately going to win over others.

It is interesting to note that with the passage of time and exposure to multifarious stages of dynamic
emotions, human beings started adapting themselves to their external environments in a way which
maximized their comfort: be it material comfort through accumulation of resources, emotional comfort
through interpersonal interactions, sexual comfort through mating or spiritual comfort by believing in a
faith or a supernatural force. These maximization endeavors resulted in the development of everything we
know today. Material comfort maximization prompted human beings to start hunting for food which
eventually transformed from tools-making to online food delivery which we know today. Emotional
comfort prompted human beings to develop languages so that they could talk with each other and express
what they felt which eventually transformed from cave-paintings to voice-keyboards which we use today.
Spiritual comfort maximization led to the invention of religion which later transformed into whatever
religion (and the related non-religious activities) has left us to think about it. xii

Questions of when artificial intelligence will surpass human intelligence are now redundant. There
are machines that can perform better calculations, analysis, decision making and even chess matches than
most human beings. Does that mean that machines will definitely evolve into super-intelligent creatures
over a century capable of controlling the world? Unlikely, as the creators, i.e. the humans, during the time
of further development, will be bringing in all aspects of safety, security, privacy and human dignity
required to implement artificial intelligence as well. Elon Musk recently commented that Artificial
Intelligence is ‘vastly more risky than North Korea’. This must not be seen in isolation and treated with

18
alarm as it is an acknowledgment of the possible harm artificial intelligence may bring to the humans.
This will only help in improving the situation of security and safety.

Artificial intelligence, unlike the narratives in movies, is not set to become evil, rather machines may
set goals that diverge from that set by humans. Also, it is not just robots and drones but any device that
can connect to the various communication channels that can affect the humans. There is a chance of
machine becoming smarter than humans and them controlling us much like how we control pets, but these
are years or decades away. There is ample time to plan ahead and devise strategies and safety measures
to prevent a Frankenstein.

Lastly, applying the LEMS analysis to AI, we revisit the four questions:

• Legal: Is AI doing the legal thing? Following the Law of the Land? Doing something decidedly
beneficial for the society and the nation?
• Ethical: Beyond the legal, is AI doing the right thing for the economy, society, nation and the globe?
Are they better alternatives that are less harmful and more beneficial than AI?
• Moral: Beyond the right thing, is AI doing the right thing rightly? For instance, is it the best time to
rush it? Is it done for India given its massive populations and poverty levels? Should national and
international governments intervene such that right things are done rightly?
• Spiritual: Beyond the legal, ethical and moral, is AI doing the right thing, rightly, and for the right
reasons? As long as AI is patronized by hedge funds for cost containment via massive job losses and
for profit maximization with no decided benefits for the marginalized millions, the right reasons
may not be spiritually valid.

We have discussed all four aspects of AI in much detail. The reader should be able to respond to
these four questions, as also add one’s own knowledge and experience of AI in doing so.

19
 Table 7.1: Assessing the potential impact of AI on various industries
Basic Target Computing or Impact on Human Potential Impact on Actual
Dimensions & derived domains of Skills Specific Industries Impact on
Domains of AI AI Specific
Industries
Machine Deep Learning High-skill statisticians Management market Initial
Learning Research Industry
Predictive Analytics High-skill data analysts Management Data Analytics Strong
industries
Translation Middle level-skilled Management Initial
translators communication industries
Natural Classification and High-level interpreters Management Hermeneutic Weak
Language Clustering and taxonomists Industries
Information Extraction High-level Inferential Strategic problem-solving Strong
Processing
Strategists Decision making industries
(NLP)
Speech to Text High-level Interview transcription Quite strong
transcriptionists industries
Speech Text to Speech Middle level Text to speech industries Initial
communications such as PPT, YouTube,
Social Media industries
Expert Systems Knowledge expert High knowledge skills High tech knowledge Strong
industries
Skills Experts High skilled routines High tech routines Very strong
industries
Market Scanning and High market scanning Market scanning skills and Initial &
New Product Designing and NDPP skills NPDD skills industries rudimentary
and Developing (NPDD)
Planning Planning Systems for High NDPP Planning High NDPP Planning Skills Strong
NPDD systems Systems Skills industries
Scheduling and
MPDD Market Decisions High NDPP decisions, High NDPP decisions, Initial and
Organization and choices choices and deliberation choices & deliberation skills promising
skills industries
Consequences of Choices Responsibility skills for Moral responsibility skills None
choice outcomes for choice outcomes
Robotics for Mechanized Low-high level Low to high level Very strong
structured routines mechanized skills (e.g., mechanized skills industries
Robotics logistics, transportation,
diagnostics, surgery)
Robots for unstructured High level non- High level non-mechanized Initial
and non-programmable mechanized unstructured skills
routines unstructured skills industries (e.g., exploratory
and emergency medicine)
Image Recognition Middle-level image Middle-level image Strong
Vision recognition skills recognition skills industries
Machine Vision Low level machine vision Low level machine vision Very strong
recognition skills recognition skills industries
Mission, values and moral High-level mission with High-level ethical and moral Very
Mission and and ethical principles ethical and moral skills mission skills industries rudimentary
Goals Setting Goals setting and Middle-level goals setting Middle-level goals setting Promising
predicting outcomes and predicting skills and predicting skills
industries

20
End Notes
iThe history of AI can be dated back to 1936 when the British logician and computer pioneer Alan Mathison Turing described an
abstract computing machine with limitless memory, consisting of a scanner that moves back and forth through the memory to
modify or improve its own program. This is now known as the Turning Machine, which is essentially the concept behind all the
modern computers.

ii
Hern, A. (2017, September 4). Elon Musk says AI could lead to third world war. The Guardian. Retrieved from
https://www.theguardian.com/technology/2017/sep/04/elon-musk-ai-third-world-war-vladimir-putin

iii Major bottlenecks to AI’s earlier Growth were: a) Limited computer power - The most significant limitation of artificial
intelligence in its initial phase was the limited computer power available for computation. Computer vision applications were
strained because of this limitation. A typical supercomputer in 1976 cost around $5-8 million with speed only in the range of 80-
130 MIPS; b) Intractability and Combinatorial explosion - The earlier limitation was compounded by the fact that most problems
could only be solved in exponential time. As a result with the technology available at that point of time, it required enormous
amount of time even to do basic combinatorial computations; c) Common knowledge and reasoning - Advance applications like
image processing and language processing require a large amount of data to be stored in the database. At that point of time, no
one could build such a large database and people were also not aware of how to use such a vast amount of information; and d)
Frame and qualification problems - With the technology and interface that was available, AI researchers could not represent the
logics that they wanted to implement. Consequently they had to build alternative logics that could be incorporated into the
system with the existing technology
iv Historically, technological advancement was always perceived as a threat to employment especially of the masses. The
Luddites during the industrial revolution vehemently opposed the textile mill automation through machines and steam engines.
The clerical staff and the officers of all the Indian banks had opposed the computerization process. However, the productivity of
the industry increased, demand for product and services increased and the jobs became easier for the employees as well. Direct
new jobs such as maintenance and repair of machines became evident and indirect ones such as extended and varied services
such as improved and targeted customer service and the sale of insurance was now possible in a Bank branch. An ATM installed
reduced the manual labor required for cash handling by more than half. A World Bank research has predicted up to 69% jobs are
being threatened by Artificial Intelligence in India alone. Complete elimination or at the very least marginalization of jobs is
inevitable. Mr. K.R. Sanjiv, Chief Technology Officer of Wipro, said: “If it (automation) is not planned well and addressed
holistically, it is a disaster in the making.” Decisions need to be made today to ensure smooth transition from the current jobs that
is in all likelihood going to take place within the next decade.

The Steel Industry illustrates this law perfectly. Nearly 400,000 people have lost their jobs in the Steel Industry between the
years 1962 to 2005. This is due to the conscious decision made to lower costs by replacing costly manual labor with automated
machines. In the last few years, software companies have reduced their workforce significantly eliminating thousands of jobs
every year. This has given rise to trade unions in software industry to protect people’s jobs. Even in the manufacturing sector, the
growth at which new jobs are being created is decreasing year by year and the entire assembly lines are automated thus leaving
many people jobless. This rise in unemployment is decreasing the welfare of the people who have lost their jobs and many
people could lose their jobs in future as well.

v Manyika, James, Michael Chui, Mehdi Miremadi, Jacques Bughin, Katy George, Paul Willmott, Martin Dewhurst (2017,
January). A Future That Works: Automation, Employment, and Productivity. McKinsey Global Institute, McKinsey & Company.
Retrieved from https://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Digital%20Disruption/
Harnessing%20automation%20for%20a%20future%20that%20works/MGI-A-future-that-works-Executive-summary.ashx

vi
Forrester Predicts IOT, AI, AR, and VR will change the Tech world by 2021. (September 12, 2016), Forrester. Retrieved from
https://www.forrester.com/Forrester+Predicts+IoT+AI+AR+And+VR+Will+Change+The+Tech+ World+By+2021/-/E-
PRE9464

vii
Will robots displace humans as motorised vehicles ousted horses? Probably not, but humans have a lot to learn from the equine
experience (2017, April 1), The Economist. Retrieved from https://www.economist.com/news/business-and-finance/21719761-
probably-not-humans-have-lot-learn-equine-experience-will-robots

viii
Crofts, Andréa (2017, November 6). Notes from #WebSummit: Opening Address from Stephen Hawking: The impending impact
of AI on humanity: for better, or for worse. Retrieved from
https://medium.com/web-summelier/notes-from-websummit- opening-address-from-stephen-hawking-442bb4305ff4

21
ix
Morris, D.Z. (2017, July 15). Elon Musk Says Artificial Intelligence Is the ‘Greatest Risk We Face as a Civilization’.
Fortune. Retrieved from http://fortune.com/2017/07/15/elon-musk-artificial-intelligence-2/

x
Lehmacher, Wolfgang (2016, November 8). Don’t Blame China For Taking U.S. Jobs. Fortune. Retrieved from
http://fortune.com/2016/11/08/china-automation-jobs/ . Wolfgang Lehmacher is head of supply chain and transport industries at
the World Economic Forum.

xi
The Fourth Industrial Revolution Gains Momentum. Circuit Insight, Electronics Assembly Knowledge, Vision & Wisdom.
Boston MA, USA. The painful period we've been in since the dot-com bubble burst in 2000 represents a predictable transition.
It's like the Great Depression-a period when economic institutions are fundamentally reshaped to meet the demands of the new
revolution: Just as the Great Depression had market crashes in 1929 and 1937, the so-called Great Recession had them in 2000
and 2008.

xiiWhat is still more interesting is that the abilities which we take today for granted is a cumulative effort of the natural forces
teaching us how to respond. This forms the essence of Natural Intelligence: the abilities which nature has endowed us through
genetic evolution in enabling human lives. Artificial Intelligence is the extension to that very notion. Artificial Intelligence (AI) is
the art of enforcing evolutionary learning in a non-living body in a revolutionary time-frame so that the object responds with an
equal or even enhanced panache as compared to human-response when subjected to instances of natural stimulus.

22
 Chapter 08
The Ethics of Reinventing the Morally Embattled Corporation
Executive Summary

The over 125-year old economic miracle called the Corporation is suddenly shaken in its foundations. The
corporate business world is rapidly changing not only in the USA but across the globe. The front covers of
business magazines and dailies, once dominated by names and faces of “Corporate Giants,” are now being
replaced with success stories of great startups and small business entrepreneurs. The reasons for these
radical changes progressively reveal the imperfections existing in the current corporation and the business
boardroom paradigm. For over a century, huge corporate entities spawned by capitalism have established
and entrenched themselves in their respective industry arenas and have since been ruling the world,
dominating money, capital, cash and market opportunity. Once they provided solutions to people’s
employment and career needs, but have made a fortune for themselves thereby. In the course of their
evolution, the businesses have transformed into corporations, seeking people’s money for doing business and
in turn giving a share of proportionate ownership to the investor people in the form of dividends and capital
gains. Such a brilliant method of raising capital has empowered the corporations to grow and expand beyond
physical and political boundaries. Today, however, the corporations are run by the board of directors most of
whom are representing gigantic promoter investor institutions. That is, the main administrative role is now
replaced by private equity firms and hedge funds that provide the required capital but who also exert undue
pressures on CEOs to focus on short-term strategies that have massive profitability potential, thus defying
the usual business management model and paradigm the CEOs were trained for in B-Schools. The massive
CEO exodus that has migrated from the traditional corporations to newly created startups and smaller
business entrepreneurial ventures has also made the corporation an endangered species. In such a market
turbulence how do we redefine, re-design and reinvent the morally embattled corporation? This
chapter explores solutions.

Case 8.1: The Persephone Beer Company

Persephone Brewing Company (PBC) is located in picturesque Gibsons, British Columbia (BC). PBC grows
hops, food, beer and community at what is lovingly known by the locals as The Beer Farm! Named for the goddess
of spring bounty and the log salvage boat from CBC’s hit TV series The Beachcombers, Persephone operates an 11‐
acre farm and craft micro‐brewery on BC's Sunshine Coast. Producing some of the finest craft beers, the PBC
"farmhouse" approach integrates onsite farming of hops and honey while sourcing BC grown and malted barley.
Their brewery and farm is in part owned by the Sunshine Coast Association for Community Living (SCACL), a
non-profit organization providing services for people with developmental disabilities, a number of whom work at
the farm. Their annual fundraising events include the Tough Kegger adventure race and the Sunshine Coast Craft
Beer Festival, great excuses to have fun and quaff some delicious brews for a good cause.

Not content with simply making the best and freshest beer, Persephone is committed to making the
world a better place through early adoption of ecologically positive systems and working as a social
venture to employ people who need it most. PBC’s aspects of sustainability program include converting their
spent ingredients into compost, reusing waste water for irrigation, partnering with local growers and chefs to provide
a hyper-local culinary experience, and scads of community fundraisers and events that bring the community together
with visitors from afar to help them build the world we all want to live in.

Persephone was first inspired by breweries in the UK who had found success with crowd-funding, and saw an
opportunity to drive connection to their company through ownership. “We saw the real benefit in terms of investors’
engagement—not just their capital but their help to build a loyal customer base. That’s fostered its own momentum
and its own opportunity,” Smith said. “What if we had a thousand owners? Not just loyal customers but
ambassadors who would tell their families about Persephone Beer. I think this strategy to capitalize our growth
doubles as a marketing strategy in terms of spreading our brand awareness and developing that owner-customer
base.” (See Reference #2 below for this as well as other quotations in this Case)

1
 Beyond creating new evangelists for their company, exploring equity crowd-funding has also helped
Persephone Beer tap into an investment market that most North American businesses haven’t even heard of.
“Crowd-sourced equity is much more mature in Europe than it is in North America; we’re on the front end of a
pretty substantial investor wave,” Smith told us. Equity crowd-funding has only been possible in Canada and the
USA for less than eighteen months. “Frontfundr is our partner here in BC. The regulations allowing for crowd-
funded equity are only about a year old in Canada, so there aren’t a lot of players in the space who are using this to
attract investors to businesses.”

Persephone Beer has another advantage: their B Corp story. i When law firm Drinker Biddle studied the first
companies to start raising money through regulation crowd-funding in the USA, they saw that social enterprises
were disproportionately represented. The most successful campaign so far in the USA belongs to a Pending B Corp
and benefit corporation named BetaBionics.

“I definitely think there’s a big draw from being a B Corp,” Smith confirmed. “Being a B Corp is very
indicative of the kind of company we are and helps us attract community investors.” For Smith, the principles that
apply to values-driven consumers apply just as much to this new class of investors. “People who want to use their
consumer dollars thoughtfully also want to use their investor dollars thoughtfully. Not surprising, but very
encouraging,” he said; “70-80% of our investors are in that vein.”

With the lower price point that comes with equity crowd-funding, many more of those conscious consumers
become potential investors. People can purchase shares through Persephone’s campaign on Frontfundr for only
$250 dollars. “We wanted to popularize equity investing for folks who might otherwise have had to be accredited,”
Smith said. “This is a company that’s growing fast. Our investors see opportunity in that, and it’s very accessible.”

Their investors also saw the opportunity to create positive impact. “For us, a big part of growth is not just
making more beer but having more impact on our community,” Smith said. “Last year we were at about 15-20
employees, and next year we’ll be at 30ish. A proportion of our employees are people with disabilities. I think many
of our investors and partners are thinking, ‘I’m in this for the impact, not just the financial returns, so let’s see if we
can take that B Corp model to scale. Can we take it to 500 people affected by Persephone’s work?’”

Smith sees a future in equity crowd-funding for both B Corps—both to raise capital and to change the
investment world. “It depends on the kind of business you are and the investor you’re looking for, but I think it’s
worthwhile as part of the B Corp movement to popularize equity investing through crowd-funding,” he told us.
“Equity crowd-funding helps people diversify their portfolios and become more savvy about where their money
goes, so they can keep it local or keep it cause-based, and make it more thoughtful. If we’re saying you should be a
more thoughtful consumer, you should be a more thoughtful investor too.”

Companies of all kinds are beginning to pursue equity crowd-funding, including both early stage businesses
and older companies. For Persephone Brewing Company, a three-year-old B Corporation in British Columbia,
crowd-funding their third round of investment let them capitalize on the appeal of their positive impact and use their
ownership to contribute to their social mission. “We always had the idea of democratizing our ownership model,”
said Brian Smith, Persephone’s co-founder and CEO. “Just like we knew we wanted to start an employee stock
ownership program, we knew we wanted to bring in more local ownership.”

Reference Links:
[Major Source: The BlogVoice of the B Corporation Community. Posted by: efreeburg August 24th, 2016].
https://www.bcorporation.net/community/persephone-brewing-company
https://www.facebook.com › Places › Gibsons, British Columbia › Urban Farm
https://www.tripadvisor.com/Attraction_Review-g182206-d6405750-Reviews-Perseph
https://www.yelp.ca › Food › Breweries
https://twitter.com/persephonebeer?lang=en

2
Ethical and Moral Questions
1. Following Persephone Beer Company (PBC), discuss the legality, ethicality, morality and spirituality
of crowd-funding ownership for small businesses in India.
2. Following PBC, discuss the legality, ethicality, morality and spirituality of democratization of capital,
investment and ownership for your company in India.
3. PBC is not debt over- leveraged or promoter-dominated – two major threats to corporations today.
Is this a good template for reinventing the morally battered corporation of today, and why?
4. PBC shows also signs of crowd-innovation and crowd-customer-facing. How will you incorporate
these new features (see also P&G or Google or Cloud who do this) as your Corporation’s additional
strengths when battered?
5. Small is beautiful (Schumacher, 1973). PBC is small and beautiful, doable and desirable. How can
this model save the over-sized embittered corporation of today?
6. There is hardly anything that Artificial Intelligence can threaten in PBC. It is not an individual wage
job; it is a community innovative work-project, especially for the challenged. How will you emulate
these attributes in reinventing your corporation, and why?

Introduction
The over 125-year old economic miracle called the Corporation is suddenly shaken in its
foundations. The corporate business world is rapidly changing not only in the USA but across the globe.
The front covers of business magazines and dailies that were once dominated by names and faces of
“Corporate Giants” are now being replaced with success stories of great startups and small business
entrepreneurs. The reasons for these radical changes are now being discussed openly and scrutinized
objectively. Such discussions are progressively revealing the imperfections existing in the current
business paradigm and the corporation in the free enterprise capitalist system (FECS).

Imperfections in the Free Enterprise Capitalist System (FECS)-based

Corporation
The fragmentation of ownership is an unintended consequence of the rise and development of the
American public company. In the 19th century USA, there were limits on a bank’s ability to swap or lend
restricted credit, and a strong legal system supported contractual agreement. Hence, companies began to
raise capital through direct public offerings via stock markets, and this enabled the development of the
American corporation and the American industry. But a result of this democratization of capital and
ownership there followed serious dilution of ownership and the loss of control.

Over time, however, mechanisms emerged to trade these direct offerings in regional and national
financial markets. Stock markets flourished, and joint-stock companies became models of ownership, and
the big public companies became the capitalist norm. Large corporations became akin to sovereign
entities, divorced from the influence of their “owners” by retained earnings that allowed managers to
invest as they thought fit. When companies became ever larger and more powerful (something that Adam
Smith did not foresee in 1776 when he wrote “The Wealth of Nations”), governments felt the need to
control them. Ever since the emergence of the large corporations, laws and regulations have greatly
increased, and so also the power of corporations through the “lobby” created by corporate donations. To
help investor buy-sell decisions, the corporations were mandated to disclose their operations and
performance by structured Annual Financial Statements supplemented by Annual Reports during Annual
General Body Meetings (AGBM) with shareholders.

For over a century, huge corporate entities spawned by capitalism have established and entrenched
themselves in their respective industry arenas. These entities have since been ruling the world, dominated

3
money capital, cash and market opportunity. No doubt, they have provided solutions to people’s
employment and career needs, but have made a fortune for themselves thereby. In the course of their
evolution, the businesses have transformed into corporations, seeking people’s money for doing business
and in turn giving a share of proportionate ownership to the investor people. Such a brilliant method of
raising capital has empowered the corporations to grow and expand beyond physical and political
boundaries. They also provided the common man of dreaming big and ultimately making it - often from
rags to riches. That is a tremendous increase in wealth even when adjusted for inflation levels. Thus, the
mode of financing an organization completely changed, and with it the whole organizational structure
changed as well, with its vision and mission. Today, the corporations are run by the board of directors,
appointed members of which serve as CEO and chairperson. The main administrative role was taken up
by a board of directors who represented the shareholders and intended to work in their favor. The role and
the ownership of managers, therefore, have diminished in the organization. The corporation structure
became too complicated with layer upon layer added and that is where the problem started.

Growing Dissatisfaction of Corporations

Currently, there is a growing dissatisfaction with the corporation or the listed public company,
especially as it exists in the USA. The best listed companies or corporations have been remarkable
organizations thus far, mobilizing talent and capital, responsible for their quarterly results and long-term
investments that have kept them growing, and they have certainly produced a stream of talented managers
and innovative products. But after a century of market dominance, the public corporations are showing
signs of wear and tear. One reason is that top managers put their own interests first, even though the
shareholder-value revolution had incentivized them via stock options since the 1980s in the USA. Many
managers feel that their jobs depend upon and are rated by short-term goals and objectives, quarter after
quarter, rather than the long term ends the markets look for.

The corporate structure and daily routine is becoming more and more undesirable and unwelcoming.
Even though the companies are trying to attract new recruits through incentives and stellar salaries, they
are still failing to retain talent. Corporations go to great lengths to attract them with strong value
propositions; but once they join, these values are nowhere to be seen. Corporations do not give employees
at all levels of the firm the ability to challenge the way things are done and propose new ways of working.
This stifles innovation in big corporations and contributes to employee turnover.

The once publicly appreciated and omnipresent public company structure is now under the radar and
is facing public scrutiny due to a multitude of legal, economic and ethical repercussions that have diluted
the position of strength that the corporation structure once enjoyed. With time, several unwanted
components have crept into the system and have played their role in destabilizing a once popular and
efficient model.

Some new consequences of the contentious public company structure are:

▪ Conflict of Interest: Managers today, at least the vast majority, believe in a different ideology. They
believe their sole responsibility in the organization is to maximize the wealth of their shareholders. They
do not want to extend their services beyond that. The obvious fallout of this kind of thinking is sheer
neglect of other important facets of the organization - the fact that they also have a duty to the company
and are linked to the shareholders via the company. Managers need to keep the betterment of the
company above anything else. This would lead to a holistic development of the organization and the
surrounding ecosystem.

▪ Quarterly Capitalism: This is a new term for ‘short-termism’ – it strategizes short-term benefits rather
than long-term objectives and investments. Over the years, the axis of concern has shifted from long-term

4
 benefits to short-term gains. Focus is now on distributing money to shareholders rather than innovating
and taking risks so as to come with radical solutions to existing market and humanity problems. Corporate
executives have shortened their investment horizon, mostly to a quarter. The fast turnover of CEOs has
acted as a catalyst to incorporate quarterly capitalism as they would not be liable for the actions initiated
in the present. It has also developed an attitude that is intolerant towards failure. The top rung of the
company have slowly begun to cut down the gestation period for new and innovative projects as it might
have a negative bearing on the quarterly reports of the company. In a time where climate change is our
most important concern, the growing trend of quarterly capitalism is a harbinger of ominous times. Short-
termism is antithetical to long-term sustainable approach towards growth. Short-termism discourages and
depresses executive imagination and creativity, transformational innovation and productivity and
subsequent long-cycle innovations that result from long-term strategies.

▪ Regulations: Regulations have multiplied since the Enron scandal of 2001 and the financial crisis of
October 2008. Conflicting interests, short-term goals, and regulation all impose costs. The outcome of all
this is dismal: public companies are struggling to squeeze profits out of their operations. In the past 30
years profits in the S&P 500 of the big American companies have slipped to a mere eight percent growth,
and have even sunk to five percent growth in the last two quarters of 2015. The number of companies
listed on stock exchanges in the USA has fallen by half since 1996, partly because of consolidation, and
also because talented managers have moved to private companies (“Reinventing the Company,” The
Economist, October 24, 2015, p. 11). The global financial crisis of October 2008 was an eye opener. It
showed us the extent to which our capital system is fragile and has been damaged and that it is time to
introduce new changes to the system. The dot com bubble, Enron scandal, and the closer-to-home Sahara
case and the Forex scandal in the Bank of Baroda, and now the behemoth scandals in the Punjab National
Bank and its foreign branches, are also testaments to the fact that the government was provided with no
other option but to introduce stricter regulations in the system so as to curb “wealth without work,” a
capital sin that Mahatma Gandhi asked us to avoid at all costs. These regulations have resulted in erosion
of profits as it has increased red tape and also increased the clearance time required for projects. Growth
has stagnated and squeezing profits out of operations is a task in itself. This also has an adverse impact on
the consumers as firms tend to escalate prices. Stricter regulations also discourage foreign investors to
invest in an over-regulated market or country and thus send a negative image of the country. This in turn
has encouraged the concept of quarterly capitalism as firms concentrate on short term benefits rather than
going for long-term projects.

▪ The Agency Problem: In the traditional publicly listed corporations interests are misaligned along the
entire chain of owners, investors, managers, and employees. The distinction between these parties is not
well defined and often denied in many ways. Capitalists have become owners, and managers have lost
their freedom to create, imagine and innovate. For instance, an employer running a 401K selects a
committee which selects an investment provider which in turn selects fund managers who select
companies whose (selected) board members appoint managers. Each step is swathed in regulation that,
even if well-intentioned, is shaped by lobbyists to benefit one or other of the parties rather than the system
as a whole” (The Economist, October 24, 2015, pp. 23-24). This layered management provides ample
scope for mischief, fraud, corruption, and bribe. The main problem identified is termed as “The Agency
Problem.” This simply translates to the conflict of interest problem which exists in such a situation
involving managers and shareholders. The shareholders appoint the top manager (as CEO or managing
director MD) and they want the manager to maximize the returns for the shareholders. On the other hand,
the manager’s role is actually to manage the business; that is, taking into consideration both the long-term
goals and short-term goals. The manager must act in the interest of the organization, but is always under
the scanner and pressure of getting higher returns for the shareholders. When this pressure builds up it
terminates into unwarranted actions taken by the manager which harms the organization and therefore the
shareholders.

▪ Fraudulent Practices: Nowadays managers have to deal with anonymous or ghost owners as companies
are swamped with them. The managers interact with funds managers who represent these anonymous
owners. These funds managers buy and sell stocks on the stock exchange. This results in a long chain of
intermediaries – the latter creates an environment for financial leakages. Intermediaries at different levels
would have their own self-interests thus making life difficult for managers. The practice of insider trading

5
 has also reared its ugly head. Since the financial institutions yield significant power, they can use insider
trading to fuel short term earnings of the company and hence, indulge in quarterly capitalism. This would
push the value of stocks in the market thus coalescing funds from the market.

▪ Crony capitalism is also a consequence of the current structure of public companies. Since there are
very high power centers in the organization, power does not get distributed. Insider trading can be one
way to encourage crony capitalism as sensitive information can be shared so as to ensure heightened
benefits.

Promoter Dominance Paralyzes the Corporation

Individuals were buyers and sellers of shares for decades. But in their place investment banks have
emerged and have expanded relentlessly. Big sovereign financial hegemonies like BlackRock, Vanguard,
and JP Morgan Chase that own over 70% of the value of shares in the American stock markets are
dominating the traditional corporation. Their sheer size and ubiquity gives them tremendous influence,
and the managers of these institutional giants may not share the interests of the small shareholders nor of
the corporation managers. This has created what John Bogle, founder of Vanguard, calls a “double
agency” society in which the assets owned nominally by millions of individuals are in the hands of a
small group of corporate executives and investment managers whose concerns could differ from those of
the masses.

The other aspect of the problem is the lack of ownership on the part of managers in the organization.
There have been several methods adopted to incentivize these individuals to act proactively bringing
benefits to the organizations and its shareholders, but self-interest compels them to adopt means to
maximize their own income without caring for the unseen consequences of such action. This ultimately
backfires for both the company and the shareholders. Thus, with such a structure, the owners are actually
not having the control of their own organization, the managers fail to perform their duties in a sound way,
and ultimately the corporation fails both in its business model and structure.

Thus, the different interests of the different layers impose large and inescapable costs. For instance,
fees such as those charged by mutual funds are unavoidable at every level. Most insidious is the “agency
problem” that arises from conflicts of interest between people who provide money (e.g., promoter
investors) and all the parties through which it travels to and from investments. The link between the
interests of the forced capitalists in 401Ks (and federal government pension schemes that are broadly
similar) and the management of assets they seemingly own is, at best, compromised. The experience of
ownership of a company no longer accords with the traditional concept of ownership. The allocation of
rights in a public company has become unarticulated and ambiguous. Attempts to fix this by demands for
transparency and regulatory changes (e.g., the Sarbanes-Oxley Act 2002) have either almost failed or
added to the costs and complications of enforcement that includes additional levels of bureaucracy and
more red tape.

In the year 2014, 14.2 % of CEOs at the world’s largest 250 public companies were dismissed - the
highest rate since 2005. Executives from Bank of New York Mellon, British Petroleum, Burger King,
Hewlett Packard, Standard and Poor, Yahoo, among others, were all abruptly shown the door (BTS
Insights, October 2015). For today’s CEOs, the window available to develop a strategy and translate it
into long-term production-cycle action is narrowing dramatically. To deal with the new age requirements
CEOs are turning to new age solutions. Business simulations and experimental learning methodologies
are being used increasingly. However, the industry is still on the look-out for a solution that holds well in
the long run.

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 Public corporations have been at the heart of modern capitalism for over a century now. Public
companies can raise funds and capital through debt or equity instruments. Going public is an easy way for
private organizations to raise capital. But since the turn of the century, number of publically traded
companies has been dropping consistently. On the American Stock Exchange, the number of such
companies dropped close to 44% from 1997 to 2012.

Share Buy-Back for Restoring Corporate Control

A very recent trend in USA is share buy-backs by corporations. These ran at $600 billion a year.
Apparently, they are a legitimate way to return cash to investors and also artificially boost earnings per
share (EPS). Thus, IBM spent $121 billion on buybacks during 2005-2015, twice of what it forked out on
R&D in the same period. In the third quarter of 2015 its sales fell by 14% (or by 1% excluding currency
movements and asset disposals). Wal-Mart spent $60 billion on buy-backs and thus fell far behind
Amazon in e-commerce (The Economist, October 24, 2015, p. 58). Both IBM and Wal-Mart should have
invested more in their own business. Buy-backs may not be the best strategy to recover balance for the
embattled public corporation as they erode profits. For their entire obsession with growth, big
corporations appear paralyzed. While they long to expand, they also want to protect peak profits, restrain
wages from profit sharing, buyback shares and hold armfuls of excess cash on their balance sheets. What
might make sense at the level of the firm causes stagnation across the economy. How can corporations
escape this trap?

High-potential Dynamic Startups

A new interesting alternative, however, to the troubled public listed company is the new breed of
high-potential startups in temporary office spaces created by thousands of young people, fueled by coffee
and dreams. Vizio was the bestselling brand of TV in America in 2010 with just 200 employees.
WhatsApp persuaded Facebook to buy it for $19 billion despite having less than 60 employees and
revenues of $20 million. Startups are in every business from spectacles (Warby Parker) to finance
(Symphony). Hotel Airbnb put up nearly 17 million guests over the summer of 2015. Uber (London
cabbies) drives millions of people every day, and Cloud computing stores and retrieves thousands of
Gigabytes and Terabytes of data. Across industries, “disrupters” are reinventing how the business works;
they are reinventing what it is to be a company. They are a revolution in the making, all insurgent
companies confined to a corner of Silicon Valley. Yet they are going main stream.

Is the start-up bubble in India ready to burst? This year (2015) could be one of the biggest years for
tech-based start-ups in India, concludes a study by Bangalore based consultancy firm Zinnov. India holds
the third rank in the start-up race worldwide with more than 4,200 start-ups. Investor backing has
increased by more than 2.3 times and global investors are flooding the market with never-seen-before
money. One year saw a doubling of active investors and there has been a spectacular rise in the number of
accelerators and incubators as well. The start-ups are changing the way the Indian Businesses think.
Flipkart, Amazon and Snapdeal have not only shaken the old retailers but have developed the logistics
industry (Huffington Post, October 13, 2015).

The start-up bubble, although it waits to be seen whether really it is a bubble or not, has become a
living thing and is expanding at an astounding rate. WeWork, an American outfit that provides
accommodation for startups, has 8,000 companies with 30,000 workers in 56 locations in 17 cities. Start-
ups are cropping in every part of the world, more so in the US, India and China. These countries have
registered phenomenal increase in the start-up sector, complemented by setting up of various venture
capitalist firms and angel investors coming into picture. The numbers are telling—from 3,100 startups in
2014 to a projection of more than 11,500 by 2020 - this is certainly not a passing trend. It is a revolution.

7
And it is going to change the way the markets are working today in India (Das 2015). The amount of
money raised has become a way some people benchmark a startup's success. The more an investor pours
into a startup, the better the startup's idea and team must be. It will have enough money to live a little
longer, at the very least. That logic is a bit twisted (The Economic Times, October 27, 2015, p. 1).

Another important aspect of the whole case is the reluctance of such startups to go public. These
firms thrive on the mantra that without the extra burden and red-tape that is involved when going public
will result in a better operational and financial functioning and better efficiency. However, many experts
believe that it is only a matter of time when these so-called start-ups go public in order to raise funds and
become public, finally converting into a full-fledged conventional company.

Crowd-Funding and Crowd Innovations Challenge the Corporation

The extreme surge in digitization and disruption in the cloud-based technology has been one of the
ground-breaking reasons for this paradigm shift. More and more app based start-ups are coming on the
horizon with more and more innovative ideas which are trying to challenge the existing practice of
various business and its running. Some of the most successful start-ups such as Uber, Airbnb etc. are all
App-based firms which involve an alarmingly low cost of capital as there is very limited capital
expenditures (Capex) in terms of operations. Similarly, a lot of start-ups have followed the suit. For
example, Netflix had altered the basis of competition in DVD rentals by introducing a business model that
used delivery by mail. At the same time, it reinvented itself by capturing the technology and replaced
physical copies of films with digital streaming over the internet. Today, Netflix has evolved from a
solely DVD-by-mail service into the world's largest provider of on-demand streamed media.

Technology and democratization of Internet has been successful in creating a profound impact on
entrepreneurship. The ability to learn skills for free online, share ideas, pictures instantaneously, has
created a new generation of startups with a genuine value to add. The supporters of this future suggest
that startups truly will stand up to the expectations shown by their high valuations.

The advent of crowd-funding platforms has the ability to disrupt the venture capital market in 2016.
This phenomenon has also driven up company valuations. The arrival of new forms of capital such as
Wall Street investors and crowd-funding platforms has altered the space previously exclusive to venture
capitalists. Non-VC investors are now in on about 66% of deals, particularly in middle and later stage
rounds. Hedge funds, mutual funds, and Limited Partnership co-investments are a growing source of
capital for startups. Crowd-funding will continue to change the dynamics of venture capital in the years to
come. An average person now has the power to invest in early stage companies, entrepreneurs have
greater access to funds, and ordinary people are in a position to gain more from early stage ventures.
According to experts, crowd-funding will move on to surpass venture capital in 2016.

At the same time, public companies are struggling to generate profits from their operations due to
conflicting interests, short-termism and regulations which impose costs. The stark difference in the
ownership has also contributed in the downfall of public companies and rise of private players. In
startups, initially the founders and first recruits own a majority stakes. They incentivize people with
ownership stakes or performance-related rewards. Today even the rights and responsibilities are precisely
defined in contracts. This aligns the interests and creates a culture of hard work and camaraderie. More
applicable performance indicators such as number of products produced are used in private as compared
to public companies which are still stuck in the convoluted rules and regulations. However, the
sustainability of the capital influx to the tech entrepreneurs will have to be seen in future. Many predict
that there’s potential for a market bubble similar to that of the 90s dotcom bubble. Recent declines in

8
venture capital funding show the industry may be on the decline, perhaps taking a backseat to new forms
of raising capital.

In the Indian context, the pioneer of start-up was Flipkart. Flipkart brought to the fore a very
different and unique business model of door-to-door delivery which was an unexplored business style.
The idea clicked and took off at an amazing pace. The company received numerous rounds of funding and
grew at an incredible rate. So much so, that the company started resembling many large business firms in
the country only to be differentiated by the fact it was still not public. It remains to be seen whether such
upcoming firms do go public in the future and even if they do, whether they can still maintain their
uniqueness and individuality and continue to thrive on the same working modules that they incorporated
during their inception.

Until 2009, 85 Broad Street in downtown Manhattan was the heartbeat of financial America, the
headquarters of Goldman Sachs. It was gracefully surrounded by streams of limousines with blacked-out
windows. Today, WeWork, an American outfit that provides accommodation for startups, has taken over
six of its 30 floors to house its 2000 “member” employees, and 85 Broad Street is now swarmed by
ordinary people with start-up wear, from tartan shirts to hoodies. WeWork has 8,000 companies with
30,000 worker members in 56 locations in 17 cities. Even though the startup scene is dominated by a
clique of venture capitalists with privileged access, yet ordinary people can invest in startups through
platforms such as SeedInvest or indirectly through mainstream mutual funds such as T. Rowe Price,
which buys into them during their infancy.

The ambiguities and obfuscation of public companies contrast sharply with the new corporate
structures of new startups. As a contrast, the startups are uniquely structured – investors, founders,
managers, and often, employees, have stakes that are carefully spelt out by contracts, rather than shares
traded on stock markets. These structures mitigate agency problems as the startup structures include
detailed agreements that include control issues (such as the allocation of board seats). Investors usually
insist that management, and often employees, own large stakes to ensure their interests are aligned to the
success of the venture. These contractual arrangements provide an experience of ownership that sidesteps
the concerns of public companies, by avoiding the contentious regulations and politics that surround big
corporations. The startups do not have the “agency problem” that arises from conflicts of interest between
people who provide money (e.g., promoter investors) and all the parties through which it travels to and
from investments. Hence, startup managers are fully focused on transforming a concept into a successful
company.

In the place of the century-old empires of old public companies where nobody knows who owns
them, these new startups are pioneering a new organizational form that defines who owns what. In their
early stages, the founders and first recruits of these startups owned a majority of stake, and they
incentivize people with ownership stakes or performance-related rewards, with rights, duties, and
responsibilities meticulously defined in contracts drawn up by lawyers. This situation aligns their interests
and creates a culture of hard work and camaraderie. Because they are private and not public, they
measure and state their performance not by elaborate accounting standards and annual financial
statements, but by new performance indicators such as how many new patents and products they have
produced. They exploit new technology that enables them to go global without being big with lumpy
nonproductive assets (NPAs) such as property and computer systems. They “can expand very fast by
buying in services as and when they need them; they can incorporate online for a few hundred dollars,
raise money from crowd-sourcing sites such as Kickstarter, hire programmers from Upwork, rent
computer processing power from Amazon, find manufacturers on Alibaba, arrange payments systems at
Square.” New startup companies always suffered from capital as commercial banks cannot lend to firms
that lack assets and revenues, nor could they afford the high fees and retainers demanded by traditional

9
investment banks and law firms. But an elaborate financing system has emerged instead. Startups can get
initial capital at effectively no cost from crowd-funding sites like Kickstarter and Indiegogo.

Startups will not have it all their own way. Public companies, however, will have their place to stay,
especially for capital intensive industries like oil and gas. Many startups will inevitably fail, including
some of the most famous, and some of them will eventually list or sell them to a public company. Their
approach to building a business will survive them. Currently, a growing number of startups choose to
stay private, and are finding it ever easier to make funds without resorting to public markets. In short, the
new startups are fabulously poised to conquer the world. They are pioneering a new sort of company that
seems to do a better job of turning dreams into business (“Reinventing the Company,” The Economist,
October 24, 2015, p. 11-12). Startups are fully focused on transforming a concept into a successful
company (“Reinventing the Deal,” The Economist, October 24, 2015, p. 23).

Startups typically begin with savings, or money from family and friends, and then tap outside
investors for seed funding through a variety of channels such as angel investors, accelerators (i.e., schools
for startups). Angel investors include entrepreneurs who were successful and made money from their
own startups and now invest in other young startups. The number of angel investors and venture
capitalists has increased substantially in recent years in USA – VCs alone, some 900 or so in 2009 to
3,000 in 2014.

Startups want to know what investors want – investors’ opinions matter hugely to startup firms.
Julia Jacobson’s small startup, NMRKT, enables boutiques and small manufacturers to create appealing
electronic marketplaces for their products in about half an hour. Since 2013, NMKRT has gathered 150
clients and is now considering its fourth round of financing. She attends several events (e.g., baby
showers) to meet prospective clients and investors. This empowers her to align interests of owners and
investors – an enduring inefficiency of the current corporation market. There is no “agency problem” to
contend with, no misalignment of interests between the investor and the owner. In startups there is a clear
distinction between what it is to be an owner and an investor. “Such a new model of capitalism practiced
by Ms. Jacobson and thousands of other startups is an attempt to get around the inefficiencies and costs
imposed by the agency problem” (The Economist, October 24, 2015, p. 24).ii

Incidentally, September 2015 in India, losses to unit holders and redemption pressure faced by JP
Morgan Asset Management Company (AMC) have driven capital market regulator SEBI to consider new
investment limits for fund houses. Two debt schemes of JP Morgan AMC faced redemption pressure
after bonds of Amtek Auto were downgraded by credit agencies. Unlike fund houses in the past, JP
Morgan chose to pass on the credit loss to investors. The Amtek Auto default rattled the corporate bond
market, raised risk premium on securities, and turned investor attention to securities of other debt-laden
companies. SEBI’s decision to revisit investment limits was occasioned by these developments in the
financial markets. According to a proposal under discussion, no fund manager would be allowed to invest
more than 20% of a scheme in securities issued by companies belonging to a corporate group. Thus far,
there have been no restrictions on the maximum amount that can be invested in a single company or
sector; that is, there is no cap on exposure to a single business group. The sector exposure limit is likely
to be reduced to 25% from 30%, while the single issue limit may be brought down to 10% from 15%
(Zachariah, Zeena (2015), “New Investment Limits for Fund Houses Likely,” The Economic Times,
Friday, October 30, 2015, p.1).

Is the Corporation an Over-Taxed Endangered Species Today?

In his online article of September 26, 2014 titled “Is the U. S. - Based Corporation an Endangered
Species?” Stephen J. Entin, a senior fellow at the nonpartisan Tax Foundation in Washington, D.C.,

10
contended that America's businesses are tired of waiting for tax reform, and in response they are voting
with their feet - physically and metaphorically. This do-it-yourself tax reform will continue until Congress
lowers the corporate tax rate, repeals our arcane worldwide tax system, and ends the double tax bias
against schedule C-corporations.iii Globally, the nearly 40 percent combined US federal-state corporate
tax rate is the third highest of 163 countries, behind only Chad and the United Arab Emirates. Not only is
our corporate tax rate too high, but the U.S. imposes that rate not only on domestic income, but also on
the non-U.S. income of U. S. headquartered businesses if the income is brought back to the United States.
Only six other developed OECD countries do the same to their businesses. The rest have so-called
territorial tax systems and do not tax the earnings of their companies in other countries.

A handful of U.S. multinational corporations are actually voting with their feet by moving their
official headquarters abroad to escape U.S. tax on their foreign income, a practice known as "inverting."
In fact, over the past two decades, thousands of businesses have quietly adopted "pass-through" forms -
such as partnerships, LLCs, REITs, RICs, and schedule S corporations - to escape the double taxation of
the schedule C-corporation. Inverting firms still pay tax to the U.S. on their U.S. earnings like any other
company. They only save the additional tax the U.S. imposes on repatriated foreign earnings, on top of
taxes paid to foreign governments. This is an additional tax that U.S. businesses' foreign competitors need
not pay. That added tax may be the difference between thriving and failing in foreign markets, and
between expanding and contracting U.S. production if firms need access to their foreign profits to reinvest
here.

As a result, the traditional C-corporation is on the path to becoming an endangered species.

According to latest IRS figures, there were 1.65 million C-corporations in 2011. This is the lowest
number since 1974 and nearly 1 million fewer since the Tax Reform Act of 1986. By contrast, the number
of non-C-corporation entities has exploded since 1986. The number of schedule S-corporations (which are
taxed like partnerships) has grown from 826,000 to nearly 4.2 million in 2011. Also, the number of
partnerships and LLCs has doubled, from 1.7 million to almost 3.6 million. The growth in the number of
sole proprietorships has been equally impressive. In fact, there is now more net income reported on the
individual 1040s of pass-through owners' than on the 1120 tax returns of C-corporations.

While Washington condemns inversions, it has actively encouraged foreign firms to buy American
firms. The Bush Treasury begged Barclays to bail out Lehman Brothers at the onset of the financial crisis,
but Barclays waited until the bankruptcy to pick up selected assets. The Obama Administration had no
qualms when Delphi was shopped to Britain during its reorganization, and had no trouble with Fiat's
purchase of Chrysler, even though the combined firm will be headquartered in the Netherlands.

Britain had a high corporate tax rate and a global tax system. As other European countries cut their
corporate tax rates, Britain saw some of its leading firms move to Ireland or the continent. In response,
Britain cut its corporate tax rate and adopted a territorial tax in line with or better than its neighbors. Now,
their corporate sector is rebounding and U.S. firms are fleeing to Britain. The number of U.K.
corporations is now more than triple of what it was in 1986, exceeding one million in 2012, and climbing.
It may soon surpass the U.S. level.

Chinese Economic Invasion Threatens American Capitalism and the

Corporation
Currently, China is dominating the production of goods in the world and is able to supply 40% to
60% of general public usage goods for far lesser prices than most competing companies, and is thus
endangering existence of smaller corporations and companies. Most of the domestic factories were
forced to shut down as they were unable to compete with the Chinese players. For instance, microwave

11
ovens were once pioneered by Raytheon, a USA company; in 1946 another U.S. company, Amana, outdid
Raytheon as the U. S. market leader, and in 1976 GE/Samsung emerged as the world leader. Today
almost 100% of microwave ovens sold globally are produced in China. Wal-Mart, the largest retailer in
the world and currently commanding over $600 billion in annual sales, purchases from China nearly 30%
of its supplies. China manufactures about 40% of furniture and over 45% of garments sold in the USA.
China’s exports of auto parts to the USA are three times over its next highest trading destination (Japan).
Apple Company, even though its headquarters and R&D units are still based in the USA, does most of its
production in China through its subsidiaries.

Almost 60% of Chinese exports to USA, however, are produced by firms owned by foreign
companies, many of which are American. These firms have moved production operations to China and
overseas in response to competitive pressures in USA to lower production costs and thereby offer cheaper
but quality products to consumers, as also higher shareholder return to domestic investors. In 2005,
China was a net steel importer; it became net steel exporter in 2006, and the largest steel exporter in 2007
to being the top global marketer of steel in 2015.

Obviously, while employment significantly increased in China, USA lost over 5.5 million
manufacturing jobs to China since 2005 (see “China’s Unfair Trade Practices” by Stephen Tabb 2011).
Since 2001, USA has lost 42,400 factories (362 among them employed over 1000 workers). If we include
the social externalities of these factory shutdowns on ancillary industries, the total multiplier effect could
be a loss of about 27.5 million manufacturing jobs. This loss looms large when we factor in that USA had
just about 33 million manufacturing jobs in 2005. Meanwhile, USA continues to increase its goods trade
deficit with China which grew from $124 billion in 2003 to $162 billion in 2004 to $366 billion in 2015.
[The USA, however, has a services trade plus with China that was around $30 billion in 2015, up by 5.2%
from 2014]. Allegedly, China’s government continues to subsidize its domestic manufacturing units so
that they remain overseas competitive and more. Out of 33 Chinese listed steel companies, 20% received
government subsidies accounting for more than 50% of their profits in 2014.

Even the Chinese dual currency (Yuan and RNB) seems to be artificially manipulated to nearly 35%
depreciation in relation to the US dollar so as to boost exports to the USA. China has essentially
“pegged” the value of Yuan to the US dollar instead of allowing it to float freely in open world foreign
currency markets. Such currency manipulation is illegal against Article IV of the World Trade
Organization (WTO) Agreement, but China as a sovereign nation, refuses to treat its currency devaluation
as actionable under a foreign law, even though it officially joined the WTO in 2001 with an agreement to
abide by its rules. In 1994, China devalued its official currency rate, and combined its dual exchange rate
system for uniformity. Apparently, Chinas continues indulging in regular espionage, counterfeiting, and
buying American technology companies. According to the US-China Economic Panel Security
Commission’s Report of 2015 to the Congress, “China’s government conducts and sponsors a massive
cyber espionage operation aimed at stealing trade secrets and intelligence from U.S. Corporations and the
government.” This includes Chinese government’s blocking of U. S. Company websites, revoking
business licenses, and censoring the Internet. Of late, China requires U. S. companies that build plants in
China to create joint ventures with local companies and build local R&D facilities so that they have
access to their latest technologies. China has over 1,000 such R&D units today. Testimony to Congress
by Patrick A. Mulloy asserts that “we are slowly losing the Advanced Technology Products industries to
China.” iv The Advanced Technology Industries include computers and electronics, life sciences and
biotechnology, aerospace, and nuclear technology. In 2014, US trade deficit with China in advanced
technology products was $123 billion. To say the least, these Advanced Technology Industries have
provided China with a strong military build-up.

Initially, USA promoted trade with China hoping thereby American consumers would be better off
by low-cost, high-quality Chinese imports. But currently, and in the long run, trade with China has proved

12
to be worrisome: it has created an accumulated trade deficit of $3.6 trillion, while exporting millions of
manufacturing jobs to China and stagnating domestic wages in the USA. China’s share of the US trade
surplus has soared, especially in 2009. American small businesses and entrepreneurs have lost market
opportunities losing to the dominating presence of Chinese products in the domestic markets. If
therefore, USA continues to be a major dumping station of China and its subsidized products, what can
stop China from dominating and overpowering the US markets and endangering its corporations?

Reinventing the Capitalist Corporation

The content, structure and operations of a typical corporation are changing. For instance, the highest
valued online retailer in the world, Alibaba, holds no inventory. Airbnb, which provides the highest
number of accommodations in the world, owns no real estate. Uber, which is the world’s biggest car
service provider, owns no cars. Google that maintains the largest and fastest growing encyclopedia in the
world does not provide the content. All four startups have one thing in common: they are thriving with
their customer-facing. They are capitalized, energized and growing via customer involvement, digitization
and globalization.

Creativity and innovation continue to be the prime engine of growth and sustainable competitive
advantage (SCA) for the corporation in general, and for the American corporation in particular. The 21st
Century innovative company is disrupting the economy at an unprecedented scale and if anything can be
predicted, it is that the disruption is going to continue. This is, according to Joseph Schumpeter (1943), a
positive and healthy disruption. A friction-free economy is an economy where labor, currency, capital and
data move with lightning speed at almost no cost. Journalist Geoff Calvin, in his Forbes article (October
2015) on the 21st century Corporation, demonstrates how this economy has already entered our world.

In October 2013, Tesla Model S-cars were catching fire due to low ground clearance. Usually a
defect like this would involve a recall that would cost the company in millions but Tesla skillfully
avoided this by sending a software update to thousands of cars remotely. Tesla in this case was
successfully able to bypass intermediaries like dealers and directly serve the customers. The trend of new
companies cutting down physical assets is led by Tesla. The drivetrain employed by Tesla is simpler and
requires the employment of fewer people. While General Motors creates $1.85 for a single dollar of
physical asset, Tesla makes $11. The common thread running in the 21st century Corporation is the
fluidity of asset movement and this is only possible by owning less physical assets and being nimble.
Companies have found ingenious ways to eliminate friction in the economy and connect the stakeholders
in an efficient way. The new way of conducting profitable business is to be idea intensive (see Beyond the
Idea by Vijay Govindarajan and Chris Trimble (2013)) and light on assets (see Forbes, October 2015,
Geoff Calvin).

Reinventing the Corporation

We assume the 125-corporation can be still renewed, renovated and even reinvented as a crucially
important component of the free enterprise capitalist system (FECS). Essentially, what the new
corporation needs is asset fluidity, human agility, nimble management and structure flexibility. From the
discussions on the current threats to the corporation we have considered thus far, we suggest the
following features as necessary conditions for redefining and redesigning the new corporation:

Fluidity of Asset Management: The distributed role of the capital from millions of household investors
has moved to stifling dominance by a handful few behemoth financial hegemonies like BlackRock, JP
Morgan and Vanguard. Reverse this progressively. Promoter domination is not good for the FECS-based
Corporation anywhere in the world. It destroys corporate executive freedom of imagination and planning,

13
the spirit of national and international venture and adventure, curbs inter-industry creativity and
innovation, cross-industry research and experimentation, and skews global progress and prosperity.
Promoter dominance accumulates wealth and capital at the top, and hence, growth and opportunity
concentrated with the top less than 0.01% of the national or global population, thus widening the gap
between the rich and the poor.

Change in Ownership: One way of reversing this promoter dominance trend is to decrease ownership of
capital assets by renting, leasing or shared use. The less dependence on physical capital (e.g., land,
buildings, equipment) as done by Uber, Airbnb) the more nimble and mobile will be top management.
This will reduce the need for huge promoter investor capital, and accordingly, for promoter dominance.
This will reduce crony capitalism. This is the secret of Apple and Google.

The action and values of a company are defined by its ownership structure. Today there are
numerous alternative ownership models viz. limited liability, Chinese capitalism, and western joint stock.
These range from Chinese state capitalism, with its strong connection between government and
enterprise, to cooperative businesses in Europe, where employees - the shareholders - distribute the
annual profit among themselves. But the single model which has claimed attention recently is the “No –
ownership” model. The largest hotel service provider (Airbnb) does not own a single hotel, the largest
taxi service player (Uber) does not own a single taxi, the largest electronic encyclopedia (Google) does
not provide any page of content, the largest content provider (Facebook) does not create a single line of
content on its own, and largest retailer (Alibaba) does not keep any inventory. Thus non-ownership model
has redefined the business processes and now it is more about creating value platforms rather than own
and control everything. Also the ownership of the company should not be invested in few hands which
control and make decisions for the company but rather each stakeholder should own the company and be
a part of the decision making process.

Long-termism and New Product Design and Development (NPDD): Good and innovative products and
services take some time for translating customer ideas into upstream value-chain activities such as
industry concepts, designs, prototypes, supply chain management, materials management, inventory
management, trade credit management, to midstream activities such as form and function, size and space,
color and sheen, texture and touch, product bundling, to downstream value chain functions such as
marketing, advertising, promoting, customizing, personalizing, pricing and financing, distributing and
retailing, salesforce and customer feedback, honoring warranty and guaranty, handling complaints and
redress.

All these are customer-facing functions that get compressed or fast-forwarded in promoter-
dominated, and rushed and crushed product cycles. Strong brand design, management and development
takes time, decades, and even centuries, as was the case with Glenfidich, P&G products, Lever Brother
Products, Levi Strauss, Coca-Cola, MacDonald, Pepsi-Cola, and the like. A strong brand can provide and
promote capital much more steadily and effectively than by promoters that spell loss of control. The
corporation should reinvent itself getting back to the basics of higher customer-facing-blessed, upstream,
midstream, and downstream NPDD value-chain activities and cycles.

Comprehensive and collaborative Entrepreneurship, Social Entrepreneurship and Startups: The

reinvented corporation should redefine and restate its more comprehensive and collaborative goals and
mission of reengineering and retrofitting this world as a place of entrepreneurship, incubation, creativity,
imagination, innovation, research and experimentation, with a primary purpose of making this world more
just than unjust, more equal than unequal, more safe than unsafe, more peaceful and secure than the
opposites, more giving back to society than sucking from it, more humanizing societies than
dehumanizing, more sustainable than ever before, more legal and moral and spiritual than ever before.
The Company’s statement of purpose defines the goals and motivations of an organization. The purpose

14
can also reveal the degree to which a corporation is committed to social improvement or wealth
generation and distribution. The purpose of the company should be clearly defined and it should not be
confined to being a part of the mad race of improving balance sheet numbers. This can also prove useful
as startups continue to grow in size and number as every firm will be aware about its social and economic
role in the marketplace.

All business entities, the big corporations, the startups, the small and medium businesses, new
entrepreneurs and venture capitalists, should focus on developing products and services that solve real life
problems, creating value for the customers rather than aiming for short term higher profits, improving
meaningful work (not necessarily employment) for all that progressively eliminates poverty, destitution,
squalor and disease. Startups like Amazon.com and eBay, Apple and Microsoft, Google and Tesla, Nokia
and Motorola, Uber and Ola, FaceBook and What’sApp, WeWork, JustDial, Naukri.com and Rediff.com,
to name a few, should produce products, produce and services that will make nations and continents safe
and secure, binding and belonging, socially and economically equalizing, ethically, morally and
spiritually humanizing. The established corporations like the Tata’s and the Fords, GM and GE, Toyota
and Honda, L&T and Voltas, P&G and Unilever, and the like, and the heavy infrastructure companies like
BP and Indian Oil, International Caterpillar, Komatsu and Hitachi, Indian Oil and ONGC, commercial
and investment banks, passenger and cargo railways, and the like, should be collaboratively contributing
to a happy and humanized world. Some of these companies have done it successfully and have become
market leaders in no time. Then all will revive and survive - the corporations, the startups, and
entrepreneurship, the big and the small, and all over the world. The means should justify the noble ends.
Bad ends can never justify the means.

Corporate Governance: The quality of leadership and human capital is very vital to the long term growth
of any organization. The management of the company would continuously work on infusing fresh talent
at regular intervals to maintain its growth trajectory. Over the past decades, regulations in the financial
markets have increased dramatically in the wake of various financial crises. This has increased the cost of
doing business and has also pulled away individual investors from the financial markets.

The Board of Directors should play an active role in ensuring transparency in its daily operations and
would discourage activities like ‘off balance-sheet financing’, wash trading, complicated organization
structure, intercompany transactions, and other accounting shenanigans. It would also make sure that the
members of the Board of Directors do not hold multiple directorships that breed conflict of interest, and
which could impact their ability to contribute to the company. At the moment, successful businesses find
it easier to find it raise money through private means, which allows them to take more risk. Low interest
rates have undermined returns from “safe” investments and encouraged speculation. Even so, the new
structure pioneered by start-ups is likely to endure as long as it serves as an effective response to the flaws
of the current corporation and its public markets.

For a continuous sustainable growth of firms, the structure of accountability and decision making is
a critical element. There is a crying need for shifting the focus from shareholder accountability to
stakeholder accountability. All the key stakeholders like employees, customers, governments,
shareholders, suppliers, distributors, unions, creditors, directors and the community from which the
business draws its resources should be considered while making all the business decisions. This Board of
Directors (BOD) should first realize this shift in values which then trickles down to the entire
organization. All this change should accompany with an increase in reciprocal transparency and make
long-term decisions not concentrating on short-term fixes and profits.

Democratization of Capital: Regardless of its organizational structure, the financial investments are
critical for every corporation. Historically, capital markets operated without regard to long-term impacts
or regulations. Although, recently, the firms have started taking sustainability into account for the

15
decision-making processes. Instead of raising capital through public offering, firms should opt for private
funding through crowd funding and angel investing as it reduces the pressure on the firms to show profits
to the shareholders. This allows unhindered growth of the organization and promotes innovation and more
strategic production cycles.

Since the invention of public company in 19th century, they have been the locomotives of
capitalism. In 1990s, older forms of corporate organizations like partnerships and newer rivals such as
state owned enterprises, were discarded over choosing to be a public company. As China’s former
President Jiang Zemin put it: “NASDAQ is the crown jewel of all that is great about America.” Cozy
partnerships were abandoned by Wall Street banks in favor of the public equity.v

The reasons for the triumph of the public company were three main factors which make for durable
success: limited liability – encouraging public to invest; professional management – boosting
productivity; and ‘corporate personhood’ - ensuring that businesses survive the removal of a founder or
CEO. But in the past two decades, it has been more like the eclipse of the public corporation. The number
of public companies in America has fallen dramatically- over 38%, in the past decade. Some of America’s
most prominent public companies imploded in 2001-02 like – Enron, Tyco, and Global Crossing. Lehman
Brothers, another public giant fell 6 years later and Citigroup and General Motors turned to the
government for a bailout. Simultaneously in the emerging markets, SOEs are growing and challenging the
fact that public companies are the biggest fishes in the sea. With the flouring private equity firms in the
West and the rise of Asian economies and their legions of family-owned conglomerates, the idea that
public companies are the best managed and best equipped to capture new geographical frontiers does not
sit well. Statistical data also seems to corroborate this with the number of initial public offerings (IPOs) in
America declining from an average of 311 in a year in 1980-2000 to 99 a year in 2001-11(Reuters, 2015).
It is the small companies (having annual sales less than $50m before their IPOs) which have been the
hardest hit. From 165 small companies on average going the IPO route in 1980-2000, the number fell to
30 in 2001-09.

This IPO famine has given a shot to other corporate life forms. Limited liability companies and
partnerships seem to be thriving with many established names choosing the LLC route too. Larry Ribstein
of the University of Illinois called this “the rise of the un-corporation.” Policymakers also seem to have
embraced the alternatives to the public company. WL Gore, a private firm and the maker of Gore-Tex
and employing 9,500 ‘associates’ and ‘sponsors’ and not workers and bosses is being cited as a model by
American corporate reformers. The firm uses shares to motivate their employees and shield themselves
from the capital markets. On joining, employees become co-owners and they also need not sell their
shares when they leave the firm. Laws have been passed by seven American states allowing companies to
register as “B” corporations which explicitly subordinate profits to social benefits.vi

The Brookings Institution, one of the USA's oldest nonprofit think tanks, released a paper last
week (late June 2016) on B Lab and the B Corp movement. Brookings conducts research and education in
the social sciences, primarily in economics, governance, and global economy and development. Authored
by B Lab cofounders Jay Coen Gilbert, Bart Houlahan, and Andrew Kassoy, the paper is titled “Impact
governance and management: Fulfilling the promise of capitalism to achieve a shared and durable
prosperity.” In it, the B Lab cofounders tackle the cultural shift around the role of business in society, the
opportunity—and necessity—for businesses to be a force for good, and the institutional and normative
barriers in the way. The B Corp movement is profiled as one example of how legal innovation and
credible, common standards can transform shareholder capitalism into stakeholder capitalism.

We are in the early stages of a global culture shift that is transforming our vision of the purpose of business
from a late 20th century view that it is to maximize value for shareholders to a 21st century view that the
purpose of business is to maximize value for society. Significantly, this transition is being driven by market-

16
 based activism, not by government intervention. Rather than simply debating the role of government in the
economy, people are taking action to harness the power of business to solve society’s greatest challenges.
Business—what we create, where we work, where we shop, what we buy, who we invest in—has become a
source of identity and purpose.vii

In India too family conglomerates are among the top firms. Though listed on the stock market, they
do little to constrain the power of the family shareholders. Family businesses account for about two-thirds
of the listed companies in India. Tight control of their empires is exercised by the families and
shareholder power is limited through a variety of mechanisms such as family controlled trusts (having
more power than boards), appointment of family members in managerial positions, and attaching different
voting rights to different classes of stocks. Long term views are taken by diversified family firms and
money is diverted from cash cows to new industries.

We can note that some of the reasons for the decline of public companies are temporary, like the
dotcom bust. Also, the success of alternatives could be due to transient reasons like private equity boom
being fuelled by cheap debt and the rise in the price of oil and other commodities turbocharging SOEs
growth. But at the heart of all this lies a fundamental glaring fact that the alternate corporate firms are
managing their problems better than public companies while also exploiting their advantages. The biggest
plus of SOEs are political ties with governments which protect them from unwelcome competition.
Family firms have the ability to take long term views.

In contrast, the public company is plagued with hindrances, majorly three. First is the principal-agent
problem: the split between the people who own the company (principals) and those who run it (agents).
The agents want to work for their own gain and the principals have not done a good job at monitoring the
actions of the agents. The supposed solution of making managers liable for their performance by linking
their pay to reflect the company’s performance has backfired as it led to heavy manipulation of company
share prices. Second, is the burden of regulation which, since the collapse of Enron in 2001 and the
financial crisis of 2007-08 has grown heavier for public companies. This is to safeguard the interests of
the common man who risk their capital in corporations. From the 2002 Sarbanes-Oxley legislation on
accounting to the Dodd-Fran financial regulations of 2010, new rules have been introduced in America.
As per one estimate, the annual cost of complying with the securities law due to Sarbanes-Oxley
increased from $1.1m per company to $2.8m. Costs of distraction have also skyrocketed. Founders of
Oaktree Capital Management, hedge-fund advisory firm, in 2007, chose to raise $880m in a private
placement than an IPO as: “we were happy to sacrifice a little public market liquidity, and even take a
slightly lower valuation, in return for a less onerous regulatory environment and the benefits of remaining
private.”

Short-termism comprises the third main issue. With the rise of huge institutional investors and
intensification of shareholder activism, capital markets have increased their power dramatically. Goliaths
such as McDonald’s and Time Warner are taken to task by hedge funds if they seem to give any
indication of flagging. Corporate life has become riskier as capital markets have flourished. Average life
expectancy of public companies shrank to less than 10 in 1990 from 65 years in the 1920s. A CEO’s
average tenure also has fallen from 8.1 years in 2000 to 6.3 years in 2009. Striking a balance between the
short-term satisfying the market’s demand for profits today and long term- planning for the future, has to
be done by companies. It is becoming harder on the managers to look beyond quarterly earnings due to
the demands of regulators and owners, more time is being devoted to enforcing regulations than to
strategy.

The reasons stated above have all combined to stagnate the growth of public companies. This
situation is especially true in America. In India though similar issues abound, the emerging market
enables IPO growth though at a lesser pace than anticipated. Also, many public companies are family

17
owned thus enabling them to overcome many of the inherent vices of a public company. But public
companies still hold sway over many sectors- especially that of oil and gas. This gives hope that they can
still overcome the rut that they have fallen into. We cannot afford to let public companies decline. Not
only do they provide ordinary people with a chance to invest directly in capitalism’s most important
wealth-creating machines but they also form a part of an ecosystem of innovation and job creation. The
need of the hour is a change in thinking – among regulators, among the brilliant minds in companies
themselves and restructuring to enable the companies which build the railroads of the 19th century, which
filled the world with cars and televisions and computers, which brought transparency to business life and
opportunities to small investors, to continue being the locomotive of capitalism.

Concluding Challenge
The corporation may be reinvented in many ways, and we have pointed some ways. The PBC (Case
8.1) is a good example. The ethical questions stated at the end of the PBC case are good leads to reinvent
the corporation. But the main architect of change and reinvention is the corporate executive as CEO,
CXO, or a member of BOD. These executives together with major representatives of corporation
stakeholders must follow the LEMS analysis in whatever they do:

• Legality: Is the corporation doing the legal thing? Following the Company Law of the Land? Doing
something decidedly beneficial for the society and the nation?
• Ethicality: Beyond the legal, is the corporation doing the right thing for the economy, society, nation
and the globe? Are they better alternatives than the current ones that are less harmful and more
beneficial to the society, nation and the planet? For instance, seemingly the large corporations have
accumulated wealth and opportunity in the hands of very few, thus widening the gap between the
rich and the poor as never before. Hence should we do the right thing and put a cap on the growth,
control and dominance of the corporation, thus reinventing its structure and legitimacy, survival
and sustainability strategy and capacity?
• Morality: Beyond the right thing, is the corporation doing the right thing rightly? For instance,
beyond the usual bottom line of profits does the corporation actively pursue ecology and
sustainability? How can the corporation reinvent in India such that it can provide work and
sustenance to maintain human dignity among its teeming populations? Should national and
international governments intervene such that right things are done rightly?
• Spirituality: Beyond the legal, ethical and moral, is the corporation doing the right thing, rightly, and
for the right reasons? As long as executive spirituality defined this is safeguarded we can keep in
check fraud, corruption, bribe, money-laundering, black money, tax evasion, deception and guile.

In the end, when everything is said and done, the future of the corporation is more in the hands of
corporate executives than with promoters and turbulent markets. If B-schools can redesign their
curriculum, pedagogy, and goals for students (to-be-corporates) learning to make it more ethical, moral
and spiritual, that is, making it more flexible and nimble for empowering it to make business students
more imaginative, creative and innovative, then we have laid the foundations for reinventing the morally
embattled corporation today.

References:

Chanchani, Madhav (2015, November 24). Warburg Pincus raises $12 billion new fund, may invest with a long-
term view. The Economic Times, p.1.
Das, Saikat (2015, November 4). Investment Limits In Corporate Bonds likely to Hit Liquidity, feel Funds. The
Economic Times, p.1.
Eavis, Peter (2015, November 4). Public Companies Trying to Mimic Private Firms. The New York Times.
Gratton, Lynda (2013, May 14). Reinventing the Corporation. Forbes.

18
Mascarenhas, Rajesh (2015, December 4). IPO rush fallout: Interest rate for funding investment in new offers could
go up by 2%” The Economic Times, p.1.
Reuters (2015, October 2). US IPO Market Scene Shaken But Not Shut. The Economic Times, p.1
Zachariah, Z. (2015, October 30). New Investment Limits for Fund Houses Likely. The Economic Times, Friday,
p.1.
DEN Networks Rallies as RBI Hikes FII Investment Limit. (2015, October 27), The Economic Times, p.1
Hyperactive, Yet Passive. (2015, December 5), The Economist.
The Endangered Public Company. (2012, May 19), The Economist, p.1
The Big Engine That Couldn’t. (2012, May 19), The Economist, p.1
Reinventing the Company. (2015, October 24), The Economist, p. 11.
Reinventing the Deal. (2015, October 24), The Economist, p. 23-26.
The Age of the Torporation. (2015, October 24), The Economist, p. 57-59.
Schumpeter – Nine Billion Company Names. (2015, October 24), The Economist, p. 63.
New investment limits for fund houses likely; investor losses may trigger SEBI move. (Oct 2015.). The Economic
Times, 30.
Investment limit in corporate bonds likely to hit liquidity, feel funds. (2015, November 4), The Economic Times.
CEOs feel the pressure after buyouts. (2015, October 30), Financial News.
The Heat is On: CEOs Under Pressure to Perform. (2015, October), BTS Insights.
http://smallbusiness.chron.com/conflicts-between-corporate-management-shareholders-75063.html
http://www.scu.edu/ethics/practicing/focusareas/business/board-management-conflict.html
http://yourstory.com/2015/04/what-propelled-indians-to-startup/
http://www.huffingtonpost.in/2015/05/15/startups-india-fail-fast_n_7289522.html
http://www.fastcompany.com/1824235/8-reasons-choose-startup-over-corporate-job

Ethical Questions:
1. Do you feel that the (listed) corporation is an endangered species in the USA, and why?
2. Is the situation anyway different in India, and why?
3. How do you legally, ethically, morally and spiritually (LEMS) justify the corporation today, and why?
4. How do you LEMS justify share-market concentration in the hands of very few promoter investors?
5. What are their long-run unintended, ethical and moral consequences, and why?
6. How legal, ethical, moral and spiritual are startups with their new startup structures?
7. To what extent do startups legally, ethically, morally and spiritually disentangle themselves from the
“agency problem” and how?
8. To what extent do startups offer real hope for industry and market survival and revival under a free
enterprise capital system, and why?
9. What are the decidedly superior legal, ethical, moral and spiritual advantages of startups over public
corporations, and why?
10. Hence, how would you LEMS reinvent the corporation to save and revive it?
11. How would you restructure the corporation in terms of debt, equity, share buy-backs, market
capitalization and the like such that ownership and responsibility passes on to the right hands?
12. To what extend can startups replace, displace or substitute the traditional corporation that has lasted for
more than 125 years? Explain.
13. How can modern entrepreneurship effectively reinvent, replace, displace or substitute the traditional
corporation that has survived more than 125 years? Explain.

End Notes
i
B Corp is to Business as ‘Fair Trade’ is to Coffee, or ‘Organic’ is to Veggies…The ‘B’ is a standard issued by non-profit
organization – B Lab – based on four core assessment criteria: Community, Environment, Employees, and Governance. As a
certified B Corporation, PBC takes a ‘triple-bottom-line’ (People, Planet, Profit) approach to its business model, and incorporates
both social and environmental sustainability into its operating principles and core values. PBC is committed to using the power of
business to help solve social and ecological problems. Learn more at https://www.bcorporation.net/community/persephone-
brewing-company.

19
ii
Meanwhile the startups are creating their own problems, while the West is creating startups at an unprecedented rate.
Emerging-world companies are going global. Established companies are merging to form mind-blogging combinations. For
instance, the soon-to-be ABInBev/SABMiller behemoth is rooted in five separate companies, Anheuser Busch, Interbrew,
AmBev, South African Breweries, and Miller Brewing. Company names are important; they are the best chance of making a
good impression. Great names such as Google can provide the ultimate bonus of turning into a verb. But alphabetical ersatz
names (e.g., Airbnb, Diageo, Flickr, QuickQuid, Strategy &, Uber, Upwork, Vizio, Yahoo, WeWork, WhatsApp, Wonga) do
opposite to what brand names are supposed to do: rather than putting a human face to a corporation, they emphasize their lack of
soul. Google (which got its name from the mathematical term for ten to the power of 100 or a googol) came up with a clever
name Alphabet for its holding company earlier in 2015. Copyright law is a pain: companies have to go to great lengths to make
sure that nobody has staked a claim to their favorite names. But what’s in a name? Great companies can survive boring names
but even the best names cannot save dismal companies (The Economist, October 24, 2015, p. 63).

iii
A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners.
A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies (and
many smaller companies) are treated as C corporations for U.S. federal income tax purposes. C corporations and S corporations
both enjoy limited liability, but only C corporations are subject to corporate income taxation. Generally, all for-profit
corporations are automatically classified as a C corporation unless the corporation elects the option to treat the corporation as a
flow-through entity known as an S corporation. An S corporation is not itself subject to income tax; rather, shareholders of the S
corporation are subject to tax on their pro-rata shares of income based on their shareholdings. To qualify to make the S
corporation election, the corporation's shares must be held by resident or citizen individuals or certain qualifying trusts. A
corporation may qualify as a C corporation without regard to any limit on the number of shareholders, foreign or domestic
(Wikipedia).

iv
Collins, M. (2016, June 13). It is Time to Stand Up to China: Why and how the U.S. must confront China on unfair trade
practices. Industry Week. Retrieved from http://www.industryweek.com/trade/it-time-stand-china

v
The endangered public company: The big engine that couldn’t. (2012, May 19), The Economist, 1-16.

vi
B Corporations are a new type of company that uses the power of business to solve social and environmental problems. The
vision is simple yet ambitious: people using business as a force for social good. B Corp is to business what Fair Trade
certification is to coffee or USDA Organic certification is to milk. B Corps are for-profit companies certified by the
nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. Today,
there is a growing community of more than 2,300 Certified B Corps from 50 countries and over 130 industries working together
toward one unifying goal: to redefine success in business. For a good example of a B corporation, see Case 8.1.

vii
Kassoy, A., Houlahan, B., and Gilbert, J.C. (2016, July), “Impact governance and management: Fulfilling the promise of
capitalism to achieve a shared and durable prosperity,” Center for Effective Public Management, Brookings. Retrieved from
https://www.brookings.edu/wp-content/uploads/2016/07/b_corps.pdf

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 Chapter 13
The Ethics of Executive Critical Thinking
Ozzie Mascarenhas SJ, PhD, JRD Tata Chair Professor of Business Ethics, XLRI
November 12, 2019

“Paradigms power perceptions and perceptions power emotions. Most emotions are responses to
perception – what you think is true about a given situation. If your perception is false, then your
emotional response to it will be false too. So check your perceptions, and beyond that check the
truthfulness of your paradigms – what you believe. Just because you believe something firmly
doesn’t make it true. Be willing to reexamine what you believe” (Wm Paul Young 2007, The
Shack, p. 197).

The railroads are in trouble today not because the need was filled by others (cars, trucks, airplanes,
even telephones), but because it was not filled by the railroads themselves. They let others take
customers away from them because they assumed themselves to be in the railroad business rather than
in the transportation business. The reason they defined their industry wrong was because they were
railroad-oriented instead of transportation-oriented; they were product oriented instead of customer-
oriented.” Theodore Levitt, “Marketing Myopia”, Harvard Business Review, July-August 1960

Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else—if
you run very fast for a long time, as we’ve been doing.” “A slow sort of country!” said the Queen.
“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to
get somewhere else, you must run at least twice as fast as that!” Lewis Carroll, Through the
Looking-Glass

Companies who do not heed the clarion call to re-examine their business models in this way risk
falling victim to the “fatuous contentment” in Levitt’s polemic, and thereby “guarantee premature
senescence”. This applies to all industries, even information technology. Silicon Valley is replete with
its own examples of companies that were felled by the “marketing myopia” warned by Levitt.

Arguably, the most successful companies in any industry today are Silicon Valley titans Amazon,
Google and Facebook (and their fellow Chinese titans, Baidu, Alibaba and Tencent). Though each of
the Silicon Valley giants is nominally in a different business – e-commerce, search, social networking
– all three are unified by a common business model. All three are in the business of collecting as
much data as possible, by every means possible, and making money off that data. Period. This is all
they do. This is what might be known as the “Amazoogle” business model.

But just today, we have finally passed out of the Industrial Age and truly into the Information Age.
It’s now the information itself — not the manufactured good, even if that manufactured good
happens to be a really sophisticated electronic device, software platform or chemical compound —
that fuels the predominant business model. Business models will no longer be predicated on the
manufacturing of a thing — mobile phone, automobile, pharmaceutical — but on the value and
understanding of the data that each of these things creates. This represents the most fundamental
change in business model since the rise of manufacturing and the Industrial Age.

“The unexamined life is not worth living” (Socrates). That is, without critically inquiring into the knowledge of life
which is well-being and valuable, life is not worth living. Critical thinking questions existing theories and their
unexamined and obsessive assumptions and generalizations, constraints and “best” practices of the prevailing
system of management, and tries to replace them with more valid assumptions and generalizations that uphold the

1
dignity, uniqueness and inalienable rights of the individual person and the community. In the diverse, pluralist
culture environment the promise of a truly generative dialogue among Occidental (Western) and Oriental (Eastern)
cultures and civilizations holds great hope for the future. Critical thinking can facilitate this dialogue such that all
of us have a meaningful place in this universe. After defining critical thinking and arguing its importance for
executives, this Chapter introduces critical thinking in three parts: Part One: Various Approaches to Critical
Thinking; Part Two: Some Theories of Critical Thinking, and Part Three is Critical Thinking as applied to
corporate Problem Solving. Several contemporary business cases will be invoked to illustrate the need, nature and
scope of corporate critical thinking.

Critical thinking starts with us, where we are: some fundamental questions this regard:

• Our global markets are changing.

• Our globalized competition is changing.
• Our political world is changing.
• Is our University changing?
• Is our Jesuit Business School changing?
• How is it changing our professors?
• Hence, how is it changing our business students?

Are business schools keeping up with change? How do we rethink the MBA content, program,
design, curriculum and delivery, assessment and redesign to align with or transform these changes?
Business is not about production, costing, accounting, financing and marketing problems, and business
education is not about rules and algorithms to solve them. Business is a living process of human
relationships that shape the lives of all its stakeholders – customers, employees, creditors and suppliers,
distributors and retailers, governments and the governed, and the local and global communities. How do
our business schools engage our students in the rigorous intellectual, moral and emotional exercise and
standards that should be the very heart of our business education?

Mini Case 01: Every day do what you have to do and enjoy it: Warren Buffett once said to the students at the
University of Nebraska: “If there is any difference between you and me, it may be simply that I get up every day and
have a chance to do what I love to do, every day. If you want to learn anything from me, this is best advice I can
give you.” Buffett was a patient man; his mind was more practical than conceptual. Like many people who are both
fulfilled and successful, he found a way to cultivate his strengths and put them to work. His investor strength was
his now famous “twenty-year perspective” that led him to invest only in those companies whose products and
services he could intuitively understand and whose trajectory he could forecast with some level of confidence for the
next twenty years. Some such companies were Dairy Queen, Coco-Cola Company, and the Washington Post
Company. He started his first investment partnership with $100 in 1956. Currently, his investor wealth exceeds
forty billions. He has honed this patient investor talent, perfected it, and stuck to it despite the quick high-margins in
the other high-tech companies (Buckingham and Clifton 2001: Build on your Strengths, p. 21).

Mini Case 02: Natural Tendency towards Lazy and Uncritical Thinking: Emily Pronin, a Princeton University
Professor, ran an experiment in which she showed subjects one of two photos of a man she introduced as an investment
advisor, and asked how much of a hypothetical investment sum of $1,000 stake they would trust him to invest. For one
photo, her investment advisor model wore a suit and a tie, while the other was dressed in khakis and a Polo shirt. The
man in the suit at an average was entrusted with $535, while the same man in casual clothing got only $352. Pronin
conducted other behavioral experiments at Princeton and found a flaw in people’s perception: people feel better when
they can make quick decisions and move on as opposed to the more difficult task of exercising patience and
deliberation before decision-making. She concluded: we seem to have a natural tendency towards lazy and uncritical
thinking (Nitesh Gor (2012), The Dharma of Capitalism: 30-31).

Mini Case 03: Moral relativism – we often rationalize that our bad behavior is less bad than that of others.
Furthermore, most of us have an instinctive need to conform even when doing so results in choices that go against our
best judgment and conscience. A frequently cited example in this regard is the infamous prison experiment in 1971 by

2
Philip Zimbardo, a psychologist at Stanford University. He divided a group of students into “prisoners” and “guards”
and then confined them to a makeshift prison environment to act out their assigned roles. In just a few days the guards
became so sadistic and the prisoners so depressed that the experiment had to be cut short. Zimbardo coined the term
“Lucifer Effect” to explain this phenomenon: almost anyone, given the right situation and influences, can be made to
abandon their scruples or virtues and cooperate in violence and oppression. This experiment is an extreme illustration
of something we experience everyday: we choose the uncritical path of least resistance or easily give in to our
preconceived ideas, biases and prejudices (Nitesh Gor 2012: 29-30).

The Black Swan Puzzle: (N N Taleb: The Black Swan; the Impact of the Highly Improbable, 2007, 2010):
Events of low probability (predictability) and large impact makes the Black Swan a great puzzle. Most scholars and
scientists still believe they can measure uncertainty; even traders and portfolio-managers claim they can define and
measure and contain risk. We are blind to randomness, particularly the large deviations. Black Swan logic makes what
you do not know far more relevant than what you know. Think of the terrorist attack of September 11, 2001. Had we
predicted this event on 10th of September, 2001, USA would have had fighter planes circle the sky above the twin
towers, and all airplanes would be installed with locked and bullet proof doors, and the attack would not have taken
place. [Obviously, the 9/11 attack would be a Black Swan events for the victims, but certainly not for the perpetrators!]
Consider the Indian Ocean tsunami of December 2004. Had it been expected, it would not have caused the damage it
id. History has many Black Swan events (World Wars I and II, the 1929 Black Friday, Adolf Hitler, the Holocaust, the
crumbling of the Berlin Wall, the demise of the Soviet bloc, the rise of terrorism, the mighty crash of October 19, 1987,
the 1993 Internet bubble, the Enron scandal of 1999-2001, the 2002 Dot.com Bubble, the October 2008 Global
Financial crisis, the Fall of Lehman Brothers, the Brexit, some pandemic diseases, the current US-China trade war, and
the current Face Book scandal and the Cambridge Analytica complicity). “The inability to predict outliers implies the
inability to predict the course of history (Taleb 2010: xxiv). All wars were fundamentally unpredictable.

A Black Swan events has three properties: 1) it is an outlier, lying outside the realm of expectations, as nothing in the
past was anyway like it; 2) it carries an extreme impact; 3) despite its rarity or outlier status, we have many
explanations for it post-factum, making it retrospectively explainable and predictable. We formulate theories leading to
projections and forecasts without focusing on the robustness of these theories and the consequences of the errors. It is
much easier to deal with the Black Swan problem if we focus on robustness to errors rather than on improving
predictions. What is surprising is not the magnitude of our forecast errors, but our ignorance about it. There are so
many things we can do if we focus on anti-knowledge, or on what we do not know. Contrary to social science wisdom,
almost no discovery, no technological breakthrough, no marketing breakthrough, no radical innovation, came from
design and planning – they were just (positive) Black Swan events.

Another related human impediment comes from our excessive focus on what we do know: we tend to learn the precise,
not the general (Taleb 2010: xxv). We scorn the abstract. We use our brain on subjects too peripheral to matter. We
focus on the “normal,” particularly with the “bell curve” methods of inference that tell you close to nothing. The bell
curve ignores large deviations, cannot handle them, and yet makes us confident that we have tamed uncertainty (Ibid.
xxix). We tend to generalize from what we see. This the illusion of our understanding: we think that the world in which
we live is more understandable, more explainable, and therefore more predictable that it actually is (Taleb 2010: 9).
Our minds are wonderful explanation machines, capable of making sense out of almost anything, but generally
incapable of accepting the idea of unpredictability. Our minds do not seem to be made to think and introspect; we think
we are good at backward prospecting. History and societies do not crawl. They make jumps. They go from fracture
to fracture, with a few vibrations in between. Yet historians like to believe in the predictable, small incremental
progressions (Ibid. 11).

The works of Hegel, Marx, Toynbee, and Fichte on the philosophy of history and its properties said something similar
– the notion of dialectics, that things developed through contradictions (or opposites) – through thesis, antithesis and
synthesis, that science progresses via forward and backward processes, there was a difference between the before and
the after. History clusters and categorizes events fairly arbitrarily into “right” and “left,” into “conservatives” and
“liberals,” into “libertarians” and “egalitarians,” and so on. Currently history has other boundaries – between the
Mediterranean and non-Mediterranean, between Europe and on-Europe. Most history is a distortion – the journalist or
historian decides what is important and what is irrelevant to history. We glorify those who left their names in history

3
books at the expense of those contributors about whom our books are silent. We humans are not just a superficial race
(this may be curable to some extent); we are a very unfair race (Taleb 2010: xxviii).
Categorizing is necessary for humans, but it becomes pathological when the category is seen as definitive, preventing
people from considering the fuzziness of boundaries, let along revising their categories (Taleb 2010: 15). Categorizing
reduces true complexity - it is some form of Platonicity that rules out sources of uncertainty – the Black Swans. This is
“epistemic arrogance” of the human race (Taleb 2010: 17). In this sense, reading the newspapers decreases your
knowledge of the world (Taleb 2010: xxviii). Living on our planet, today, requires a lot more imagination than we are
made to have. We lack imagination and repress it in others (Taleb 2010: xxxii). Exhibit 13.1 illustrates the processes
and costs of historic distortions.

Exhibit 13.1: Historic Processes of Resisting Randomness

Social Historic Processes of Social Distortions History as
Externalities Divine Command Socio-economic Scientists Guild Narratives
Suppression Political Oppression Repression
Imposed Order Suppressive Order by Oppressive Order of Repressive Order of Selective significant
Divinely Appointed Political and economic Gatekeepers and event narratives
Rulers Ideologies Scientific Paradigms
Resisting Suppression was not Oppression was not Repression was not Selection of events was
Randomness random but divinely random but ideologically random – as science not random – as
willed determined unfolds its paradigms determined by history
Non-robust Divine Command Feudal or Baron or Paradigm dominance Historians recognize and
Unexamined theory; Monarchical or Capitalist rights vs. represses contesting include leaders and
Theories Nobility supremacy worker duties paradigms events in history.
Historic Social Dehumanizing costs of National costs of poverty Ideological gatekeeper Costs of errors of
Costs of Errors “divinely willed” (impose social violence) costs of Academic omitted leaders and their
Suppression and oppression Repression omitted contributions to
history
Representative Bonaventure, Albert John Locke, Thomas Isaac Newton, Albert Georg Hegel, Arnold
Thinkers Magnus, and Thomas Hobbes, Karl Marx, Einstein, Sigmund Toynbee, William Shirer,
Aquinas defended the Adam Smith argued for Freud, Thomas Kuhn,
Divine Right of Kinga wealth accumulation via Top Science Universities
Free Enterprise and Business School
Capitalism Paradigms

Critical Thinking and Fooled by Randomness (Taleb 2004/2005)

How do we perceive and deal with luck in life and business and in the markets. Our mind can be
unwittingly prone to the confusion between noise (statistical) and meaning, between randomly constructed
arrangements and precisely intended message. Past events will always look less random than they were (this
is called hindsight bias). You can mis predict everything for all your life yet think you will get it right next
time. “Probability is not a mere computation of odds on the dice or more complicated variants; it is the
acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our
ignorance” (Taleb 2005: xii). Our brain sometimes gets the arrow of causality backward. For instance, we
assume that good qualities cause success. This does not mean that every intelligent, hardworking,
persevering person becomes successful, or that every successful person is necessarily intelligent,
hardworking and persevering person – this is a logical fallacy called affirming the consequent.

Very often we mistake luck for skill, randomness for determinism, probability for certainty, belief-guess-
conjecture for knowledge-certitude, theory for reality, anecdotal coincidence or causality or law, forecast for
prophecy, contingency for necessity, induction for deduction, and so on. Set in a table, our confused life is

4
indulging in dreams and mistaking them for reality (see also Taleb 2005: xlv). Exhibit 13.2 illustrates this
mistaken identities.

Exhibit 13.2: Fooled by Randomness

Domain Contingency Mistaken
In life Interpretation
General Luck Skill
Randomness Determinism
Probability Indeterminism
Probability Certainty
Belief Knowledge
Conjecture Certitude
Theory Reality
Anecdote Causality
Arbitrary antecedent Necessary condition
Coincidence Necessity
Forecast Prophecy
Pattern Law
Induction Deduction
Expectations Privilege Right
Seeking truth Objectivity
Welfare Entitlement
Right to work Right to employment,
Reservation Deserved advantage
Behavior Success Happiness
Passion Greed
Fraud Wealth without work
Quick fix, band aid Tactic
Long term planning Competitive Strategy
Power and control Leadership

How often do we mistake the right hand column for the left, or vice versa? Very often the left column is
mistaken for the right one. However, we may also mistake non-randomness for randomness, and thus
ignore patterns and messages. .Symbolism is the child of our inability and unwillingness to accept
randomness; we give meaning to all manners of shapes; we detect human figures in inkblots; we read too
much into things. More generally, we underestimate the share of randomness in about everything. We often
focus on noise (confusion) rather than the signal (meaning or message). We must take into account the cost
of mistakes. Mistaking the right column for the left one may not be as costly as the reverse (Taleb 2005:
xliv). Bad information is worse than no information at all.

One cause for this confusion between the left and the right column is our “inability to think critically” (Ibid.
xliv). We enjoy presenting conjectures as truth; it is our nature. Our mind is not equipped with the adequate
machinery to handle probabilities. Such infirmity strikes even the expert, often, just the expert. Wealth is
elusive: that which came with the help of luck could be taken away by luck, often rapidly and unexpectedly
at that. Think of equity trading, proprietary trading, insider trading. Things that come with little help from

5
luck are more resistant to randomness (Ibid. 4). Mild success can be explained by skill and labor; wild
success is attributable to variance or luck (Ibid 12).

Case 13.1: GAIL Pipeline Blast Kills

• An explosion in a Gas Authority of India Ltd (GAIL) pipeline around 5:00 am, Friday, June 27, 2014 near
Nagaram Village, East Godavari District, Andhra Pradesh killed at least 20 people while injuring 18 others and
damaging 50 houses.
• Allegedly, GAIL had not paid attention to the many complaints on gas leaks that were made by the Nagaram
villagers. They said that the pipelines were laid 15-20 years ago and had become corroded and defective.
• The Oil Industry Safety Directorate (OISD), under the petroleum ministry, carries out periodical safety checks
and audits of oil and gas installations across the country. Apparently, they did not detect the GAIL pipeline
defects near Nagaram village.
• Moreover, OISD has only powers of recommendation. It is not a statutory body. Often, its recommendations
have not been taken seriously. There have been talks now of giving it such an authority but it has not
materialized yet.

Gas Authority of India Ltd (GAIL) is a Government of India undertaking and is India’s largest state-owned
natural gas processing and distribution company. It procures natural gas from ONGC, Reliance Industries and Cairn
Energy. It has 850 kms of gas pipelines in Andhra Pradesh and supplies natural gas to 37 industrial units. A winner
of the prestigious award Maharatna, Gail is known for high standards in terms of quality. As per industry rules, Gail
did follow all statutory and safety guidelines in their operations. They also had ensured that the pipeline had been
certified safe by various national and international agencies. The probability of a leak being present in their pipeline
for so long without any action being taken would therefore have been very small.

However, an explosion in a (GAIL) pipeline around 5:00 am, Friday, June 27, 2014 near Nagaram Village, East
Godavari District, Andhra Pradesh, killed at least 20 people while injuring 18 others and damaging 50 houses.
Massive fires gutted houses, vehicles and coconut orchards, leaving a trail of destruction in the village. Coconut
orchards were reduced to ashes and several other crops were damaged too. Over 300 birds which included several
species like cormorant, pond heron and common crane (Eurasian crane) were also killed. This explosion was the
second major industrial accident in India this month. On June 12, six people were killed in a poisonous gas leak at
the Bhilai Steel Plant, one of India's largest steel plants in Chhattisgarh state, belonging to the Steel Authority of
India Ltd. (SAIL). The injured were rushed to different hospitals nearby in the district. Chief Minister of Andhra
Pradesh (AP), N. Chandrababu Naidu, who was then in Delhi, and Petroleum Minister Dharmendra Pradhan visited
Nagaram and also the hospitals where the injured were being treated.

6
Once the blast was reported there was almost no time to act as the damages were caused almost instantaneously.
Though GAIL officials were successful in cutting off the gas supply to the suspect pipeline within 15 minutes, this
duration was enough for the crisis to wreak enormous damage to the area affected, both in terms of losses to the
local populace as also destruction of property and resources. GAIL dispatched multiple teams to undertake foot-
patrol of every inch of its pipeline network in the KG basin to check on its deficiencies

\There are over a dozen gas gathering stations in the area. GAIL supplies gas to 37 industrial units in Andhra
Pradesh, including the Lanco Kondapalli power project near Vijayawada. Operations at Lanco, however, were not
affected as they resumed gas supply through an alternative pipeline. Supply to the 1,466 megawatt Lanco power
station was restored within a few hours. GAIL supplies 0.7 million British thermal units (BTU) a day to the Lanco
plant.

The sudden stoppage of supply of natural gas to industries in Kakinada from the Oil and Natural Gas Corporation’s
(ONGC) Tatipaka terminal seems to have an adverse impact on the urea production. However, absence of the
supply of natural gas has forced the Nagarjuna Fertilizers and Chemicals Limited (NFCL), the largest manufacturer
of fertilizer, to stop production forcibly in its plants located in the city. The firm that produces 4,600 tons of urea a
day was in idle mode for the next two weeks, which cost Rs. 1.5 crore a day in terms of halted production.

GAIL faced a dilemma as to how to address this situation in the future. Even though there is valve at every 40 km of
the pipeline and gets shut in case of a leak, layout of pipelines through the residential area is protested by people.
Though they re-established supply to the various industries in the neighboring regions through an alternate pipeline
quite briskly their goodwill and industry standing had taken a battering. Further the blast also resulted in major
capital losses through the destruction of the pipeline and loss of the gas that is transported.

There were complaints of gas leakages by the Nagaram villagers but GAIL authorities did not pay heed to these
complaints. They said that the pipelines were laid 15-20 years ago and had become degraded and defective. The
Petroleum Minister Pradhan has ordered an inquiry into this debacle by a committee headed by a joint secretary and
with representatives from the Hindustan Petroleum Corporation, the Oil Industry Safety Directorate, and the
National Disaster Management Authority.

A public interest litigation was filed in the High Court seeking directions to the GAIL to shift the gas control station
(GCS) located in the midst of a habitation to an isolated place with immediate effect. The Hyderabad high court on
Monday, June 30, 2014 directed the Central government to file its reply within three weeks to a petition that sought
the shifting of gas collecting station (GCS) and pipelines of GAIL from Nagaram area of East Godavari district.

As a part of relief measures, GAIL is paying Rs. 20 lakh to the next of kin of the deceased and Rs. 50,000 to each
injured amounting to a total remediation bill of Rs. 3.89 crore. GAIL was even ready to bear the medical expenses
of all the injured persons and put Rs. 5 lakh in fixed deposit for each of the permanently disabled persons to enable
them to access benefits through monthly income schemes. GAIL constituted an internal inquiry committee headed
by its Executive Director (Operations and Maintenance), and thus, seemingly were trying to make up for their
mistakes.

The Oil Industry Safety Directorate, under the petroleum ministry, carries out periodical safety checks and audits of
oil and gas installations across the country. In a late-evening press release on June 27, Friday, ONGC said there
could be minor gas leaks in the trunk line, which due to zero wind in the vicinity get settled over the area. During
the early hours, when someone lights a stove for daily chores, the settled gas could trigger fire amounting to a
pipeline explosion. The GAIL terminal was closed instantly, but it took 15 minutes for the gas source to cease. In
the intervening time, the remaining gas in the pipeline might have caught fire and caused the burst of the GAIL’s
trunk line

Exhibit 13.1.1 is a timeline of recent industrial disasters:

7
 Exhibit 13.1.1: Recent Energy Disasters in India
Date Disaster Description Death/Injury Toll
August 2013 Fire at HPCL’s Vishakhapatnam refinery in Andhra Pradesh At least 30 died
November A ceiling collapsed at an underground mine operated by Coal India Ltd. in 4 died
2013 Dhanbad district, Jharkhand
March 2014 Toxic gas leak at a dyeing unit of KPR Mills at State Industries Promotion 7 died
Corporation of Tamil Nadu (SIPCOT), Erode industrial estate, some 400 kms
from Chennai.
June 2, 2014 A poisonous gas leak at SAIL’s Bhilai Steel Plant in Chhattisgarh 6 killed, 36 injured
June 6, 2014 Ammonia gas leak from a cold storage unit of Nila Seafood, a private processing 54 people got
company in Tamil Nadu unconscious
June 20, Minor fire at HPCL-Mittal Energy’s Bathinda refinery None injured
2014
June 27, An explosion in a GAIL pipeline near Nagaram Village, East Godavari District, About 20 killed and
2014 Andhra Pradesh 18 injured
.

Are events in Exhibit 13.1.1 System-Breakdowns or Organizational Crises?

A system or an organizational crisis is “a low probability, high-impact event that threatens the viability of the
organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that
decisions must be made swiftly” (Pearson and Clair 1998:60). This definition implies that organizational crises: a)
are highly ambiguous situations where causes and effects are unknown; b) they have a low probability of occurring
but still pose a major threat to the survival of an organization and its stakeholders; c) they offer little time to
respond; d) they often surprise organizational members and e) present an organizational dilemma that needs to be
resolved. In general, most organizational crises imply or result in losses of capital, market valuation, human
resources, revenues and reputation.

Management efforts for surviving an organizational crisis are not enough. Pulling an organization unscathed
through a crisis may not always be possible. Between these two extremes, effective crisis management implies: a)
that operations are sustained or resumed; i.e., the organization is able to maintain or regain the momentum of core
activities necessary for satisfying its customers; b) organizational and external stakeholder losses are minimized, and
c) organizational learning occurs so that future similar incidents are avoided or better handled. For instance, Johnson
& Johnson’s management of the Tylenol crisis was very effective and successful, reinforcing the reputation of the
company for integrity and trustworthiness. Nevertheless, it was not very successful, given that the perpetrator was
never identified, and some plans or procedures during the management of the crisis failed.

On the other hand, Exxon Valdez Oil Spill crisis in Prince William Sound was not very successful judged by: a)
warning signals were ignored; b) plans and preparations for such events were substandard; c) public statement made
by Rawl, CEO of Exxon, outraged the public and immediate stakeholders, d) and media coverage indicated that
Exxon management was generally unwilling to learn from the crisis. Some financial analysts, however, claimed that
the crisis management was effective since the financial costs incurred were manageable for Exxon and that the costs
of fixing the crisis were less compared to suggested preventive alternatives (e.g., invest in double-hulled vessels
throughout the fleet; conduct ongoing fitness evaluations for those in command; have a comprehensive crisis
containment plan for all of Prince William Sound).

Perhaps the worst oil spill disaster in history was the Bhopal Oil spill tragedy on December 2-3, 1984, at the
Union Carbide India Limited (UCIL) pesticide plant in Bhopal, Madhya Pradesh. Over 500,000 people were
exposed to methyl isocyanine (MIC) gas and other chemicals. The toxic substance made its way in and around the
towns located near the plant. The official immediate death toll was 2,259. The government of Madhya Pradesh
confirmed a total of 3,787 deaths related to the gas release. Others estimate 8,000 died within two weeks and another
8,000 or more have since died from gas-related diseases. A government affidavit in 2006 stated the leak caused
558,125 injuries including 38,478 temporary partial injuries and approximately 3,900 severely and permanently
disabling injuries. UCIL was majority owned by Union Carbide Corporation (UCC), with Indian Government-
controlled banks and the Indian public holding a 49.1 percent stake. In 1989, UCC paid $470m ($907m in 2014
dollars) to settle litigation stemming from the disaster.

8
 Exhibit 13.1.2 characterizes organizational crises by type and impact: a) its type (system breakdown, human
intervention, or natural disaster) and b) its impact (low versus high probability of occurrence and low versus high
organizational impact). The first categorizing factor (system breakdown, human intervention and natural disaster) is
from Mitroff and Alpaslan (2003). The second factor follows from the definition of organizational crisis by Pearson
and Clair (1998). Some crises can be recurrent and non-preventable, whether they are system breakdowns, human
interventions or natural disasters. However, their organizational impact is low. Other crises are rare but their
organizational impact is high. Effective management of such a crisis is difficult and often partial.

Exhibit 13.1.2: Categorizing Organizational Crises by Type and

Probability of Occurrence and Impact
Probability of Type of Organizational Crisis
Occurrence and
Magnitude of
Normal Crises: Abnormal Crises: Natural Disasters:
Organizational
Impact System-Breakdown Human Intervention Acts of God
Plant explosion Workplace bombing Natural disasters (e.g.,
Escape of hazardous materials (e.g., Terrorist attack earthquakes, tidal waves,
Bhopal spill; Exxon-Valdez oil spill) Hostile takeover tornados, fires, epidemics,
Low Probability of Product recall Product tampering droughts, famines) that destroy
Occurrence but Vehicular fatality Computer hacking corporate physical assets
Major environmental spill Personnel assault Natural disasters that destroy
High Dramatic refugee migrations Executive kidnapping non-physical assets (e.g., human
Organizational Major supply breakdown Work-related homicide resources; organizational
Massive global competition Product-service boycott information and databases; plans
Impact Industrial labor strike and strategies)
Corporate fraud
Money laundering
Product defects Absenteeism; Worker apathy Natural disaster (e.g., storm,
Wastage Go slow at work blizzards) that disrupt a major
Industrial pollution Pilfery & skimming; product or service
High Probability Minor environmental spills Counterfeiting
of Occurrence but Energy failure Information sabotage Natural disaster (e.g., death,
Minor industrial accidents Malicious rumor major disability or accident) that
Low Minor demographic shifts Security breach eliminates key stakeholders
Organizational Minor technology shifts Sexual harassment
Minor supply breakdown Assault of customers
Impact Extortion
Copyright infringement
Trademark infringement
Intellectual property violation
Computer tampering

The GAIL pipeline leak case is one that is suitable for discussion using the concepts of Organizational Crisis
and the Ethics of Critical Thinking as this case describes an event that is a crisis in the truest sense of the term. It is
an organizational crisis with low probability but high impact that can be attributed to a system breakdown but its
root cause is lack of human intervention in terms of audits.

References:
“GAIL Pipeline Blast Kills 15.” Business Standard, Saturday, June 28, 2014, Kolkata, pp. 1, 12].
http://www.thehindu.com/news/national/andhra-pradesh/gail-gas-pipeline-leakage-impacts-urea-production/article6221809.ece
Mitroff, Ian I. and Murat C. Alpaslan (2003), “Preparing for Evil,” Harvard Business Review, (April), 109-115.
Pearson, Christine M. and Judith A. Clair (1998), “Reframing Crisis Management,” Academy of Management Review, 23:1
(January), 59-76.

9
Ethical Questions:
1. Define the GAIL Pipeline disaster as an ethical organizational crisis. Describe its antecedents, determinants,
symptoms, concomitants and consequences in relation to GAIL.
2. Some crises can be recurrent and non-preventable, whether they are system breakdowns, human interventions or
natural disasters. To which type does GAIL Pipeline blast belong and why? To what extent is ONGC’s explanation
of this blast a crisis that is recurrent and non-preventable, and why?
3. Other crises are rare but their organizational impact is high. Effective management of such a crisis is difficult and
often partial. Does the GAIL Pipeline blast belong to this category?
4. In general, most organizational crises imply and/or accompany losses of capital, human resources, revenues and
reputation. Assess these losses for the Nagarjuna village and for GAIL. Assess GAIL’s moral responsibility to
prevent such disasters.
5. Hence, argue, develop and justify an ethics of organizational crisis by content, goals and objectives. Compare it to the
Bhopal Spill of December 2-3, 1984.
6. Apply critical thinking (CT) principles: which did GAIL violate most and why?
7. Apply ethical theory principles of teleology, deontology, distributive justice, and corrective justice: which ethical
theory and its principles did GAIL (together with OISD, PESO and ONGC) compromise most and why?
8. Hence, how would you detect, avert and preempt such disasters in the future, especially in relation to the powerless
poor villages of India?

Case 13.2: Closing of Nokia Plant at Chennai

Sequence of Critical Events:

• Nokia agrees to sell its phone business to Microsoft for $ 7.5 billion in Sep 2013
• Rajeev Suri is set to take over as Nokia CEO in April 2014
• Government of Tamil Nadu serves a tax notice of 2,400 crore alleging that Nokia was taking undue advantage of
tax benefits by claiming to export products while at the same time was selling its handsets only in the domestic
market
• In another case Supreme court orders Nokia to give Rs 3500 crore guarantee before handing over the plant to
Microsoft
• But due to the tax proceedings Indian tax authorities have frozen the asset i.e. the Chennai plant, hence Nokia
cannot transfer the plant to Microsoft
• Nokia offers Voluntary retirement scheme for the workers and assistance programs for the transition hinting at
the closure of the plant
• In June 2015, deal closed at $ 7.2 billion excluding the Chennai plant
• Nokia to produce mobile phones for Microsoft
• Nokia tries to resolve Rs. 21,000 crore tax dispute with the Government of India
• Tax authorities claim that no phones exported during 2009-11 while customs documents show otherwise

The Nokia Chennai mobile devices production plant at exurban Sriperumbudur, near Chennai, India was
started with a capacity of 500,000 mobile sets per day in 2006, one of the largest facilities of Nokia globally,

10
employing about 8,000 people directly (of which more than 60% were women) and about 12,000 indirectly
employed in the Sriperumdur region. Sriperumbudur was part of Tamilnadu’s industrial corridor or the Special
Economic Zone (SEZ) near Chennai. As part of the EPCG (Exports Promotion Capital Goods) for establishing
factory in SEZ, Nokia was exempted from paying hefty import duties on machineries required for the factory in lieu
of export-obligation agreement, which will help the government earn crucial foreign exchange. The Nokia plant was
primarily meant to export its products to overseas markets including Australia, New Zealand, Middle East, and
Africa. Nokia’s operations peaked in 2010 when it produced about 500,000 mobile phones a day, the highest output
among all Nokia plants across the world. Nokia Chennai was one of the largest foreign exchange earners for India in
the technology sector, exporting phones more than $2 billion a year. Nokia India’s annual turnover was about Rs.
150,000 crore during 2006-2012.

But crippled with multiple labor, operational and fiscal issues, Nokia grinded to a zero-unit production halt by
mid October 2014 – a virtual plant closure (Deccan Herald, Monday, October 20, 2014, p. 15). This is very
disconcerting when India is on the eve of a great FDI revolution and MNC intensity. Industrial and political experts
in India agree that Nokia should have consulted the Central and State governments before suspending operations.
Nokia, headquartered in Helsinki, Finland, had invested about $500 million in the Chennai factory and had started
manufacturing in January 2006 and had regularly exported mobile devices to markets including the Middle East,
Africa, Australia and New Zealand.

Earlier in September 2013, the Finnish handset maker Nokia had agreed to sell its phone business to the
software giant Microsoft for 5.4 million euro (US$ 7.5 billion). Nokia was planning to close this deal on Tuesday,
April 22, 2014, when the Delhi High Court froze Nokia India’s assets, blocking its transfer to Microsoft. Nokia
agreed to keep the Chennai Nokia plant out of the Microsoft deal. Nokia also announced its new CEO, Rajeev Suri.
Suri, 46, born in India, had been widely considered the leading candidate for the CEO post for Nokia as in recent
years he had helped the network division Nokia Solutions and Networks (NSN) turn profitable with a drastic
restructuring plan and by divesting unprofitable businesses.

The real problem started in March 2014, when the Tamilnadu state government (whose capital is Chennai)
served Rs 2,400 crore (Rs 24 billion) notice on Nokia, alleging that the firm sold products from the Chennai plant in
the domestic market instead of exporting them overseas. A second issue was even more serious: the Income Tax
Department demanded Rs 15,258 crore in unpaid taxes, interest and penalties. Additional charges related to Nokia’s
import of software from its head office in Helsinki, Finland, payment for which was made without keeping back any
withholding tax. In a separate tax case, the Supreme Court ordered Nokia India on March 14, 2014 to deposit Rs
3,500 crore guarantee in an escrow account before it transfers the plant to Microsoft. Meanwhile, as a result of
ongoing tax proceedings, the Indian tax authorities have forced an asset freeze on the Chennai manufacturing plant.
Nokia had often indicated that the transfer of the plant could be adversely impacted if the dispute remains
unresolved. Nokia India countered all these allegations on tax and labor issues but to no avail. If the tax issues
continued, Nokia India said it had no other option than to shift the business to Vietnam.

Currently, it seems that Nokia would continue to produce mobile devices for Microsoft from its Chennai plant
as part of its service agreement between the two companies. The divestiture deal to Microsoft has been closed at
$7.2 billion, and apparently seems to exclude the Chennai plant due to tax issues with the Government of India.
“Consequently, the Chennai facility remains part of Nokia following the closing of the transaction,” said a press
release from the Finnish firm. The same day, April 22, 2014, Nokia was supposed to release its first-quarter
earnings, and how much cash it would pay out to shareholders. With its new administration Nokia will outline its
new strategy with a focus on its networks equipment business.

The opposition DMK, which was instrumental in getting Nokia in Tamilnadu said that the present AIADMK
government should hold talks with the management to ensure the 8,000 Nokia Chennai workers do not lose their
jobs. The government has a duty to safeguard employee interest, it added. Nokia India Thozhilalargai (Nokia India
Employee’s Union) and its honorary president and MLA Mr. A. Soundararajan affirmed that it was a matter of
serious concern. Nokia India, he said, has not yet given a proper statement regarding the future of its current
employees.

Lately, on the prospect of the Microsoft purchase of Nokia, Nokia India even offered a voluntary retirement
scheme (VRS) to its employees in Chennai. About 5,700 employees quit the company opting for “golden

11
handshakes” in phases. Nokia had installed a Bridge Program to support employees affected or to be affected by the
relocation of the plant. Nokia said it would bring to Chennai some elements of the Bridge Program such as financial
assistance and training that would give employees some chance to explore opportunities outside Nokia.

Wednesday, June 25, 2014, Chennai Nokia offers to produce relevant documents to the Indian tax Authorities
at the Madras High Court to prove that it has been exporting handsets made at its plant in Sriperumbudur. This is
the first engagement of the Finnish mobile handset maker Nokia with the new Indian government represented by the
Commerce and Industry Minister Nirmala Seetharaman, in a bid to resolve the over Rs 21,000 crore tax dispute. The
Tax department claims that Chennai Nokia did not export any mobile phones during 2009-2011. Customs
documents, however, show that Chennai Nokia exported more than 400 million phones during 2009-2011. Given
this stalemate, sources said that the Finnish firm may be looking up for approval to sell the Chennai plant to
Microsoft to pay its tax dues. At this point, Nokia was seeking for an amicable resolution of the tax dispute. But
apparently all negotiations have failed, and Nokia India is virtually a closure as of October 20, 2014.

Newspaper References:
• “Nokia closes Microsoft deal sans Chennai Plant,” Deccan Herald, Saturday, April 26, 2014, p. 13;
• “Rajeev Suri may be named Next Nokia CEO,” Deccan Herald, Saturday, April 26, 2014, p. 13;
• “Finnish-ed? Or, will Nokia Reconnect Afresh?” Deccan Herald, Monday, October 20, 2014, p. 15;
• “Nokia Offer to Tax Department,” Business Line, Thursday, June 26, 2014, pp. 1, 7;
• “Tax Dispute: Nokia Officials meet Sitharaman,” The Financial Express, Thursday, June 26, 2014, p. 3.
• http://www.moneycontrol.com/news/business/nokia-tax-case-hc-asks-i-t-to-release-chennai-plant_1007118.html
• http://timesofindia.indiatimes.com/tech/tech-news/Nokias-Chennai-unit-may-shut-
down/articleshow/35127452.cms
• http://www.livemint.com/Companies/lD9MqKdyQz5ZgLdRnXHVPJ/Court-accepts-Nokias-plea-to-lift-factory-
freeze-in-tax-dis.html

Critical Questions:
1. As a critical thinker analyze this case, identify the key players and issues, determining who is right, who is wrong,
and for what reasons.
2. From other sources, ascertain what was the export-obligation agreement of Nokia in Chennai with the Government
of India, and to what extent the company was legally wrong in violating this agreement.
3. To what extent is this export obligation ethical beyond being legal, and why?
4. To what extent were the Government tax authorities morally right in imposing Rs 3,500 crore guarantee on Nokia
before it transfers the Chennai plant to Microsoft, thus foiling the larger deal of divesting its manufacturing plants to
Microsoft?
5. Freezing the assets of the Chennai plant could eventually shut down the plant, thus endangering the employment of
over 8,000 workers? To what extent was the Tax Authority of India justified in imposing the asset freeze? How do
you apply the theory of double effect here?
6. If you were Rajeev Suri, the current CEO of Nokia, how would you resolve this tripartite deal between Nokia,
Microsoft and the Indian Government and emerge with a win-win-win situation for all parties concerned?

Case 13.3: BASEL III Reforms

The breakdown of the Bretton Woods systems of managed exchange rates in 1973 soon led to serious casualties.
On June 26, 1974, West Germany’s Federal Banking Supervisory Office withdrew the banking license of Bankhaus
Herstatt after discovering that the banks foreign exchange exposures exceeded three times its capital. Banks outside
Germany took heavy losses on their unsettled trades with Herstatt, precipitating an international financial debacle. In
October 1974, the Franklin National Bank of New York also closed operations after racking up huge foreign exchange
losses. January 1975, in response to these and other disruptions in the international financial markets, the Central Bank
Governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices. Since its
first meeting in February 1975, the Committee has been meeting regularly about three to four times a year in Basel,
Switzerland. This Committee was later named as the Basel Committee on Banking Supervision (BCBS), and
specifically designed as a forum for regular cooperation between its member countries on banking supervisory matters.

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Its predominant aim was to enhance financial stability by improving supervisory knowhow and the quality of banking
supervision worldwide. For achieving this aim, the Committee sets minimum supervisory standards, improves the
effectiveness of techniques for supervising international banking business, and exchanges information on national
supervisory arrangements. In dealing with modern diversified financial conglomerates, the Committee has been also
working with other standard-setting bodies, including those of the securities and insurance industries.

Started as a G10 body, the Committee has expanded its jurisdiction to include 27 jurisdictions in 2009. The
Basel Committee now reports to an oversight body made up of Governors of Central Banks and supervision heads of
non-central banks of member countries. In strengthening the banking structure in the period of stress and in
preempting financial crisis, the Committee has given three Accords thus far: Basel I, Basel II, and Basel III.

Basel I Accord of 1988 strongly recommended a minimum capital ratio of capital to risk weighted assets of 8%
to be implemented by December 1992. Today, this Accord is universally followed in almost all major banks of the
world. However, Basel I did not distinguish between different levels of risks – for instance, a loan to an established
corporate borrower was considered as risky as one to a new business. Thus, all loans to veteran corporate borrowers
were subject to the same capital ratio requirements as new risky loans, without taking into account the credit rating,
credit history, corporate governance structure of established corporate borrowers, or the ability of clients to repay.

Basel II Accord of 1998: In order to address the dramatic changes in the banking systems since the Basel I
Accord of 1988 (e.g., increasing complexity of financial instruments (such as options, hybrid securities) and financial
activities, and advances in risk management), Basel II Accord refined Basel I Accord to recommend three mutually
reinforcing pillars that enable banks and supervisors to evaluate properly the various risks that banks face and realign
regulatory capital more closely with underlying risks. Pillar I dealt with revised minimum capital requirements; Pillar
II refined supervisory review processes, and Pillar III enforced market discipline of instrument transparency and risk
disclosure. But all three pillars could not be forcefully enforced owing to lack of sufficient and precise public
knowledge, and lack of consistency.

Basel III Accord of 2008: Basel I and Basel II focused on capital leverage only, with no internationally agreed
upon quantitative standards for liquidity. This was often perceived as a serious shortcoming when the financial crisis
unfolded in 2007 and liquidity evaporated in the key funding markets used by many banks and bank-sponsored
vehicles. Basel III distinguished between the quality and composition of capital, and suggested different capital and
liquidity ratios for different tiers of capital. The express purpose of Basel III reforms was: a) to strengthen global capital
and liquidity regulation for promoting a more resilient banking sector; b) to improve the banking industry’s capacity to
absorb shocks arising from financial and economic stress. Basel III reinforced the three pillars of Basel II: Pillar I:
enhanced minimum capital and liquidity requirements; Pillar II: enhanced supervisory review process for firm-wide
risk management and capital planning; Pillar III: enhanced risk disclosure and market discipline.

In general, Basel III guidelines seek to enhance the ability of banks to withstand periods of economic and
financial crisis by prescribing more stringent capital and liquidity requirements. More stringent Basel III capital
requirements (leverage ratios) include: 1) higher minimum core capital stipulations; 2) Tier 1 capital requirements; 3)
capital conservation buffers, and 4) counter-cyclical measures. More rigid Basel III liquidity requirements include: 1)
short term minimum liquidity coverage ratio (LCR), and 2) medium- and long-term minimum net stable funding ratio
(NSFR). Both liquidity requirements must enable financial institutions to withstand periods of low market liquidity.
For instance, LCR should ensure that a bank maintains an adequate level of unencumbered, high-quality liquid assets
that can be converted into cash to meet liquidity needs for at least a 30-day period under significantly severe stress
conditions, by which time it is presumed that the bank will take appropriate corrective actions to stabilize its leverage
and liquidity requirements.

The objective of NSFR is to promote medium and long-term funding of the assets and activities of banking
organizations. “Stable funding” is defined as the portion of those types and amounts of equity and liability expected to
be reliable sources of funds over a one-year period under conditions of extended stress. The NSFR is expressed as the
ratio of available amount of stable funding divided by NSFR required amount of stable funding; this ratio must exceed
100%.

Table 13.3.1 summarizes the capital and liquidity requirements under Basel I, II and III. The new capital
requirements under Basel III would impact banks positively as the reforms raise the minimum core capital, introduce

13
countercyclical measures, and empower banks to conserve core capital through capital buffer for periods of economic
and financial stress. The new liquidity requirements of Basel III would also stabilize and strengthen banks in
combating liquidity crises more effectively. Indian banks currently follow Basel II but are well positioned to
implement Basel III. Careful implementation of Basel III can create a new risk management culture with higher levels
of transparency and accountability. However, if Basel III reforms are not well understood or implemented by banks
throughout the world, then this could lead to international arbitrage resulting in disruption of global financial stability.

Questions:
1. How would you establish that the Basel I-II-III Reforms are a fruit of critical thinking?
2. Applying critical thinking, how will you further tighten Basel I-III Reforms so that they detect and prevent future
financial crisis?
3. Given that all banks feed on public monies, assess the ethics of Basel I versus Basel II versus Basel III.
4. Analyze the efficiency of Basel I-III Reforms based on the ethical theories of Teleology and Deontology.
5. Are the reforms and norms of Basel III reasonable, based on distributive justice or corrective justice, and why?
6. Are the Basel reforms and norms legally binding? If not, should they be binding ethically and morally? Why?
7. Asset quality control is a moral necessity for banks – Discuss.

Table 13.3.1: Comparing BASEL I, II and III Capital and Liquidity

Requirements

Type of Specific Basel I Basel II Basel III Basel III +

Requirement Requirements Reforms Reforms Reforms RBI
Under Each Type Requirements
in India
Minimum ratio of total 8% 8% 10.5% 11.5%
capital to risk-weighted
assets (RWAs)
Minimum ratio of None 2% 4.5 – 7.0% 5.5%
Common Equity to RWAs
Minimum Tier 1 capital to None 4% 6% 7%
Capital Ratio RWAs
Requirements Core Tier 1 capital to None 2% 5% 7%
RWAs
Capital Conservation None None 2.5% 2.5%
Buffers to RWAs

Leverage ratio None None 3% 3%

Countercyclical Buffer None None 0.0 – 2.5% 0.0 – 2.5%
Leverage Minimum Liquidity None None From 2015 5%
Ratio Coverage Ratio (LCR)
Requirements Minimum Net Stable None None From 2018 From 2015
Funding Ratio (NSFR)

The Ethics of Critical Thinking

Edward Deming, the founder of Total Quality Management (TQM) movement and guru of business
management, in writing an introduction to Peter Senge’s (1990), The Fifth Discipline, wrote:

“Our prevailing system of management has destroyed our people. People are born with
intrinsic motivation, self-respect, dignity, curiosity to learn, joy in learning. The forces of
destruction begin with toddlers – a prize for the best Halloween costume, grades in school,
gold stars – and on up through the university. On the job, people, teams, and divisions are
ranked, reward for the top, punishment for the bottom. Management by Objectives,

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 quotas, incentive pay, business plans, put together separately, division by division, causes
further loss, unknown and unknowable.” [Cited in Senge (2006: xii)]

In writing a preface to the new edition of The Fifth Discipline, Peter Senge (2006: xiv-xv) summarized
the maladies that afflict most organizations today. We capture and expand them in Table 13.1. Table 13.1
is fodder for critical thinking. Critical thinking questions obsessive generalizations, constraints and “best”
practices of the prevailing system of management, and tries to replace them with more valid assumptions
and generalizations that uphold the dignity, uniqueness and inalienable rights of the individual person and
the community. The old prevailing system of management focused on the shareholders raising their share
value, and most often, at the expense of individual, social and natural capital. Following this prevailing
system of management, the gaps between the poor and the rich, the prosperous and the marginalized, the
haves and the have-nots, are widening in almost every country of the world.

An alternative to the prevailing system of management must be based on human dignity and equality,
self-respect and self-esteem, dialogue and sharing, love rather than fear, curiosity rather than an insistence
on “right” answers, transparency rather than secrecy, and executive privilege, a shared vision and a shared
ongoing journey rather than a fixed destiny of growth targets, and learning rather than on controlling. Senge
(2006: xviii) believes that the prevailing system of management is, at its core, dedicated to mediocrity. It
forces people to work harder and harder for the corporation and its shareholders, while failing to tap the
spirit and collective intelligence that characterizes working together at their best. In the diverse, pluralist
culture environment, the promise of a truly generative dialogue among cultures and civilizations holds great
hope for the future. Critical thinking can facilitate this dialogue such that all of us have a meaningful place
in this universe.

What is Critical Thinking?

Emily Pronin, a Princeton University Professor, ran an experiment in which she showed subjects one of
two photos of a man she introduced as an investment advisor, and asked how much of a hypothetical
investment sum of $1,000 stake they would trust him to invest. For one photo, her investment advisor
model wore a suit and a tie, while the other was dressed in khakis and a Polo shirt. The man in the suit at an
average was entrusted with $535, while the same man in casual clothing got only $352. Pronin conducted
other behavioral experiments at Princeton and found a flaw in people’s perception: people feel better when
they can make quick decisions and move on as opposed to the more difficult task of exercising patience and
deliberation before decision-making. She concluded: we seem to have a natural tendency towards lazy and
uncritical thinking (Nitesh Gor (2012), The Dharma of Capitalism: 30-31).

Moral relativism – we often rationalize that our bad behavior is less bad than that of others.
Furthermore, most of us have an instinctive need to conform even when doing so results in choices that go
against our best judgment and conscience. A frequently cited example in this regard is the infamous prison
experiment in 1971 by Philip Zimbardo, a psychologist at Stanford University. He divided a group of
students into “prisoners” and “guards” and then confined them to a makeshift prison environment to act out
their assigned roles. In just a few days the guards became so sadistic and the prisoners so depressed that the
experiment had to be cut short. Zimbardo coined the term “Lucifer Effect” to explain this phenomenon:
almost anyone, given the right situation and influences, can be made to abandon their scruples or virtues and
cooperate in violence and oppression. This experiment is an extreme illustration of something we
experience everyday: we choose the uncritical path of least resistance or easily give in to our preconceived
ideas, biases and prejudices (Nitesh Gor 2012: 29-30).

The word critical (from the Greek kritikos) means to question, or to make sense of or able to analyze. It
is by questioning, making sense of things, events and people, and by analyzing them that we examine and
improve our thinking and the thinking of others (Chaffee 1988: 29). The word critical is also related to the

15
word criticize that implies questioning and evaluation in a constructive way. Thus, at an initial and
etymological level, critical thinking is thinking that questions and challenges our past and present thinking
on subjects and objects, their properties and events. Critical thinking is constructive thinking about the
world of ours that questions and evaluates its operations, history and management. Bernard Lonergan used
to say: you can criticize anything as long you love the person or institution you criticize.

The word “critical” is closely associated with the concept of a threshold or a critical point. For
instance, in physics, the critical point is the point above or below which certain physical changes will not
occur. In thermodynamics, the properties of the substance at this point are called its critical constants.
There are numerous other instances of this application of the word critical as “limiting.” Applied to
business knowledge, critical point would mean a critical threshold beyond which we want the students to
emerge free from their “critical constants” of management orthodoxy, apathy and malaise, value-
hibernation, self-centered rigidity and individuality to thinking for others, for the five billion that are poor
in the world, the masses that our business education or capitalist system does not directly benefit.

Critical thinking thinks beyond the short-term to the long-term goals and consequences of our
thinking, decisions, choices and actions. Critical thinking, therefore, thinks beyond revenues, market
share, profits and shareholder value to other bottom lines that include the intended and unintended long-
term consequences of corporate decision-making, strategies and implementations.

Critical thinking is a discipline that questions and challenges “our prevailing system of management”
and its assumptions and generalizations. In the process, it is an attempt in transforming the prevailing
system of management. Deming believed that a “common system of management” governed our modern
institutions, and, in particular, formed a deep connection between work and school. From early infancy, we
have been socialized in ways of thinking and acting that are embedded in our most formative institutional
experiences. The relationship between a boss and subordinate is the same as the relationship between a
teacher and student. The teacher sets the goals, the students respond to them. The teacher has the answer,
the students work to get the answer. Students know when they have succeeded because the teacher tells
them so. By the time the children are ten, they all know what it takes to get ahead in school and please the
teacher – a lesson they carry forward in their later academic and management careers. Hence, Deming
would often say, “We will never transform the prevailing system of management without transforming our
prevailing system of education. They are the same system.” In a broader role, critical thinking questions
and challenges our current system of education.

Habermas and Critical Thinking

Habermas (1966, 1971) argued that all people, regardless of the social group they belong to, face
three challenges with respect to the world and with one another: efficiency, stability and justice.
Habermas (1971) maintained that these challenges motivate three different “cognitive interests” that make
people raise questions about how to make societal institutions more efficient, stable, and just. Habermas
(1971) affirmed that people need to exert some control over the world in which they live. For example,
people must know which time of the year is the best for planting particular seeds and how to construct
houses that do not collapse. This need for efficient solutions motivates a “technical cognitive interest”
(Habermas, 1971: 172) that leads people to strive for knowledge about causes and effects. Such
knowledge helps to “enhance prediction and control” (Willmott, 2003: 95) and to optimize means-ends
relationships. Enhancing prediction and control is also important in the economy because people have
scarce resources and thus try to allocate resources as efficiently as possible (Walsh et al., 2003).

Secondly, people need common practices that are based on a shared understanding of actions, roles,
and routines to jointly cultivate grain or to cooperatively build a house. Without common practices,
cooperation will almost certainly break down and become close to impossible. This need motivates what

16
Habermas (1971: 173) called “practical cognitive interest.” This interest prompts people to search for
knowledge that helps them “improve mutual understanding” (Willmott, 2003: 95). For instance, financial
markets function properly only if interactions between market participants become institutionalized
through roles and routines (Berger & Luckmann 1966) and stabilized by processes of joint “sense-
making” (Weick 1993). Stability at the systemic level requires a certain degree of mutual understanding
at the individual level: “Complex patterns of interaction that are stable require actors who share cognitive
assumptions and expectations” (Fligstein 2001: 27).

Thirdly, people encounter relations and institutions that are unjust, such as when some individuals or
groups have a disproportionate influence on how food, housing, money and other goods are produced,
distributed and consumed. Such injustices motivate what Habermas (1971: 194) called “emancipatory
cognitive interest.” Habermas (1986: 198) argued that this interest is not merely a subjective attitude that
some people happen to have but, rather, something “profoundly ingrained in the structure of human
societies. While this concern with justice does not suggest that people always act justly (Ariely 2012), it
does suggest that people want to know whether and how societal institutions and relationships could be
transformed so that fewer people suffer and struggle (Marti & Scherer 2016: 302).

Currently, technocratic financial regulation (e.g., complex financial instruments such as derivatives
and high frequency stocks trading that cause volatility) focuses on the dimensions of efficiency and
stability but neglects issues of justice—and so does existing research (Beunza & Millo, 2014; Hendershott
et al., 2011). In addition, because most researchers measure efficiency in terms of GDP and stability in
terms of volatility (Crockett, 2001; Fleurbaey, 2009), it is hardly possible to infer from existing studies on
financial innovations what their role is in bringing about justice, if ever. Researchers who “declare that an
issue is technical . . . remove it from the influence of public debate” (Callon, Lascoumes, & Barthe, 2009:
25), since experts see no need to involve social groups in technicalities, while social groups have no
motivation to engage in technical discussions (Marti & Scherer 2016: 305). Existing research lends
credence to the narrow language of technocratic financial regulation by focusing only on efficiency and
stability and ignoring such topics as rising top incomes or income inequality and injustice (Piketty, 2014).

Habermas, J. 1966. Knowledge and interest. Inquiry: An Interdisciplinary Journal of Philosophy, 9: 285–300.
Habermas, J. 1970. Technology and science as “ideology.” In J. Habermas (Ed.), Toward a rational society: Student
protest, science, and politics: 81–122. Boston: Beacon Press.
Habermas, J. 1971. Knowledge and human interests. Boston: Beacon Press.
Habermas, J. 1998. Three normative models of democracy. In J. Habermas (Ed.), The inclusion of the other: Studies
in political theory: 239–252. Cambridge, MA: MIT Press.
Habermas, J. 2003. Truth and justification. Cambridge, MA: MIT Press.

Chris Argyris and Critical Thinking as Double-Loop Learning

In his influential HBR (1991) article, Chris Argyris, speaking about organizational learning says:
“Success in the marketplace increasingly depends upon learning, yet most people don’t know how to
learn,… even the well-educated, high-powered, high commitment professionals who occupy key positions
in the modern corporation. Most companies not only have tremendous difficulty addressing this learning
dilemma; they aren’t even aware that it exists. The reason: they misunderstand what learning is and how
to bring it about. … Most people define learning too narrowly as mere “problem solving,” so they focus
on identifying and correcting errors in the external environment. Solving problems is important. But if
learning is to persist, managers and employees must also look inward. They need to reflect critically on
their own behavior, …, how they go about defining and solving problems.”

In this connection, Argyris coined the terms” single-loop” and “double-loop” learning.” For instance,
a thermostat that automatically changes room heat with a certain predesigned critical point (say, 68

17
degrees), is single-loop learning. A thermostat that asks “why am I set at 68 degrees?” and then explores
whether other critical points can better govern room heat and its cost-economics, is doing double-loop
leaning. Highly skilled professionals, observes Argyris, are often very good at single-loop learning; this is
what they have learnt in schools, colleges, professional schools, mastering one or another disciplines and
its skills and techniques. And they are very proud and defensive about their single-loop learning. They
were never trained to double-loop thinking; the latter is critical thinking; it learns from failure. Learning
is best retained and behavior-changing when in double-loop.

Why do we need Critical Thinking?

We need to own and respond to problems that we are or that we create, before we pass the buck on to
others. Stephen Covey said it eloquently: “If you think the problem is out there, that very thought is the
problem.” Lack of critical thinking makes us either incapable of recognizing problems and their severity
in ourselves or the organizations we work for, or we flatly trace their origin to others.

We have never critiqued our education and learning systems: what are we teaching, how do we teach,
what do students learn, how do they use this knowledge, and what are the long term good outcomes of our
education systems on society? This is critical thinking and its application. David Orr (1991), an
environmental educator, reminded us long back that our education system could unwittingly create
monsters like Hitler and Stalin. These perpetrators of the Holocaust were heirs of Kant and Goethe. In
most respects the Germans were the most educated people on earth, but their education did not serve them
as an adequate barrier to barbarity. This is lack of critical thinking of our education system.

Writing around 1991, David Orr (1991: 52) continues: “If today is a typical day on planet Earth, we
will lose 116 square miles of rainforest, or about an acre a second. We will lose another 72 square miles
to encroaching deserts, as a result of human mismanagement and overpopulation. We will lose 40 to 100
species, and no one knows whether the number is 40 or 100. Today the human population will increase by
250,000. And today we will add 2,700 tons of chlorofluorocarbons to the atmosphere and 15 million tons
of carbon. Tonight the Earth will be a little hotter, its waters more acidic, and the fabric of life more
threadbare.” The truth is that many things on which our future health and prosperity depend are in dire
jeopardy: climate stability, the resilience and productivity of natural systems, the beauty of the natural
world, and biological diversity. It is worth noting that this is not the work of ignorant people. It is, rather,
largely the result of work by people with BAs, BScs, LLBs, MBAs, and PhDs.
Well-known corporations have been recently indulging in unusual business practices such as
creative or aggressive accounting, creative cash flow reporting, earnings management or income
smoothing via overstating earnings and understating debts, and, in general, fraudulent accounting and
financial reporting. Under whatever name, these unusual activities are a financial numbers game
(Mulford and Comiskey 2002) or financial shenanigans (Schilit 2002) with a singular ultimate objective
– creating an altered impression of the firm’s business performance. Fortune (2002) featured twenty five
such large corporate accounting frauds and security scandals, a research conducted during 2001 in
conjunction with the School of Business, University of Chicago. Also, early 2000 marked the beginning
of some of the worst corporate security irregularities in history. Rapidly rising stock prices and the
market collapse that followed led corporate executives to unusual activities and accounting manipulations
that were both morally questionable and reprehensible, or were outright violations of the law. Forbes
(2002) listed twenty five massive securities irregularities among top management executives, involving a
haul of over $23 billion, averaging to over $923 million per company and in excess of $257 million ill-
gotten gains per top executive.

Several multinational and global companies were involved in accounting irregularities. Enron
(October 2001) led the gang, followed by Quest Communications (February 2002), Global Crossing

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(March 2002), World.com (March 2002), Adelphia Communications (April 2002), CMS Energy (May
2002), Dynergy (May 2002), El Paso (May 2002), Halliburton (May 2002), Peregrine Systems (May
2002), AOL Time Warner (July 2002), Bristol-Myers Squibb (July 2002), Duke Energy (July 2002),
Satyam (2009), 2G-3G (2010-2013), CWG (2011), Coalgate (2012), to name a few. More recent
accounting scandals were associated with onetime respectable companies such as Arthur Anderson, Ernst
& Young, KPMG, JP Morgan, Merrill Lynch, Morgan Stanley, Citigroup, Salomon Smith Barney, Marsh
& McLennan, Credit Suisse First Boston, and even the New York Stock Exchange (NYSE) itself. All
these companies represent bad decisions and ethical failures. Most of the top executives involved in such
accounting and financial irregularities were business graduates of some of the topmost business schools of
the United States. It was education used as good means to bad ends. It was a massive failure in critical
thinking, managerial ethics, corporate ethics and corporate governance.

David Orr (1991) argues that education is no guarantee of decency, prudence, or wisdom. More of
the same kind of education will only compound our problems. This is not an argument for ignorance, but
rather a statement that the worth of education must now be measured against the standards of decency and
human survival - the issues now looming so large before us in the decade of the 1990s and beyond. It is
not education that will save us, but education of a certain kind. It should be an education that can stand
the scrutiny of critical thinking.

Another myth of higher education, points of David Orr (1991) is that we can adequately restore that
which we dismantle. For instance, in the business management curriculum we have fragmented business
knowledge into disciplines and sub-disciplines of economics, strategy, business law, human resources
management (HRM), accounting, finance, production, marketing, sustainability and the like.
Consequently, most business students graduate without any broader integrated sense of the unity of things
or the multidimensional nature of business markets and problems. For example, points out David Orr, we
routinely produce economists who lack the most rudimentary knowledge of ecology or sustainability.
Similarly, our national accounting systems do not subtract the costs of biotic impoverishment, soil
erosion, poisons in the air or water, and resource depletion from gross national product. We add the price
of a sale of bushel of wheat to GNP while forgetting to subtract the three bushels of top soil lost in its
production. As a result of this incomplete education, we have fooled ourselves into thinking that we are
much richer than we are.

The role of a teacher, a professional role, can be kept analytically separate from the role of a scholar.
Scholarship implies realized expertise or developing expertise in one's field, regular updating of one's
skills, intellectual honestly and respecting intellectual property. The role of a teacher is to communicate
one's expertise and skills, and advances of knowledge to one's students. Both roles assume and imply
ethical responsibilities.

Critical filtering of one's knowledge before it is communicated to the students is important. Critical
thinking (CT) makes us good and professional scholars that become the "conscience" of ours discipline or
field. A good scholar owes it to his/her profession to be its own objective critic. A scholar who loves
his/her profession is not afraid to criticize it. A good person who loves his/her institution is not afraid to
criticize it.

All Teachers are basically Teachers of Ethics

In this sense, "all teachers in professional education are teachers of ethics" (McDowell 1992: 54).
Ethical instruction occurs in any discussion about applying specialized expertise where there are ethical
aspects to judgments being made. There are very few areas in business management or business
management education that do not involve ethical aspects and judgments. Even professors who teach

19
only the technical aspects of business management (e.g., Business Statistics, Operations Research) need
ethics and ethical codes for handling data analysis and inferencing. Rhode (1992) makes a strong
argument for the need and responsibility of professional faculty to teach ethics throughout the curriculum.

The term "integrity" is used in two different senses: a) consistency between one's beliefs (professed
values and attitudes), principles (moral or ethical) and commitments (e.g., contracts, duties, aspirations)
and one's actions (speech, deeds, and reports), especially in the face of dangers and enticements of various
sorts; b) wholeness or consistency in the ordering of one's beliefs, principles, and commitments. One
cannot be all things to all people at all times - one must decide which of one's commitments are more
important and which can be jettisoned with relative ease, which commitments may change over time, and
which cannot be changed. Moral integrity of professionals includes other dimensions too: moral
commitment to identifiable moral goals and ideals of the profession, and maintaining the ethical integrity
of one's profession by being its conscience.

Probably the single most serious ethical problem for professional is sloppy performance. This
problem may often arise from our claim of being professional experts in our field, an expertise not
available to everyone, and thus incapable of being fairly judged by anyone other than a fellow
professional. While this claim for expertise leads to the privilege of professional autonomy, it can also
create a license for careless, wasteful and incompetent performance. However, our stakeholders
understand our justifiable priority decisions given competing pressures of our own professional and
private lives.

Part One: Various Approaches to Critical Thinking

The concept of “critical thinking” is variedly defined in the relevant literature. We select a few
thematic views of critical thinking, especially as they relate to business and ethics of business education.

Critical Thinking as Making Better Sense of the World around Us

Chaffee (1988:26) views critical thinking (CT) as an active and organized effort to make a better sense
of the world around us. Thinking represents “our active, purposeful, organized efforts to make sense of the
world.” Thinking critically is “our active, purposeful, organized efforts to make sense of the world by
carefully examining our thinking and the thinking of others in order to clarify and improve our
understanding” (Chaffee 1988: 27). Thinking is the way we make sense of the world; thinking critically is
thinking about our thinking so that we can clarify and improve it.

Critical thinking is not simply one way of thinking. It is a total holistic approach to understanding how
we make sense of the world and the universe. When we think critically, we are actively using our
intelligence, knowledge and skills to effectively deal with our life’s situations and ourselves (Chaffee 1988:
30). Critical thinking involves taking an active attitude toward the situations encountered in life. Thinking
critically does not mean simply having thoughts and waiting for things to happen. This would be passive
thinking – we would be letting events, others and their thinking to control us and define us. Watching too
much television or indulging in social media, for instance, is passive thinking; we allow ourselves to be
influenced by the thinking and acting of others. Critical thinking is active, proactive and interactive
dialogue with our world of people, properties and events.

Critical Thinking as Reflective Thinking

According to Paul and Elder (2002), critical thinking is reflective thinking or thinking critically.
Thinking critically is reflection – to think back on what we are thinking or feeling. It is thinking back on

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thinking. To think critically is to think carefully about our thinking and the thinking of others. It is a serious
study of thinking. It is serious thinking about thinking. You become the “critic” of your own thinking.1

CT is to improve your thinking. “Critical thinking is the disciplined art of ensuring that you use the best
thinking you are capable of in any set of circumstances” (Paul and Elder 2002: 7). Our thinking influences
everything we do, want or feel. Critical thinking refuses biases, prejudices or stereotypes, false beliefs,
myths or illusions to influence our thinking

There is what we might call a first-order thinking that is our everyday thinking, spontaneous and non-
reflective thinking. It contains insights, prejudices, truth and errors, good and bad reasoning,
misconceptions and ideological rigidities. Critical thinking is second-order thinking: it reflects on,
reconstructs, analyzes and assesses the first-order thinking (Paul and Elder 2002:14). Critical thinking is
“self-directed, self-disciplined, self-monitored, and self-corrective thinking. It presupposes assent to
rigorous standards of excellence and is a careful command of their use. Critical thinking implies and
empowers effective communication and problem-solving abilities” (Paul and Elder 2002: 15).

Based on Paul and Elder (2002:17-36), Table 13.2 distinguishes the traits of disciplined critical
thinking versus those of undisciplined, uncritical and blind thinking

CT as Identifying and Resolving Wicked Problems

In a landmark article in 1973, Horst Rittel and Melvin Webber, both, then, urban planners at the
University of Berkley in California, defined the notion and domain of what they called “wicked”
problems as opposed to ordinary tame problems. They observed that there are a set of problems that
cannot be resolved with traditional analytical approaches. They labeled them “wicked problems.” Rittel
and Webber (1973) were the first to introduce the notion of “wicked” in relation to social problems as
opposed to “ordinary” problems. A year later, Ackoff (1974) called such problems a “mess” and years
later, Horn (2001) called them a “social mess.”

According to Charles Perrow (1984), there are four types of problems:

• Type I: problems with known outcomes and fixed sequences that are deterministic systems;
• Type II: problems with known outcomes and known probabilities associated with sequences that
make them stochastic systems;
• Type III: problems with known outcomes and unknown probabilities associated with sequences
that make them uncertain systems, and
• Type IV: problems with unknown, unanticipated or unimagined outcomes with unknown
probabilities are emergent systems that are on the horizon.

Conventional methods of risk assessment and risk management apply to problem Types I and II. We
may understand auto, home, and life liability insurances as Type I and Type II systems with known
outcomes and known fixed or probabilistic sequences. On the other hand, safety of high-speed vehicles,
carbon emissions, and modern nuclear plants are Type III problems wherein our current level or degree of
ignorance is high owing to what Perrow (1984) calls “interactive complexity” and “coupling.” Interactive
complexity is a measure of the degree to which we cannot foresee all the ways things go wrong – this is
because there are too many interactions that we could foresee, understand and manage. Coupling is a

1 Critical thinking must be distinguished from literary criticism that has come down from ancient philosophers such as Plato and
Aristotle to modern thinkers such as Francis Bacon, S. T. Coleridge and T. S. Eliot. As understood by these scholars, literary
criticism is a reasoned and systematic discussion of the arts (especially poetry, drama, rhetoric and oratory) in terms of explaining
or evaluating their genres, constructs and structures, and techniques and products.

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measure of the degree to which we cannot stop an impending disaster once it starts – this is because we do
not have enough of resources, time, knowledge or technologies to do so.

Other things being equal, the greater the degree of interactive complexity, the less is our capacity to
prevent surprises; the greater the degree of coupling, and the less is our capacity to cure surprises. The
greater the degree of interactive complexity and coupling, the greater the likelihood that a system is a
time-bomb, an accident waiting to happen. In the latter case, “operator errors” merely serve as triggers –
putting the blame on them for such major accidents such the Chernobyl Spill, the Bhopal spill, or any
nuclear power plant disaster is “fundamental attribution error” (King 1993: 108). Such disasters are best
described as “systems breakdown” rather than any deliberate “human interventions” (Mitroff and
Alpaslan 2003). Increasing our capacity to prevent unanticipated interactions among system components
entails simplifying systems; increasing our capacity to cure unanticipated interactions entails de-coupling
major components (e.g., build in longer times-to-respond).

Type IV problems with unknown, unanticipated or unimagined outcomes accompanied with

unknown probabilities are emergent systems that are future challenges. These problems are riddled with
unknown sequences with unknown probabilities leading to an unknown sequence of failures or disasters
that we cannot control by known methods and technologies. Typical Type IV examples are: global
climate change, global arctic drift, global tsunami, continental hurricanes, global terrorism such as 9/11,
global financial market crisis of October 2008, the current Wall Street meltdown, cyber- hacking, global
cyber fraud, global invasion of privacy, and global holocausts or genocide.

There are many reasons why we confront so many Type IV wicked problems:

• Presently, our world is becoming more turbulent with things happening faster, bigger, and
beyond our control (e.g., healthcare crisis, preventive wars, forced global asylum immigration,
global terrorism, genocide, political power crisis, global energy crisis, financial market
turbulence, and the Wall Street meltdown).
• We do not know what we want. Should we build an economic and political infrastructure
predicated on the belief that we will need more energy or more conservation? Which policy will
provide us with more flexibility and adaptability, more simplicity and well-being, more health
and global peace? Such policy decisions will surely determine significant aspects of our future.
• Consequently, we cannot easily predict our energy needs, our political needs, our ecology needs,
our healthcare needs, our safety/security needs, and our consumptive lifestyles.
• We cannot predict our possible futures other than a few aspects of these futures.
• That is, most of these problems are characterized by human ignorance – what we do not know
we do not know, and many do not know that they do not know.
• We just cannot foresee all the ways things can go wrong - this is the chaos theory.
• Moreover, while we cannot easily predict our future, what we choose to do now certainly affects
our future. Our current choices may have some unanticipated consequences that we do not now
know.
• It is a loss of orientation that most directly gives rise to divergent ideological activity, an
inability, for lack of usable models, to comprehend the universe of civic rights and
responsibilities in which one finds oneself located (Geertz 1973).
• “Wickedness occurs when people confer immutability on value assumptions and ideological
considerations” (King 1993: 113).
• Different stakeholders in wicked problems hold diverse values – that what satisfies one may be
abhorrent to another – that what comprises problem-solution for one is problem-generation for
another. Under such circumstances, and in the absence of an overarching social theory or an
overarching special ethic, there is no determining which group is right and which is wrong,
which needs to serve and which needs to be served (Rittel and Webber 1973).
• “All we have are endless fragments of theory that account for bits and pieces of individual,
organizational and economic behavior. But we have no overarching or truly interconnecting

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 theories, especially none that accounts for human behavior in turbulent times” (Michael 1985:
95).
• The new mathematics of complexity raises an even more disturbing question: Can there be an
economic policy at all? Or is the attempt to control the “weather” of the economy, such as
recessions and other cyclical fluctuations, foredoomed to failure? (Drucker 1989: 167).
• Moreover, there are no grounds to suspect things could be better in principle. There are no
sound reasons to claim that the technological, social and political sciences are going to mature or
evolve to the point that we can more accurately predict and control our future (King 1993: 111).

Wickedness in wicked problems occurs when people confer immutability on value assumptions and
ideological considerations. In such cases, wicked problems can easily degenerate into tyranny or chaos
(King 1993: 113). Type IV problems are “wicked” problems that cannot be resolved by analytical or
scientific methods, but, as Rittel and Webber (1973: 162) point out, could be resolved only by logical
argumentation and consensus. It is a second-generation systems approach based on a model of planning
“as an argumentative process in the course of which an image of the problem and of the solution emerges
gradually among participants, as a product of incessant judgment, subject to critical argument.”

The process of resolving Type IV wicked problems is elaborate and argumentative. In terms of
participants, we need to build on diversity, cross-functionality and interdisciplinary expertise. We need to
build on diversity, adaptability, resilience, rapid respond times, flexibility, reversibility and even
“redundance” such that when confronted by undesirable and unanticipated outcomes we have fallback
positions. We must learn how to learn and unlearn, think about how we think, and we need to build
learning organizations (Senge 1990). Above all, we need common sense – that is, common ground.
Establishing common ground is a strategic necessity in our turbulent times (Bellah et al. 1991; Hunter
1991). Common ground essentially means that we realize that our differences are less significant and
profound than what we share in common, and that this common sense represents the beginnings of
wisdom (King 1993: 114).

Next, given this multi-specialization of stakeholders, in taming such wicked problems we need
carefully to draw boundaries such that we can sort out different “images” of the problem, tame different
pieces of the original wicked problem, generate hypotheses specific to this piece of the problem, and
converge toward emergent resolutions. Perhaps, following one of the fundamental tenets of Edwards
Deming, we should shift from strategies that focus on results, outcomes, or objectives, to strategies that
focus on continuously improving processes. This strategic shift needs a profound change in mindset for
managers and executives. We also need real listening, and engaging in what David Bohm called
“dialogue.” We need both dialogue and listening to what Edward de Bono called “mapmaking.”
Listening, dialogue and mapmaking are needed for mapping the boundaries and learning to recognize
patterns of interaction – this is the crux in sorting messes. Real listening is also essential in establishing
trust, and trust is absolutely necessary when working together. “Mistrust is the dark heart of wicked
problems” (King 1993: 114). “Trust is a fundamental strategy for collectively coping with wicked
problems” (King 1993: 112).

Problems, however, rarely fall neatly into nice and clean categories. Rittel and Webber’s
classification describes a continuous spectrum, one end of which are simple tamable problems, and the
other end of each are non-tamable wicked problems. We should not recast wicked problems into tame
categories in order to solve them. Treating wicked problems as tame misdirects energy and resources
resulting in ineffective solutions, and often such solutions create more difficulty. According to Rittel and
Webber, the opposite of wicked problems is a “tame” problem. Tame problems, however, may be quite
complex, but they lend themselves to analysis and solutions by known techniques. Traditional linear
processes are sufficient to produce a solution to a tame problem in an acceptable period of time, and it is
clear when a solution emerges. This is not true of wicked problems. In wicked problems the problem

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statement changes, its constraints keep changing, its stakeholders keep increasing and their goals and
targets are constantly moving, (i.e., its requirements are volatile), and accordingly, stakeholder resistance
to the problem resolutions keeps mounting. Such is the case with current wicked problems such as
eradicating global poverty, controlling violence and crime in schools and university campuses, making
cars more safe, locating new freeways, prisons and homeless shelters, controlling corporate fraud, saving
subprime mortgage markets, and bailing out financial markets.

Defined thus, typical examples of wicked problems are city planning, city revitalization, crime
prevention and control, wealth creation and equitable distribution, building new expressways connecting
populous cities, applying the doctrine of eminent domain, fair trial, fair elections, and the like. Other
social wicked problems include rebuilding broken urban neighborhoods or ghettoes, reforming public
education, creating and maintaining environmentally sustainable communities, reducing drug abuse,
reducing teenage pregnancy, reducing abortions, and reducing teenage suicides. Most of these problems
are linked with horizontal and vertical cross-cutting dimensions, multiple stakeholders, trade-offs between
values, and quality of family life. Wicked problems are linked and have ramifications on larger
constituents. Thus, one could link the wicked problem of terrorism to some nations seeking superpower
over others. Possibly, we could connect the current wicked problem of healthcare in the U. S. to the
inordinate profit seeking goals of healthcare systems such as the pharmaceutical companies, health
insurance companies, and the medical professions. Most public issues in the world today (e.g., poverty,
income inequality, genocide, and global climate change) stem from and create wicked problems of
avarice, greed and exploitation.

Wicked problems, as opposed to simple mechanical problems, are voluble and volatile, stubborn and
obstinate, subtle and mysterious, complex and dis-sensual. Wicked problems are ill-defined, ambiguous
and associated with strong moral, political and professional issues. Since they are strongly stakeholder-
dependent, there is often little consensus about what the problem is and its solution (Ritchey 2005). Most
major public projects today (e.g., constructing freeways, subways, bridges, and industrial parks; offshore
oil or natural gas mining; controlling and containing crime and violence in our schools) have a significant
wicked component. Major problems of uncertainty, risk and ambiguity arise along all the six steps in
their resolution. The process, far from linear, is highly iterative, forcing going back and forth between all
the six steps before the leverage value of any information becomes known. Value of any piece of
information along each step remains unknown until the desired outcome is achieved. Often wicked
problems deal with complex emerging social market issues such as uncertainty and turbulence,
information explosion, cultural pluralism and diversity, social and ethnic anarchy, and multiracial
discrimination. They are also often triggered by structures of social injustice, inequity and violence.
They are “wicked.”

Critical Thinking as Questioning and Challenging

According to Collins (2001), critical thinking (CT) is questioning and challenging what you learn.
Critical thinking is letting students question and challenge what you teach. The best students are those who
never quite believe their professors (Collins 2001: 16).

CT does not reject the data merely because one does not like what the data implies. CT confronts the
implications. CT does not reject the data merely because it rejects the theory one espouses. CT questions
one’s espoused theory. CT does not reject the data merely because it rejects one’s assumptions and
presuppositions. CT questions and challenges one’s assumptions and presuppositions about oneself, the
society and the world.

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 CT does not reject the theory merely because the data does not confirm it. CT sifts the data and
questions its reliability, validity and objectivity or veracity. CT is prepared to revise the theory if the data
justifies it. CT does not generalize when there is no evidence to back the generalization.

Critical Thinking as Positive and Normative Science

According to Hunt (2002), positive science is a body of systematized knowledge concerning what is. A
normative science is a body of systematized knowledge discussing criteria of what ought to be. Critical
thinking, then, should be a balanced mixture of both of what is and what ought to be. That is, the is/ought,
fact/value, knowledge/wisdom, relative/absolute, temporal/eternal, descriptive/prescriptive and
positive/normative dichotomies should be part of:

a) The business education inputs (e.g., vocabulary, books, articles),

b) The teaching-learning-process (e.g., inquiry, search, analysis, synthesis, assessment) and
c) The learnt or internalized outputs (e.g., values, service learning, voluntary hours, meaning and
quality of life, ethical and moral behavior, social justice, and spirituality of eternal values).

Applied to business education and business management, critical thinking should deal with three
dichotomies: the micro versus macro aspects of institutions, organizations and markets, their profit versus
nonprofit orientations, and positive versus normative evaluations. Any institution, organization or a
corporate entity could be analyzed from these three dichotomies. Table 13.3 presents a schema of such
an analysis.

Critical Thinking as Spiritual Intelligence

According to Stephen Covey (2004), the four magnificent parts of our nature consist of body, mind,
heart, and spirit that have corresponding four capacities or intelligences: physical or body intelligence (PQ),
mental intelligence (IQ), emotional intelligence (EQ) and spiritual intelligence (SQ).

PQ is something that happens within our body controlling the respiratory, circulatory, metabolic,
nervous and other vital systems. PQ constantly scans our environment, adjusts to it, destroys diseased cells
and fights for survival. PQ controls and coordinates the function of roughly 7 trillion cells of our body with
a mind-boggling level of biochemical and biophysical coordination that controls our reflexes, instincts,
drives, passions, habits, manual skills and body routines. PQ manages the entire system, much of it
unconscious. IQ or mental intelligence is our ability to reason, analyze our reasons and reasoning, think
abstractly, use language, visualize, conceptualize, theorize and comprehend. Emotional intelligence (EQ) is
one’s self-knowledge, self-awareness, social sensitivity, empathy and ability to communicate successfully
with others. It is a sense of timing and social appropriateness, having the courage to acknowledge
weaknesses, and express and respect differences. Abilities such as leadership, successful communications
and relationships are primarily a function of EQ than IQ (Covey 2004: 50-51).

Spiritual intelligence (SQ) is today becoming main stream in scientific inquiry, philosophical and
psychological discussion. SQ is the central and the most fundamental of all four intelligences because it
becomes the source of guidance of the other three. SQ represents our drive for meaning and connection
with the infinite. SQ is “thinking with your soul” (Wolman 2001:26) and represents the ancient and abiding
human quest for connectedness with something larger and trust-worthier than our world and us. Unlike IQ
that computers and robots have, and EQ that higher mammals possess, SQ is uniquely human and most
fundamental. It stands for our quest for our longing for meaning, vision and value; it allows us to dream and
to strive; it underlies the things we believe in and hope for; it makes us human.

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 SQ relates to the whole reality and dimension that is bigger, more creative, more loving, more powerful,
more visionary, wiser, and more mysterious – than the materialistic daily human existence. While IQ relates
to becoming more knowledgeable, PQ to becoming more healthy and strong, EQ relates to becoming more
relational and sensitive, SQ relates to becoming a person (see Rogers 1961).

High IQ is not enough: brilliance is not necessarily humanizing. High PQ is not enough: athletes,
boxers and heavy weight fighters have it and it did not necessarily humanize them. High EQ is good but not
sufficient: it provides passion but not humanity. High IQ may provide vision, high PQ may imply discipline
and high EQ may mean passion. Adolph Hitler had all three but produced shockingly different result
(Collins 2004: 69). High IQ, EQ and SQ is a great combination: Nelson Mandela, Martin Luther King, Jr.,
and a few others had them. High IQ, PQ, EQ and SQ is a perfect combination. The prophets and patriarchs
of the Old and New Testaments are good examples. A contemporary example is Mohandas Gandhi or
Mother Teresa.

Critical Thinking as Valuing Resources Hierarchically

In discussing information privacy, De George (1999: 346-350) distinguishes between facts, data,
information, knowledge, and understanding. These distinctions help in clarifying the language of
executive ethics.

▪ A fact is defined as "a statement of the way the world is" (p. 348), the way of the world being
independent of our knowledge.
▪ Knowledge can be of facts, known, or at times unknown but speculated.
▪ Understanding consists of knowledge that is integrated in some unified way and evaluated.
▪ Information is sometimes used to include data, facts, and knowledge, as when we speak of
information systems.
▪ Data: Information that is entered or fed into the (computer) information system by way of codes
as numbers, words, letters or symbols.

Any individual may appropriate facts without depriving anyone else from them. In this sense, facts,
information and knowledge are infinitely shareable. However, the discovery of some facts, collecting and
sorting them, often involves time and expense, and this provides a basis for claims of “intellectual
property” in relation to some "facts" as proprietary, at least for a short time-period. That is, while facts
are common property and cannot be owned, data representing facts may be owned to the extent that one
painstakingly collected and verified facts and entered such facts into the computer as classified and
organized data. Data are not owned as tangible objects are owned; but print out of data can be owned to
the extent one has collected, organized and classified them and made available in a package form usable
for a given target market.

Facts cannot be falsified, but data can be. Data may represent falsehood as well as facts. Such
distinctions have legal implications. For instance, to what extent are mailing lists (collection of names,
addresses, social security numbers, credit card numbers, and the like) stored and sorted in computers by
an information broker are data that can be owned, and hence sold as a commodity? [These problems deal
with the Ethics of Consumer Privacy; see, for example, Mascarenhas, Kesavan and Bernacchi (2003)].

Critical Thinking should distinguish between the following layers of intellectual resources (Mascarenhas
2011):

• DATA/EVENTS: facts, figures, events, anecdotes, vignettes, information, narratives, descriptions,

history and statistics

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 • INFORMATION/MEANING: Analysis and interpretation of “data” in terms of finding trends,
patterns and connections between “data,” deriving inferences or conclusions from “data,” and thus,
seeking meaning and significance of “data.”

• EXPERIENCE/KNOWLEDGE: Based on “analysis” and interpretation of data from various fields,

disciplines and domains one derives intelligent (or empirically verifiable) propositions, hypotheses,
connections and conclusions, and accordingly, builds theories, axioms, and paradigms. Knowledge
can grow from theory that is verified by data (deductive: theory to data) or from data that grounds
theory (inductive: data to theory), and based on both theory and data to forecasting the future
(predictive: from the past to the future).

• VALUES/PRINCIPLES: what are the lasting, enhancing and humanizing values or principles in the
data, and our analysis of and knowledge from it, which will make life better for all? What are also
the temporal, degrading and dehumanizing values that could make life worse for all?

• WISDOM/FREEDOM: Based on data, experience, analysis, knowledge and values, one finally derives
or absorbs and cumulatively stores wisdom that discerns what is truth from error and falsehood, what
is right from wrong, good from evil, just from unjust, ethical from the unethical, moral from the
immoral, virtue from vice, grace from sin, life from death, lasting values from the ephemeral, and from
earth to heaven, and from time to eternity.

• ETHICAL AND MORAL STRATEGY: Based on right discernment derived from wisdom of the
previous stage, we should have the moral courage and pertinacity to speak and affirm the truth while
denouncing falsehood, of doing what is right and avoiding what is wrong, of doing what is good, just,
and fair and rejecting what is wrong, unjust and unfair, of doing what is ethical and moral and desist
from what is unethical and immoral, of pursuing virtue and resisting vice, of seeking grace and life as
opposed to sin and death, and persistently seek perennial and universal values while downplaying the
ephemeral and temporal, and thus, peacefully and collectively journey from earth to heaven, from time
to eternity.

Critical thinking based education should lead students from data/events to analysis that generates
information and meaning, from information and meaning to experience and knowledge, from
experience/knowledge to lasting values and universal principles, from values and principles to wisdom
and freedom to pursue wisdom, and from wisdom to ethical and moral actions and outcomes.

Mere increase in knowledge does not imply a proportionate increase in human goodness, argues
David Orr (1991). The current information explosion in terms of increased data, numbers, words, paper
and the like does not imply an increase in knowledge, wisdom, and virtue. Such learning does not make
us better people, ethical people, especially if the knowledge of the good, of ecology, of land health, etc., is
excluded from our curricula by default, if not by design. Our education may make us ignorant of things
we must know to live well and sustainably on the earth.

Good critical thinking (CT) is many sequential intellectual activities such as analyzing,
conceptualizing, defining, examining, inferring, listening, questioning, reasoning and synthesizing, doing
and reflecting, growing and becoming. All these activities combined will help us to evaluate information,
and evaluate and refine our thought processes in a disciplined way. Thus, CT helps us to think more
comprehensively, and more ably to identify and reject false ideas and ideologies, our flaws of thinking,
our biases and prejudices of our culture and upbringing, our assumptions, presumptions and
presuppositions of cherished doctrines and beliefs, and thus to seek to be guided by true knowledge and
evidence that fits with reality, and even refutes our cherished beliefs and dogmas.

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 CT is curiosity that widens our perspective and knowledge; it empowers us to do all the work
required and to keep ourselves properly informed. CT is healthy skepticism that does not discriminate
against people but doubts and suspends judgment in order to understand people better, to explain things
better by testing, evidence, factual claims, and sound reasoning.

CT avoids false dichotomy or black & white thinking. For example, if seemingly there are only two
options X or Y, and only two attitudes possible A or B, then CT investigates other options beyond X and
Y, and other attitudes beyond A and B. False dichotomies lead to false dilemma, false ethical and moral
dilemma, false conclusions, false inferring, and the like. We must not easily let ourselves be forced to
think in rigid dichotomies such as good or evil, right or wrong, true or false, fair or unfair, just or unjust,
and so on – there could be many legitimate positions (such as grey areas) between these dichotomous
extreme positions that we need to consider.

CT does not seek 100% clarity and certainty; it can handle uncertainty of knowledge, ambiguity of
not-knowing, ambivalence of goals and objectives, and tolerate current levels of ignorance. CT waits for
valid evidence, for evidence-based answers, and awaits further research from scientists and scholars. CT
does not rely on only one solution to a problem, but investigates multiple problem formulations and
multiple solutions, and finally, converges to one solution based on solid irrefutable evidence. Thus, CT
avoids errors (Types I, II, III and IV) and flawed thinking. CT is prepared to make unavoidable mistakes
and absorb risk so that we can learn from our mistakes. CT takes the risk of being wrong, is prepared to
be wrong. If we are not prepared to be wrong, we are not prepared to be creative.

In general, Type I error refers to rejecting a hypothesis, candidate, product or a service when it is
good or true; Type II error relates to accepting a hypothesis, candidate, product or a service when it is bad
or false; Type III error is to define a problem wrongly in terms of what is a good or false hypothesis,
candidate or statement, and Type IV error is finding a wrong solution to a right problem.

Type I is producer risk (e.g., a good but rejected product or market is a producer’s loss); Type II error
is consumer risk; e.g., a wrong product or service accepted and sold can harm consumers. Type III and
Type IV errors are social risks or scientific flaws, as they affect consumers and producers, markets and
industries.

Critical Thinking as Building your Strengths

Guided by the belief that good is the opposite of bad, or right the opposite of wrong, we have unduly
focused on our faults and failures in building our strengths. For instance, doctors study diseases and its
symptoms in order to learn about health; psychologists investigate sadness in exploring joy; marriage
therapists study causes of divorce in identifying characteristics of a happy marriage; in schools and
workplaces we are advised to look into our faults and weaknesses assuming that we can build strengths by
eliminating weaknesses. Buckingham and Clifton (2001) disagree with this approach. According to these
authors, faults and failing deserve investigation, but they reveal little about strengths. Strengths have their
own patterns. To excel in your chosen field and to find lasting satisfaction in doing so, you will need to
understand your strengths and their unique patterns.

HR managers must not only accommodate the fact that each employee is different, they must
capitalize on these differences. They must watch for clues to each employee’s natural talents and then
position and develop each employee so that his or her talents transform into bona fide strengths. By
changing the way you select, measure, develop and channel the careers of your people, your organization
can be revolutionary and could build your entire enterprise around the strengths of each person. To spur
high-margin growth and thereby increase their value, great organizations need only focus inward to find

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the wealth of unrealized capacity that resides in every single employee (Buckingham and Clifton 2001:
6).

Most organizations are built on two flawed assumptions about people: a) Each person can learn to be
competent in almost anything; b) Each person’s greatest room for growth is in his or her areas of greatest
weakness. Thus, if everyone can learn to be competent in almost anything, those who have learnt the
most must be most valuable, and hence, by design, the organization gives the most prestige, respect and
promotions based on the skills or experiences they have acquired in the company. Hence, organizations
spend more money in training people once they hire them than on selecting them properly in the first
place. They spend most of their training time and money on trying to plug the gaps in employee’s skills
or competencies, calling the latter weaknesses as “areas of opportunity.” In training the incompetent,
organizations prescribe work styles by emphasizing on work rules, policies, procedures, and behavioral
competencies. Most organizations take their employees’ strengths for granted and focus on minimizing
their weaknesses. Most HRD learning-experiments focus on fixing each employee’s weaknesses than
building on their strengths. Most often, however, this is not human development, but just damage
control. Damage control is a poor strategy for elevating either the employee or the organization to world-
class performance.

Buckingham and Clifton (2001: 8) offer alternative counter-assumptions: a) each person’s talents are
enduring and unique; b) each person’s greatest room for growth is in the areas of his or her greatest
strength. These two assumptions should guide HR managers to select, develop, measure and channel the
strengths and careers of their people. These assumptions should explain why great managers are careful
to look for talent in every role, why they focus performance on outcomes than on work styles, why they
treat each person differently, and, finally, why they spend most time with their best people.

Hence, in this context, a critical thinking exercise should start with yourself: What are my strengths?
How can I capitalize on them? How can I combine them? What are my most powerful combinations?
Where do they take me? The real tragedy of life is not that each of us does not have enough strengths but
that we fail to use the ones we have. Benjamin Franklin called wasted strengths “sundials in the shade.”
Hence, identify your sundials in the shade. Look inside yourself and identify your strongest strengths,
reinforce them by practice, learning and training, and then carve out a role that draws on these strengths
everyday. When you do, you will be more productive, more fulfilled, and more successful (Buckingham
and Clifton 2001: 21).

Warren Buffett once said to the students at the University of Nebraska: “If there is any difference
between you and me, it may be simply that I get up every day and have a chance to do what I love to do,
every day. If you want to learn anything from me, this is best advice I can give you.” Buffett was a
patient man; his mind was more practical than conceptual. Like many people who are both fulfilled and
successful, he found a way to cultivate his strengths and put them to work. His investor strength was his
now famous “twenty-year perspective” that led him to invest only in those companies whose products and
services he could intuitively understand and whose trajectory he could forecast with some level of
confidence for the next twenty years. Some such companies were Dairy Queen, Coco-Cola Company, and
the Washington Post Company. He started his first investment partnership with $100 in 1956. Currently,
his investor wealth exceeds forty billions. He has honed this patient investor talent, perfected it, and stuck
to it despite the quick high-margins in the other high-tech companies (Buckingham and Clifton 2001: 21).

Tiger Woods had a different strength – his length with his woods and his irons and tremendous
accuracy in his putting. His ability to chip out of a bunker was no good; he did not need it either; and
much less did he cultivate it. Instead, he deliberately played to his strengths. He loved what he did
because he deliberately worked on his strengths.

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 Bill Gates’s strength was at taking information technology (IT) inventions to the market and
transforming them into user-friendly applications and marketing them effectively. His ability to maintain
and build an enterprise in the face of legal and commercial assault was his weakness – he let Steve
Ballmer handle that.

Buckingham and Clifton (2001: 25-61) offer some useful definitions and rules in this regard:

• Strength: consistent near perfect performance in an activity. Talents, knowledge, and skills combine
to create your strengths.
• Talents: are your natural recurring patterns of thought, feeling, or behavior that can be productively
applied. Most talents, like intelligence, leadership, and team-building, are value-neutral. Talents are
innate, and are not the same as values. You can learn values; you can change values; but your innate
talents grow with you. We accept our talents, become aware of them, and build and refocus our lives
around them.
• Knowledge: consists of the facts and lessons you learn. Knowledge is factual, experiential, also
conceptual and theoretical, logical and rational.
• Skills: are steps to an activity. Skills bring structure to experiential knowledge. That is, you can sit
back and formalize your accumulated knowledge into a sequence of steps that lead to a trained
activity. Think of a concert pianist, a great preacher or public speaker, a creative writer, a trained
diplomat, and a patient mother – they all have accumulated knowledge at their fingertips. Skills
enable you to avoid trial and error, and empower you to immerse directly into performance.
However, skills without underlying innate talents may lead you somewhere, but not to glory.

Talents, knowledge and skills are raw materials to building strengths; but most important among these
are talents. Talents are innate, while knowledge and skills can be learned and cultivated. You can never
possess strengths (e.g., salesmanship, closing a sale) without requisite talents (e.g., gift of persuasion,
talent for negotiation). The key to building your strengths is to identify your dominant talents and then
refine them with knowledge and skills. Skills determine if you can do something, whereas talents reveal
how well and how often you do it. Buckingham and Clifton (2001: 26-27) state three principles in this
regard:

• For an activity to be a strength you must be able to do it consistently, and you must derive some
intrinsic satisfaction from that activity. This implies that it is a predictable part of your
performance.

• You do not have to have strength in every aspect of your role in order to excel. Tiger Woods and Bill
Gates had their limitations; they got around them. Excellent performers do not have to be well-
rounded; they were sharp.

• You will excel only by maximizing your strengths, never by fixing your weaknesses. Of course, you
do not ignore your weaknesses, but manage around them. Find people whose strengths are your
weaknesses. That would free you up to hone your strengths to a sharper point.

Buckingham and Clifton (2001: 28-35) suggest three “revolutionary” tools to build strengths:

• Distinguish your natural talents from things you can learn (e.g., knowledge, skills, experience, and self-
awareness). Your natural talents are innate, and directly build your strengths.

• Identify your dominant talents. Step back and watch yourself for a while – try an activity and see how
quickly you pick it up; how quickly you skip steps in the learning and add twists and kinks to make
that activity your own. See, next, if that activity absorbs you, that you have a passion for it, and time
spent on that activity satisfies and fulfills you. This is a talent zone.

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 • Use a common language to explain or share your talents and accept those of others. Our language to
describe, explain and treat weaknesses such as diseases, neurosis, psychosis, depression, mania,
hysteria, panic-attack, and schizophrenia is well developed. However, our language to describe,
share and accept natural talents is sparse. The terms that we use such as, she is people-skilled; he is
self-motivated; she is a born leader; she is a team-builder, and the like, are still vague, undefined,
unmeasured, and hence, underdeveloped. HR people are rarely on the same page when they discuss
these talents

What are talents? If you are instinctively inquisitive, then it is a talent. If you are competitive, it is a
talent. If you are persistent, persuasive, compelling, then this is a talent. If you are ethical, moral,
responsible, sensitive to others, then this is talent. If you can readily pick up on the feelings of others,
then you have the talent of empathy. Some negative talents (e.g., obstinacy, pride) and frailties (e.g.,
stammering, dyslexia, and autism) can be developed into positive talents and strengths. Most of these
recurring patterns of behavior we call talents are woven in your brain as a network of your strongest
synaptic connections. “Your talents, your strongest synaptic connections, are the most important raw
material for strength building. Identify your most powerful talents, hone them with skills and knowledge,
and you will be well on your way to living the strong life” (Buckingham and Clifton 2001: 61).

CT is Changing the Way We Think

“If there aren’t fundamental shifts in how people think and react, as well as in how they explore new ideas, then
all the reorganizing, fads and strategies in the world won’t add up to much. Changing the way we think means
continually shifting our point of orientation. We must make time to look inward: to become aware of, and study, the
“tacit” truths we take for granted, the ways we create knowledge and make meaning in our lives, and the aspirations
and expectations that govern what we choose from life. Nevertheless, we must also look outward: exploring new
ideas, and different ways of thinking and interacting, connecting to multiple processes and relationships outside
ourselves, and clarifying our shared visions for the organization and the largest community. Changing the way we
interact means redesigning not just the formal structures of the organization, but the hard-to-see patterns of
relationships among people and other aspects of the system, including the systems of knowledge” (Seymour B.
Sarason (1990), The Predictable Failure of School Reform; San Francisco: Jossey-Bass) [cited in Senge, et al.
2000:20].

Most successful transformation change efforts begin when some passionate individuals or some
groups within an organization start to look hard at a company’s competitive situation, market position, the
emergence of a new industry or market, technology trends, and financial performance (Kotter 1996).
They constantly monitor patents expiring, declining margins in a core business, potential cash crisis, and
great opportunities that are very timely, and communicate this information timely and effectively
throughout the firm. Just getting a transformation program started requires the aggressive cooperation of
many individuals. Without motivation and a sense of urgency, a corporation goes nowhere. A paralyzed
senior management comes from having too many managers and not enough leaders. Change, by
definition, is creating a new system, which in turn always demands new and real leadership (Kotter 2007:
97). Rethinking Jesuit business education is to rethink the MBA program that not only produces students
in the operations of day-to-day management but in transforming them into passionate leaders of faith and
justice.

Transformations often begin when an organization has a new head who is a good leader and who sees
the need for a major change. If the entire company needs to be changed, the CEO is the key player. If a
divisions needs change, the divisional general manager is the key. If any of these key players are not
great leaders or change champions, transformation is difficult. If these leaders honestly believe and are
convinced that the status quo is unacceptable, and do something about it, then the transformation process
is on. The number one error in a transformation process is not establishing a great enough sense of
urgency (Kotter 2007: 97-98).

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 Clearly stating what your company strategy is defines the gateway to success. Very few executives
can honestly define or summarize their company’s strategy in less than 35 words (Collis and Rukstad
2008). Companies that define and state their strategy are most often successful. Conversely, companies
that do not have a simple and clear statement of company strategy, or worse, never had one, fail to
execute their strategy, and hence, turn out to be failing businesses. How many Jesuit MBA graduates can
clearly spell what Jesuit business education is all about and what the Jesuit business education strategy is
to restore business justice and business faith in a world of broken promises and structured market
injustices?

Almost any organization can substantially improve its performance and stature, perhaps even become
great, if it has disciplined leadership, disciplined people, disciplined thought and action (Collins 2001:17-
40). Any transformation strategy must be willing to challenge the status quo on an extraordinary range of
issues: hiring, individual performance evaluation, core competencies, core processes and products, core
standards, reporting relationships, decision networks and bureaucracies, strategic planning and budgeting,
business performance assessment metrics, compensation, and shared values and shared assumptions about
success. The same criteria or benchmarks can be applied to our Jesuit business schools. For instance,
how just is our hiring system, how fair is our faculty performance evaluation, what are specific Jesuit
business education core competencies, core processes, core products, core standards, reporting
relationships, decision networks and bureaucracies, and strategic planning?

According to Collins (Good to Great, 2001), the good-to-great companies did not focus principally on
what to do to become great; they focused equally on what not to do and what to stop doing. They did not
absorb the state-of-the art technology; in other words, technology does not cause transformation; it might
at best accelerate transformation. The good-to-great companies did not belong to great industries, great
markets or to great industrial revolutions. Corporate greatness is not a function of circumstance; it is
largely a matter of conscious choice (Collins 2001:10-11). What are the conscious choices of Jesuit
business schools that look outward to make this world a more just place?

Synthesizing Definitions of Critical Thinking

Each definition of or approach to critical thinking has specific inputs, process and outputs that
distinguish one approach from the other. Table 13.4 is a summary and synthesis of the above seven
approaches to critical thinking based on inputs, process and outputs. Each approach emphasizes a
specific philosophy or methodology of critical thinking. Education, in general, and business ethics
education in particular, can incorporate any or all of the seven approaches to critical thinking depending
on the specific content and methodology of the discipline.

Each approach to CT asks a different fundamental question.

▪ CT as making sense of the world (Chaffee 1988) asks: What is the positive and lasting impact upon
the world we live by what I know, do and become?
▪ CT as thinking critically (Paul and Elder 2002) asks: What is the positive and lasting impact on my
mind and thinking by what and how I think, I know, do and become?
▪ CT as challenging thinking (Collins 2001) asks: How do I positively and lastingly shape my thinking
and understanding by what I learn, read and observe?
▪ CT as positive/normative thinking (Hunt 1991, 2002) asks: What is the normative or moral imperative
value of what my corporation and I know, decide, do and become?
▪ CT as spiritual intelligence or SQ (Covey 2004) asks: What is the spiritual, lasting and divine impact
upon the world and I by what I know (IQ), live (PQ) and feel (EQ)?

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 ▪ CT as hierarchical valuing (Mascarenhas 2011) asks: What is the normative and lasting wisdom that I
derive from critically sorting, sifting and investigating data, information, theory, knowledge and
values that I encounter day by day?
▪ CT as building one’s strengths (Buckingham and Clifton 2001) asks: What are my talents and
strengths? How do I identify my talents and strengths and build them up? How do I distinguish my
strengths from the three components that support them - my talents, knowledge and skills?

Wisdom should be distinguished from cleverness, shrewdness, cunningness and one's manipulative
capacities. All these so-called skills imply taking right steps but to wrong ends. Real wisdom or
prudence takes right steps to right ends, especially those that serve common good. There may be a
strategic virtue in doing things rightly; but there is a moral virtue in doing right things rightly. Thus, one
could do right things rightly or wrongly: the former is wisdom while the latter is cunningness. Also, one
could do wrong thing rightly or wrongly: the former is deception or trickery, while the latter is
wickedness and evil.

Accordingly, Table 13.5 proposes a fourfold typology of critical thinking domains. Critical thinking
in business education should enable students and teachers to achieve the lasting outcomes of Cell 1 and
avoid the deceptively attractive offerings of Cells Two, Three and Four. One hardly admires courage in a
villain or charity in a thief who donates stolen goods, or fortitude in a murderer. In a similar sense, vices
such as vanity, avarice, worldliness are contrary to wisdom, since they pursue wrong values. Vanity sees
admiration as the highest value; worldliness pursues good life primarily in terms of wealth and power;
avarice seeks money and other money equivalents (such as land, investments, and business) as supreme
values.

Part Two: Some Theories of Critical Thinking

Critical thinking is a nascent science and tradition. Part One has suggested various approaches to critical
thinking (CT). We now present some doctrines that could be used as emerging theories of CT.

Critical Thinking and Defensive Routines

[See Peer Senge (2006), The Fifth Discipline, pp. 232-240]

For more than forty years, Chris Argyris and his colleagues have studied the dilemma why bright
capable managers often fail to learn effectively in management teams. Their work suggests that success
of team learning and productivity is dependent upon how a manager faces conflict and deals with the
defensiveness that invariably surrounds conflict. Argyris (1985) coined the concept in this regard and
proposed the theory of “Defensive Routines” that can help us further hone our critical thinking skills.
Writes Argyris, "We are programmed to create defensive routines, and cover them up with further
defensive routines. … This programming occurs early in life.”

Defensive routines are mental models that express our entrenched habits of thinking, deciding and
acting that we use to protect ourselves from the embarrassment and threat that come with exposing our
thinking. Defensive routines are our deepest assumptions that not only defend us against pain but also
keep us from learning about the causes of pain. The source of our defensive routines is the fear of
exposing the thinking that lies behind our views. “Defensive reasoning” protects us from learning about
the validity of our reasoning. We often feel exposing our thinking very threatening because we are afraid
that people will find errors in it. This perceived threat from exposing our thinking starts early in life in
home, and is steadily reinforced in schools, colleges and the workplace.

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 Top executives or senior managers, who pride themselves as skilled communicators and risk takers,
may be, in fact, so brilliant at articulating their vision that they intimidate every one around them.
Consequently, their subordinates rarely challenge their views publicly. Further, people feel afraid to
express their own views and opinions around them. Such CEOs may not see their own entrenchment and
forcefulness as a defensive strategy, but they function in exactly that way. This strategy has become the
CEOs’ most effective defensive routine. Presumably, the CEOs hoped to provoke others into expressing
their thoughts, but their overbearing behavior prevented them from doing so, thereby further protecting
their views from challenge.

Defensive routines are a response to a problem. In general, a problem is a need to learn, arising from
the “learning gap” between what a company knows and what the company should know. The
“fundamental solution” is objective inquiry that eventually generates new understanding about the
problem and new behavior – that is, organizational learning. However, the need for learning also creates
a threat, which, in turn, leads to “symptomatic solutions” prompted by defensive routines that apparently
reduce the learning gap by reducing perceived need for learning.

Problems caused by defensive routines compound in organizations where to have incomplete or faulty
understanding is a sign of weakness or incompetence. Deep within the mental models of managers in
many organizations is the belief that managers must know what is going on. All managers are expected
to know the causes of problems within their organization. Some managers respond to this expectation by
internalizing an air of confidence that makes their subordinates believe they know the right answers to the
most important problems in their division or company. Often, to protect their air of confidence, they will
close themselves to alternative views, become rigid, and make themselves un-influenceable, even though,
deep down they may be fully conscious of the uncertainty in their understanding of the problems and the
solutions. Alternatively, to maintain a façade of confidence they may even obscure their ignorance. In
short, managers who must take on the burden of having to know the answers become highly skilled in
their defensive routines. They play political games in their organizations. Defensive routines are like
diseases – the top executives carry them, and the organizations are the hosts. Soon the organizations are
infected, and they too become carriers.

To illustrate how defensive routines function within an organization, consider the case of ATP
Products, a young division of an innovative and highly decentralized company. Tim Tabor, 33, was the
divisional president, deeply committed to the corporate values of freedom and local autonomy. He
believed strongly in the state-of-the-art technology products (new printed circuit boards) of ATP, rallied
tremendous support from his subordinates, who in turn shared Tim’s enthusiasm for their prospects.
Divisional bookings grew rapidly – 30% to 50% each year until sales reached $50 million in 1994.
Accordingly, ATP doubled its capacity. In 1995, with the disastrous downturn in the minicomputer
industry, ATP experienced a 50% shortfall on projected bookings. The industry did not bounce back in
1996. Tim Tabor was fired from division president to an ordinary engineering manager.

What happened? Tim’s locked-in strategy was flawed owing to several defensive routines. His
team had set aggressive growth targets, in part, to please the top management; he strongly believed in the
product without letting his beliefs challenged; meeting these targets put too much pressure on his
subordinates that they had no time to question what they were doing; and they relied on a few major
customers upon whom they became very dependent. When the business of these customers failed, ATP
was doomed.

Why did not the top management at ATP sanction a strategy that was so vulnerable, and force Tim to
diversify its customer base? The top management had its own defensive routines. Although the CEO had
recognized the problem of the narrow customer base, he did not want to violate the corporation’s
decentralized policy or interfere with the forceful strategy of the young ATP division president.

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Moreover, Tim had questions that he was reluctant to discuss with his superiors, as he did not want to let
them down, nor was he prepared to face criticism from them. Hence, there were defensive routines
throughout the organization that did not enable free inquiry and reflection.

The more effective defensive routines are, the more effectively do they cover up underlying
problems, the less effectively do you face the problems, and the worse the problems tend to become. The
paradox, write Argyris, is that when defensive routines succeed in preventing immediate pain they also
prevent us from learning how to reduce what causes pain in the first place. Defensive routines are “self-
sealing” – they obscure their own existence. If you cannot easily identify or state your defensive routines,
you do not have leverage for reducing them either.

In most shifting-the-burden structures, there are two possible areas of leverage:

• Weaken the short-term symptomatic solution: you do this by diminishing the emotional threat that
prompts the defensive response in the first place. For instance, if Tim Tabor had acknowledged his
uncertainty about ATP products and the fast growth targets to his superiors, and if the latter felt
comfortable raising and addressing questions, both would have understood their defensive routines,
and thus weaken the symptomatic solutions they had proposed. Defensive routines are powerful only
when they are not discussed and challenged, or only when managers stuck with them pretend they
have no defensive routines.

• Strengthen the long-term fundamental solution. Skillful managers learn to confront defensiveness
without producing more defensiveness. They do so by self-disclosure and by inquiring into the
causes of their own defensiveness. The skills for diffusing defensive routines are essentially the same
skills for strengthening the “fundamental solution” in the context of “shifting the burden structures”
– they are skills of reflection and mutual inquiry. By revealing your assumptions and reasoning
behind your force strategies, you unearth your defenses, and make them open to influence and
correction.

If we have a ruthless commitment to telling the truth about current thinking and strategies, they
empower shared vision and team learning, they weaken symptomatic solutions and strengthen
fundamental solutions.

One of the most useful skills of a learning team is the ability to recognize when we are not
reflecting on our own assumptions, when we are not objectively inquiring into each other’s thinking, and
when we are not exposing our thinking in a way that encourages others to inquire into it. This is critical
thinking. It is to dismantle our defensive routines and defensive reasoning and have everything exposed
for checks and balances.

Critical thinking enables us to acknowledge our own defensiveness without provoking more
defensiveness. Often, the stronger the defensiveness, the more important is the issue or the problem
around which we defend or protect our views. If these views are made transparent, they will provide
windows onto each other’s thinking. It is not the absence of defensiveness that characterizes learning
teams, but the way defensiveness is faced. A team committed to learning must be committed to tell the
truth about our thinking and about the assumptions underlying the forceful strategies we propose. To see
reality of the markets more clearly, we must also assess and see our strengths for obscuring reality.

Critical Thinking Applied to Capitalism

The real challenge is to understand and apply the various approaches to critical thinking discussed thus
far to various disciplines of the business education curriculum. It is good to start applying critical thinking
(CT) to the large macro system, the capitalist free enterprise system our market system is based upon. In

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fact, our business curriculum is premised on the Capitalist Free Enterprise System (CFES). We have
already defined and discussed capitalism in Chapter 01. We revisit the subject from a critical thinking
viewpoint.

The United States of America has favored a capitalist free enterprise market system since its early
beginnings. Adam Smith's seminal treatise on the Wealth of Nations (1776) could have also influenced
this choice. The list of conditions that constitute an ideal free market system has been given different
forms (Buchanan 1985; Hunt and Morgan 1995). But among other things, it provides that:

1. There shall be many sellers and buyers, none of whom has a substantial share of the market.
2. All the sellers and buyers are in a position to enter or exit the market freely.
3. All have complete information about the prices, quantities and quality of goods placed in the
market.
4. The costs and benefits of production and the use of goods exchanged should fall entirely on those
who buy or sell the goods, and not on outside third parties.

The first two conditions define "perfect competition" and the latter two define the “perfect market.”
All four combined constitute the free market method of organizing productive and distributive economic
activity. It prescribes that the quantity of goods offered and the prices attached to them will
spontaneously tend toward a "point of market equilibrium" at which prices reflect: a) the value that the
consumers attach to goods they purchase and b) the costs that sellers sustain in producing and marketing
them. The above four conditions are the “positive” aspect of CFES. Critical thinking should search for
the “normative.” Are these four conditions verified in our market systems? If not verified, why not?

Given such ideal conditions and using any of the seven approaches listed in Table 13.3, critical
thinking (CT) should verify if various desirable outcomes of CFES or ethical imperatives are realizable.
Some of these imperatives are:

1. Teleological Justice: each buyer or seller can maximize one's own interest, thereby automatically
producing an economic and social asset conducive to common good of all and national
prosperity.

2. Deontological Justice: the free market system (especially via conditions one and two) can
safeguard as well as realize the rights of the individual freedom of all entrepreneurs involved.

3. Distributive Justice: In this way, the moral demand of equity and justice is also realized, more
precisely as commutative justice who prescribes that each participant in the exchange receives the
exact equivalent of what he/she gives (Lattuada 1997).

4. Ecological Justice: perfect competition strives on optimal efficiency of the productive system
understood as the elimination of waste that producers will produce only those goods and services
for which there is adequate and real market demand such that market gluts are avoided,
superfluous needs are not created or fulfilled, and scarce resources are never wasted.

When these or similar ideal conditions of the ideal free market system are realized, CT could pose even
further concerns such as:

Is CFES too ideological in that it systematically leaves the fundamental reality of our earth and
society out of account? That is, the market mechanistic growth that the CFES presumes, abstracts from
the physical conditions of our existence, the finitude of our natural resources, and from our real needs.
Said differently, the market reacts to market (often created) demand, but not necessarily real needs. The
natural conditions of human existence, namely, the consumption of energy and other resources, are

36
external to the logic of the free market. That is, natural resources that are not produced by the free market
are treated as though they were unlimited. In our current CFES, the market economies that keep the
classical promise of rationality of all actors, and prosperity and freedom for all are almost nonexistent.

Scientifically considered, the free market system is viewed as a natural phenomenon, with an internal
self-regulatory mechanism that enables it to function as though it were a physical system independent of
all human interference. The prevailing belief was that economics followed mechanistic laws like those of
classical physics. Adam Smith was regarded as the Newton of Economics, i.e., its founder as science.

Sociologically viewed, Adam Smith believed that the intrinsic laws of the free market system will
lead to the prosperity of all nations provided that one allows them to work without outside intervention of
the state. When each strives for riches via absolute competition, the selfish agents in the market systems
will hold one another in check and advance developments in a way that would be favorable to all.

Epistemologically seen, the free market is seen as a privileged place for costless information access so
that meaningful and informed economic decisions and exchanges may be brought about. While Smith
(1976) advocated a free market system, self-regulated by the "invisible hand," he also followed the
administrative tradition in dealing with fiscal problems. Hence, Smith saw the economics of the free
market system as a branch of moral philosophy and jurisprudence.

Further, Adam Smith (1976) defined a capitalist corporation as an institution for:

1. Managing productive skills of the labor force.

2. Stimulating, diffusing and institutionalizing technological innovations;
3. Accumulating the nation's human, physical, and money capital;
4. Developing a strong and large market that controls itself, and thus, for
5. Raising sufficiently high living standards among the nation's people.

CT questions if American capitalism has basically fulfilled this fivefold mission. Today, the United
States of America is the largest industrial capital base in the world, but has it fulfilled its CFES mission?
CFES can and does fail when corporate power gets abused along the same five dimensions [1-5] for
which capitalism was instituted in the U.S. Corporate power is the ability of executives, corporations and
other economic institutions to manipulate the market or business environment (Steiner and Steiner 1991).
Several values and disvalues emerge from wielding this manipulative power. Table 13.6 documents some
basic values and disvalues that currently emerge and affect our capitalist society.

American capital accumulation is second to none in size, quality, coverage, and relevance (Chandler
1977; Schumpeter 1934). Despite enormous federal budget deficits and gaping trade deficits, the US
massive socio-economic infrastructure has been its ransom during these years of uncontrollable recession,
technological and corporate restructuring, and industrial depression. Yet, the same accumulated capital
and unbridled progress has created problems (Laudan 1977; Winner 1977) such as highly skewed income
distributions and social inequalities, ghost towns as an aftermath of massive plant closings, periodic
liquidity crises, and low interest rates that have seriously eroded fixed incomes of the elderly. Regional
and national retailing concentrations (e.g., casinos) and giant chain stores (e.g., Wall-Mart) have left
neighborhood retailing stores and independents less than fighting chances for survival. Our greed for
market control has also triggered countless hostile company takeovers that have rendered firms, both big
and small, increasingly vulnerable (Ackerman and Zimbalist 1978; Mascarenhas 1980; Mascarenhas,
Kesavan and Bernacchi 2005a, 2005b; Okun 1975).

Capitalism is basically capital accumulation. But capital accumulation does not progress evenly and
smoothly since there are both regular business cycles as well as irregularly recurring periods of stagnation

37
and chronic depression. The reasons for the latter economic ailments are built into capitalism: e.g., often
capitalists slash wages or attrition labor thus depressing consumer demand, thereby also increasing
profits, retained earnings and expanding productive capacity. The result is the ever-present tendency for
supply to outrun demand – a typical case of subprime lending and housing market today. The more this
happens, the more giant corporations will emerge, smaller corporations weakened, and mergers or
leverage-buyouts will be the order of the day. Industrial concentration will result in monopolies and
serious income inequalities (Mascarenhas, Kesavan and Bernacchi 2005a, 2005b). Poverty and
marginalization will coexist amidst affluence and luxury (Galbraith 1956, 1958, 1967). Corporate
monopolistic power can control expansions, create or depress labor demand, convert labor-intensive to
capital-intensive productivities, create artificial shortages in essential commodities; in short, re-enact the
Great Depression of the 1929-1933. Actually, we may not be too far from it if monopolistic capitalism is
allowed to rule the national economy.

For instance, consider recent massive mergers of:

• Banks (e.g., Chase Manhattan with Chemical Bank in a $13 billion deal; The Travelers Group
and Citicorp combining $70 billion - a pending deal still),
• Savings institutions (e.g., Astoria Financial & Long Island Bancorp combining in $16.6 billion
in assets),
• Auto-companies (e.g., Daimler-Chrysler; Daimler-Chrysler-Cerberus),
• Electronic communications corporations (e.g., WorldCom and MCI Communications combined
$37 billion; Bell Atlantic Corp. and Nynex Corp. resulting in $25.6 billion combined assets), and
other
• Diversification mergers (e.g., RJR Nabisco and Kohlberg Kravis Roberts & Co. in $25 billion,
and Walt Disney Co. with Capital Cities/ABC resulting in $19 billion)

Such mergers and acquisitions are basically downsizing, restructuring and cost-reduction turnaround
strategies. But simultaneously, they could be power-concentration and intra-industry giant competition
strategies.

Critical Thinking and Opportunistic Executive Behavior

One of the major cultural contradictions and consequences of unbridled capitalism is opportunism and
the opportunistic executive behavior it stimulates. Opportunism is a strategic behavior whereby one
makes false or empty "threats and promises in the expectation that individual advantage will thereby be
realized" (Williamson 1975: 26). Opportunism is "seeking self-interest with guile" (Williamson 1985) or
seeking "self-interest unconstrained by morality" (Milgrom and Roberts 1992). Opportunistic behavior
manifests itself in various ways such as lying, stealing, cheating, or other "calculated efforts to mislead,
distort, disagree, obfuscate, or otherwise, confuse" (Williamson 1985: 47) partners in business.
Opportunism is "the ultimate cause for the failure of markets and for the existence of organizations"
(Williamson 1993: 102). But for opportunism, "most forms of complex contracting and hierarchy vanish"
and markets alone would be sufficient for handling most transactions through autonomous contracting
(Williamson 1993: 97).

Opportunism is a central concept in Transactions Cost Economics (TCE) theory originally proposed and
developed by Williamson (1975, 1985, 1990, 1991, and 1993). According to TCE, organizations exist
because of their superior abilities to attenuate opportunism through the exercise of hierarchical (both rational
and social) controls that, in general, are not accessible to "markets." 2 In this regard, TCE makes two

2However, recently some critics of TCE (e.g., Bromiley and Cummings 1992, 1993; Chiles and McMackin 1996; Goshal and
Moran 1996; Masten 1992; Moran and Goshal 1996) have shown that hierarchical controls need not necessarily curtail

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behavioral assumptions: a) one cannot predict others' behavior, and b) one cannot identify one's own best
behavior. Not all are inclined to opportunistic behavior; those who do, the "determined minority"
(Williamson 1993: 98), may do because of the above two assumptions. Some may be inclined to
"instrumental behavior" in which there is no necessary self-awareness that the interests of a party are being
furthered by opportunism (Williamson 1975). These people, without being aware, are instrumental in
opportunistic outcomes of others.

There is much scope for opportunistic behavior (acts of self-interest with guile or unconstrained by
morality) in business, and in marketing in particular. According to Williamson (1993: 102), opportunism
is primarily a "human condition," a human tendency or attitude (inclination, proclivity, and propensity).
Opportunistic attitudes are "rudimentary attributes of human nature" (Williamson 1991: 8). Opportunism
is distinguished from opportunistic behavior; the latter constitutes acts of self-interest with guile (Goshal
and Moral 1996).

Opportunism also differs from mere "self-interested behavior." One presumes the latter is
constrained by obedience to rules and faithfulness to promises, while opportunism (which is self-interest
with guile) is not. Opportunism seeks self-advantages with no concern for the advantages of the other.
Williamson (1991) however, does not specify the mechanisms (e.g., economic institutions, markets)
through which opportunism is created or reduced (Hart 1990), and instead assumes it to be a "human
condition" (1993: 102). Even though this behavioral assumption of opportunism is regarded as an
"extreme caricature" of human nature (Milgrom and Roberts 1992: 42), yet Williamson believed that
opportunistic behavior (specific acts of self-interest with guile) might be controlled by proper social
sanctions.

Various factors that spur opportunism have been identified. All these very well apply to the business
executive. We highlight a few below. Other things being equal, opportunism can thrive:

• When the transaction partner has invested much capital and technology in the transaction-exchange
that cannot be used for other products (this phenomenon is called “asset specificity” in TCE theory),
the predator can "hold-up" such assets by being opportunistic. Such “hostage” type of terrorist
opportunism is the ultimate cause of the failure of the free markets and for the existence of
organization. When “asset specificity” is high, it acts as a "locomotive" for opportunism (Williamson
1985: 56).

• Analogously, when the outcomes of transaction-exchanges are highly uncertain, opportunistic

behavior can go undetected (Hill 1990: 508) and un-tethered, and hence, can get stimulated.

• When behaviors of individuals and of the outcomes of those behaviors become uncertain, and this
uncertainty in turn makes measurability of individual or group performance uncertain, and when
rational control on such behaviors cannot be cost-effectively enforced, then opportunism abounds
(Ouchi 1979).

• When short-term gains of opportunistic behavior are very large.

opportunistic behavior. Indeed, they are more likely to cause the opposite effect (Goshal and Moran 1996). Non-control
mechanisms have been suggested instead such as joint ventures or strategic alliances (Balakrishnan and Koza 1993), trust
(Bromiley and Cummings 1992, 1993; Chiles and McMackin 1996), leveraging work-force ability to take initiative, to cooperate,
and to learn (Goshal and Moran 1996; Pfeffer 1994). Organizations created to attenuate opportunistic behavior fail when they are
unable to create the social context necessary to build the trust and commitment that are needed for maintaining cooperation in
transaction-exchanges.

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 • High-discretion (that is, non-fiat, non-monitored) environment within an organization
facilitates opportunistic behaviors (Goshal and Moran 1996).

• When the predator nurses negative feelings for or an unfavorable assessment of the specific
transaction partner (Goshal and Moran 1996).

• When the predator perceives biases, inequities or unfairness in the organization he or she
works for (Goshal and Moran 1996).

Opportunism under any form is not a typical “constraint” according to Aristotle (1985), nor is it
“ignorance” as he understands it. Hence, actions resulting from opportunism cannot be “involuntary” as
defined by him. Moreover, Aristotle (1985) maintained that certain conditions do not make an action
involuntary, such as compelling pleasure, emotions or appetites howsoever strong, and willed ignorance, or
ignorance without regret. To our understanding, opportunism is best described in Aristotelian terminology
as a “compelling pleasure” or a “strong appetite” and such conditions cannot make opportunistic actions
involuntary. They are voluntary. Hence, despite opportunistic challenges in a corporation, executives can
and should always exercise responsibility.

Table 13.6 depicts some of these executive responsibilities, both transactional-contractual and
transactional-relational. Table 13.6 defines opportunism in some of its main features (Column 2) and
enabling factors (Column 3). Against each enabling factor, counter-opportunistic contractual (Column 4)
and relational (Column 5) marketing responsibilities are suggested. However, according to TCE,
opportunistic behavior is positively related to the opportunity (i.e., expected benefits) for such behavior.
Opportunistic behavior is also positively influenced by opportunism itself as a tendency, which in turn,
may be conditioned by one's upbringing, childhood and adolescent exposures, and social heredity (Goshal
and Moran 1996). Opportunistic behavior is negatively related to organizational sanctions such as fiat,
monitoring and incentives. Hence, opportunism is not a fixed trait, unaffected by context, but a covariant
of opportunity determinants (Williamson 1985, 1991). 3

The Supremacy and Primacy of Technology

The capitalist world is advancing every day in its research and technology capabilities. It can
technically produce almost anything. The moral and ethical questions now are: Is it permissible to make
everything we are capable of making? Is it permissible to market everything we are capable of
marketing? These two questions are very much similar, yet have different practical implications.
Currently, several theories influence our attitudes toward these questions:

1. Break-through theory: mankind will always achieve a technical break-through into all the problems
that arise in its technical environment.

3 Several scholars carefully critique Williamson's (1985, 1991) theory of TCE. Common weaknesses detected are: a) TCE
exaggerates opportunism in markets; over time, the invisible hand of the markets will weed out habitual opportunism (Hill 1990).
b) According to TCE, organizations primarily exist because of their ability to attenuate opportunism through control. That is,
organizations begin where markets fail. For one thing, organizations may not weed out all opportunism by rational or social
control, and the other, that in the bureaucratic process of doing so, they may generate more opportunism, as is argued by the
"self-fulfillment prophecy" theory advocated by Goshal and Moran (1996). c) The distinction between markets and hierarchies is
overstated; most markets function within an organizational economy that continuously generates innovations and new products in
the market place; thus, the reverse may be equally true: "markets begin where organizations begin to fail" may be a more realistic
assumption (Rumelt, Schendel, and Teece 1991: 19). d) TCE over-focuses control; although control is necessary in all
organizations, a preoccupation with control obscures and weakens an organization's fundamental source of advantage over
markets (Goshal and Moran 1996).

40
 2. Balance-of-nature theory: human life and the life of our environment will always adjust to each
other.
3. Neutrality theory: science and technology in themselves are neutral (a-moral or trans-ethical), and
must be freed from any ethical and moral impositions of a few, lest humanity's progress be
impeded.
4. Self-limitation theory: our commitment to quality life and moral values imposes limits on human
inquiry on the one hand, and on technological progress on the other.
5. Creation theory: our universe and the world of humankind are created realities. The world and its
nature should be left as God created it. Nature has been given a fixed form, and man and woman
have their place in it. Humankind should not play God, nor displace or dispense God, nor try to
take control of nature and thus author or alter its own destiny. We ought not to create a new
humanity that intends to solve all the problems of nature.
6. Anthropocentric theory: Humankind is the center of the universe; it is been given the task of shaping
the world to its own ends. Manipulation of the world and its resources (which includes man
himself) for the betterment and survival of mankind is not only a human right and duty, but is
essential for a better understanding and realization of human destiny.

The first four theories are primarily philosophical; the last two are theological. The best way to
approach these problems is through a holistic approach such as "integral humanism." Integral humanism
stands to better the whole human system, body and spirit, mind and matter, individual and society, present
and future, all human beings and the cosmos we live in. Integral humanism as applied to capitalist
business implies a basic shift in values such as:

▪ From "big is better" to "small is beautiful"

▪ From unscrupulous profiteering to equitable profit-sharing
▪ From limitless possessions of the few to prosperity of the many
▪ From industrial concentration to wholesome competition to unraveling new markets
▪ From uncontrolled free trade to managing global trade
▪ From total mastery over nature to harmony with nature
▪ From the primacy of productivity to the primacy of human dignity
▪ From individual claim of rights to mutual duties toward human dignity and justice
▪ From work as bondage and duty to work as freedom and right
▪ From authoritarianism and dogmatism to participative management
▪ From centralization and uniformity to decentralization and diversity
▪ From individual aggrandizement to social betterment
▪ From unbridled individualism to a generous form of community
▪ From limitless consumption to resourceful conservation
▪ From total independence to healthy interdependence

Critical Thinking applied to Human Resource Management

The most important asset in a company is the right people – the ones who provide the team and
customer service behavior the organization needs. Employees represent a company’s first market. If
companies are not investing in and listening to their employees, as well as their customers, they are
probably missing opportunities to create competitive advantage (Jones 2000).

High turnover is a major problem that can be addressed through trust. If employees do not trust
their organization to provide equitable pay, training, and advancement, they will not stay long enough to
become effective and affective team members. When a company focuses on creating quality for
employees and competence in employees, they can be empowered to create happy customers. And,
happy customers buy more! (Jones 2000).

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 Human resource planning is an essential part of successful customer service, because to a customer
anyone working for an organization represents the organization. Each employee is a potential customer
service representative (Jones 2000), and salespersons, particularly, are frontline company ambassadors
(Sirdeshmukh, Singh, and Sabol (2002). Customers truly enjoy having a well trained, knowledgeable
person o deal with their concerns and orders. An organization needs to know how it impresses on its
customers who contact it. Much of the impression would depend upon how the organization’s employees
interact with the customers. Value-chain involvement enables this knowledge.

Three philosophies underlie personnel management:

1. Organizational Theory: This theory believes that human needs are either so irrational or so
varied and adjustable to specific situations that the major function of personnel management is
to be pragmatic as occasion demands. Hence, if jobs are organized and structured in terms of
clarity of job goals and objectives, favorable worker attitudes will follow.
2. Industrial Engineering: Humankind is mechanistically inclined and economically motivated and
human needs are best met by attuning the individual to the most efficient work process.
Personnel managers should therefore concoct the most appropriate incentive systems and design
specific working conditions that maximally utilize the human machine, and worker attitudes will
follow.
3. Behavioral Science: Mankind is basically social, group-oriented. Hence, personnel managers
should work on group sentiments, organizational, psychological and social culture and climate.
Personnel managers should focus on human values and human relations and these in turn will
generate healthy employee attitudes.

All three theories duly applied should motivate employees as evidenced by a significant reduction in
absenteeism, errors, and violation of safety rules, strikes, restriction of output, higher wages, greater fringe
benefits and labor turnover.

Herzberg’s (1968) motivation-hygiene theory works on the same principle of industrial engineering
but for opposite goals. Rather than rationalize work to increase efficiency, the theory suggests that work be
enriched to bring about effective utilization of employees. The theory advocates a systematic manipulation
of the motivation factors for motivating the employees.

Applying CT to the above theories of HRM, we may ask the questions as listed in Table 13.14.

Changing the way people work means changing the way they behave. Changing behavior requires
changing thinking, feeling and communicating. That is, changing the head, the heart and the hands.
Without adjustments in the way we think, feel and act, nothing really changes. Questions that need
attention under each body part arena are:

▪ Head: Where are we? What brought us here? Where are we going? What change of behavior can get
us there?

▪ Heart: Why are we here? Why do we want to go there? Why must we change? What is in it for
me? Am I capable of change? Do have the heart and the will to change?

▪ Hands: What do I need to do? What skills should I train myself in? What behavior changes do I
require? Do I have the energy and the team-support to acquire those behavior changes and skills?

Any strategic change requires energy, discipline and time. A successful change process passes through
three stages:

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▪ Coming to grips with the problem: Do the people involved perceive and acknowledge the
problem? Do they still resist or deny it? Have people’s mindsets changed? Do they intellectually
recognize the need for change? Do they have a sense how their organization must respond to the
problem, and the change the problem demands?

▪ Working it through: Are people intensely and honestly working to accept and internalize the
required change and its implications? Have the things that must change been well communicated?
How do people feel about the changes? Are they adequately ready in mind, heart and hands for the
change?

▪ Maintaining Momentum: Is the organization committed to bring about this change and support it
with all its resources? Is the organization keeping the required pace of change? Is the organization
ready to incorporate the change into its management practice, climate and culture?

How do I know that my team, the organization and I are really changing? Is there is an appreciable
difference between the “before” and the “after”? What is this difference? Is this the real change we
want? Measuring change is a powerful change-management technique? Implementing strategic change
requires that people learn new ways of thinking, feeling and behaving. We know that people learn and
change much more efficiently when they receive fair and objective feedback on how they are doing.

Table 13.7 lists the critical questions when the three body part arenas are crosschecked against the
three stages of implementing change. One can develop a scorecard that measured progressive change in
response to the relevant questions raised in each of the nine cells of Table 13.7. This is a change process
tracking scorecard and not an outcome realization scorecard. The change implementation scorecard can
diagnose problems that arise while the people learn (head), internalize learning (heart) and live, witness
and communicate (hands) learning.

Critical Thinking as Identifying and Combating Biases, Prejudices and

Presumptions in Business Thinking
A quick analysis of all these definitions and approaches to critical thinking reveals that CT identifies
biases, prejudices and presumptions in our thinking, and rectifies them by replacing them with strong
normative imperatives. Hence, our approach to CT is to identify typical biases, prejudices, presumptions
and presuppositions inherent in the Capitalist Free Enterprise System (CFES) that grounds our business
enterprise, business schools, the MBA and the PGDBM programs, and to help executives and students to
identify them, analyze them, and correct them. In the following sections, we analyze CFES from this
perspective.

According to the Webster’s New World College Dictionary (2000):

• A bias is a mental leaning or inclination, partially bent. From a statistical viewpoint, a bias is any
systematic error that contributes to the difference between statistical values in a population and a
sample drawn from it. Hence, we define bias as the systematic leaning of one’s thinking that deviates
from the norm.
• A prejudice implies a judgment or opinion formed before the facts are known. It is a preconceived
idea, mostly unfavorable, marked by a suspicion, intolerance or irrational hatred for other races,
creeds and occupations.
• An assumption is a more basic act of assuming a fact, property or event for granted without critically
assessing its accuracy and veracity, reliability and validity.
• A presumption is a subset of assumption and implies taking something for granted or unjustifiably
accepting it as true, usually on the basis of improper evidence.

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 • A supposition is the act of assuming something to be true for the sake of an argument or to illustrate
a proof. It is regarding something as true without actual knowledge, hence, often tantamount to
conjecture, guessing or mere imagination. In this sense, it is a subset of assumption.
• A presupposition is an act or statement of supposing or assuming beforehand. It also means to
require or imply as a preceding condition for something.

All of the above, biases, prejudices, assumptions and presumptions, suppositions and presuppositions,
can be wrong inclinations or systematic errors in our thinking. CT intends to unearth them, confront them
and rectify them or eliminate them.
Based on the discussions thus far, Table 13.8 captures some major themes (Table 13.8, column 1) of
the capitalist business system where unhealthy biases, prejudices and presumptions can arise and
contaminate human thinking. To counteract these wrong drifts of thinking we need some strong human
imperatives, some of which are listed in the last column of Table 13.8. These are italicized. Table 13.9
examines the biases, prejudices, presumptions and presuppositions in our business education and learning.
According to Godel's theorem (Hofstadler 1979), as a formal system, no theory can be both complete
and consistent. Consistency is the condition under which symbols acquire meanings; consistency seeks to
derive true statements. Completeness, on the other hand, is the confirmation of these meanings;
completeness seeks all true statements. Formal theory systems have to balance inconsistency and
incompleteness. No theory is intended to answer all questions. Theories that seek too much
comprehensiveness can become so overextended as to become ambiguous and complicated. As a social
science, marketing theory can best develop through layered assertions into an integral theory. Just as a
collection of sentences does not necessarily make a story, nor can a collection of assertions, even when
verified, necessarily becomes a theory (Sutton and Staw 1995). Critical thinking accepts Godel’s theorem
and its practical realism in formulating a comprehensive business turnaround management theory.

Part Four: Case Analysis:

Critical Thinking Applied to the GAIL Pipeline Leak Disaster
In applying critical thinking to the GAIL pipeline disaster we summarily apply critical elements of
Assurance of Learning Models AOL1, AOL2 and AOL3.

Critical Thinking using Assurance of Learning Model 1 (AOL1):

We first identify the critical subjects, objects, properties and events (SOPE Analysis) in the GAIL case:

• Subjects: Gas Authority of India Ltd (GAIL); Oil Industry Safety Directorate (OISD); Petroleum and
Explosive Safety Organisation (PESO), and Oil and Natural Gas Corporation’s (ONGC) – all government
institutions; affected villagers of Nagarjuna, some 20 people killed and many more severely injured;
• Objects: The external environment – affected villages, ONGC, Reliance Industries and Cairn Energy,
Lanco Kondapalli power project
• Properties: GAIL, a government of India undertaking, procures natural gas in the region from ONGC,
Reliance Industries and Cairn Energy. The audit body OISD is not a statutory one but just a
recommendatory one. This is perhaps why its recommendations were not taken seriously.

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• Events: The explosion that took place on 27 June, 2014 led to the loss of life and property. Lack of
effectiveness in the safety audits performed by OISD and follow-up implementation by GAIL was a moral
failure. It is true GAIL and governments rushed to extinguish the fires and compensate the victims: but
prevention is better than cure; one should check the specific inputs, process and procedures that lead to
tragic outcomes such as these rather than compensate victims after the tragedy that could be avoided.

Antecedents: Complaints about initial gas leaks were completely ignored and no actions taken in time.
Precautionary steps and proper maintenance could have averted the whole situation. Poor maintenance
always leads to final breakdown one day or the other. Hazardous things if not handled with enough care
can be very detrimental to human lives. Lack of responsibility on the part of the Gail Authorities and the
Government led to deaths and loss of many who were not directly related to the whole business.

Determinants: Possible short term business goals of saving money while risking the lives of thousands
and lack of far-sightedness.

Concomitants: Even when so many accidents happened within a year that preceded the GAIL pipeline
crisis, ONGC, OISD, PESO or GAIL seemingly failed to learn from these tragic “:mistakes” and seek
preventive actions. Government did not form a committee that could check for similar gaps in other
related organizations and ensure 100% safety to human lives and society in general.

Controllable Factors: Maintenance of pipelines, regulatory check of the supply lines and preventive
measures for any possible mishaps. Emergency evacuation plans in case of any likely mishap.

Uncontrollable Factors: Government regulations and statutory obligations that were not properly
enforced. Unknown accidental mishaps and hazards can occur as possible “system breakdowns.”

Problem Identification
Based on the Timeline of Key Events (see Exhibit 13.1.1) that preceded the GAIL pipeline disaster, by hindsight one
could argue that GAIL, OISD, PESO and ONGC did not proactively use these warning signs for better critical thinking
that leads to preempting such disasters.

Economist speak of “Externalities” to explain an effect of a purchase or use decision by one set of parties on
others who did not have a choice and whose interests were not taken into account. This GAIL pipeline disaster is a
clear case of neglected externalities: how villagers not involved in the transactions between GAIL and Lanco end up
as victims to clear negligence from both parties.

Agencies and companies often forget the fact that we operate in an ecosystem which has a delicate balance. They
need to consider various factors such as the communities and environment that they are impacting. The Gail incident
is a clear example of the voice of the common man being ignored by authorities under the guise “We know best”;
or just the Indian mindset of taking necessary steps only after the death of few dozen people. Whom do we blame
under such circumstances: The inefficient system, the lack of safety regulatory body or the apathy towards safety
norms?

OISD is not a statuary mandate. There is no clear law governing crucial safety mechanism in India. There are
hazards on account of inherent risks associated with the oil and gas industry such as extreme physical conditions in
which it operates, high probability of fire and explosion from accidental release of flammable hydrocarbons. Even
after several complaints GAIL seemed to have turned a blind eye to the potential hazards. Vested interests, cost-
containment, insensitive to international regulations can be some reasons. Implementing safety standards involves
cost in space, time and money.

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Analysis using Assurance of Learning (AOL) Model 2 based on control of
Issues, Processes and Procedures leading to the Problem:

Legal, Ethical and Moral Issues

With the advent of capitalism, environment ethics has become somewhat skewed towards the view point of
corporate anthropocentrism. The GAIL case is a classic example where the local interest of life and safety were not
considered while corporate goals got undue prominence.

• Legal: Agreed that the Laws of the Land were not technically and strictly violated, there are other ethical and
obligations such as the duty and right of regular and quality maintenance of the pipeline and its environment,
especially when GAIL was alerted by several complaints of the locals.
• Ethical issues: No transfer of benefits to the locals except for employment of few when the pipeline was routed
through their village properties. Also no proactive responsibility was designed and executed even when it was
known that explosive gas-bearing pipelines would jeopardize surrounding villages and their livelihoods.
• Moral: The intention of ignoring the complaints of the poor smacks of power and might of big corporations.
Not taking responsibility for the wellbeing of the local villages is a serious omission. Narrowing duty to mere
law compliance regarding protecting pipes, and not considering it as a true safety issue is lack of critical
thinking. Mere cost-containment and growth-expansion strategies at the expense of locals are exclusive and not
inclusive growth strategies.

Hence, Problem Resolution Alternatives:

• Giving statutory powers to OISD

• Merging Petroleum and Explosive Safety Organisation (PESO) to OISD.
• Increasing the accountability of industries to the communities they impact
• Setting up quick action response teams for natural and man-made disasters
• Strong investigating and complaints body to address local concerns
• Awareness on safety and hazards to the locals living close to oil and petroleum set ups.
• Triple bottom should be implemented: ecology, safety, and profitability
• Only if the GAIL, OISD, ONGC and PESO officials understood and fulfilled their duty and made the
necessary maintenance checks on time especially in hot summer time and the gas leakages were already
detected in the early morning hours, this incident could have been avoided. Making OISD a statutory
body is a must.
• Workplace and operational safety should be top priorities coupled with taking care of the community
interests.
• Consequences for all internal and external stakeholders should be foreseen and avoided:

The case of GAIL pipeline blast is clearly a question of moral lapse. Every organization has certain values that it
needs to prioritize because its presence in the ecology itself is an intervention. Value is something which
characterizes the way we behave. The very fact that the GAIL, OSID, PESO and ONGC authorities treated the
matter as a mere compliance issue and not a village safety issue made them overlook the very nature of the problem
that jeopardized the lives of the powerless locals.

Assurance of Learning Model 3 (AOL3) based on Analysis of Problem Outcomes using

various Ethical Theories
Analysis of Harmful Consequences:

• Lack of statutory obligations and regulations by Government may partially explain lack lustre behaviour of
GAIL, ONGC, PESO and OSID regarding the GAIL pipeline consequences.
• Mostly focused on short term cost-containment and marginal maintenance strategies in relation to the
pipelines, the officials did not plan nor try to check the safety or replace the pipelines wherever required

46
 • Possibly, they did not foresee the impact any possible mishap could cause to the people living in the
vicinity and how it would negatively impact the reputation of their public institutions.
• Precautionary steps and proper maintenance could have averted the whole situation. Poor maintenance
often leads to future breakdowns. Hazardous systems if not managed with due care can be very detrimental
to human lives.
• It is a collective responsibility of GAIL, ONGC, PESO and OSID to detect and pre-empt disasters, failing
which to own and compensate for the fatal consequences of the pipeline tragedy.

Ethical Analysis of Consequences

Teleological Analysis: The GAIL pipeline service-strategy is a moral action if it produced decidedly more benefits
than costs to the largest number of stakeholders. Judged by the manifold harmful consequences to the villagers in
terms of deaths, injuries, and environmental degradation, the unsupervised and unchecked GAIL pipeline project
fails to be ethical and moral on teleological grounds. The final outcome was a huge systems-breakdown or man-
made disaster for the villagers, while pipeline project continues to be beneficial to the industrial units it was serving.

Deontological Analysis: The GAIL pipeline service-strategy is a moral action if it upholds the rights of the
powerless much more than it upholds the rights of the powerful across the largest number of stakeholders. Judged
by the violated rights of life, community life, safety, village property, village ecology and the like in terms of
harmful consequences of deaths, injuries, and environmental degradation, and disproportionate number of rights of
GAIL and its industrial clients in Andhra Pradesh upheld, the GAIL pipeline strategy, unsupervised and unchecked,
fails to be ethical and moral on deontological grounds. It’s right of the industrial clients to get essential supplies of
CNG but that does not mean that they can sacrifice the safety and security of others. It is gross negligence of duties
by the authority. Lack of responsibility of GAIL Authorities and the Government led to deaths and loss of many
who were not directly related to the whole business. The gainers did not do much to alleviate the lot of those who
suffered untold damages.

Distributive Justice Based Analysis: Regardless of the nature and magnitude of the benefits and costs, rights and
duties of the GAIL pipeline tragedy, the GAIL service-strategy is a moral action if it distributes benefits and costs,
rights and duties equitably across the largest number of internal and external stakeholders. Judged by the
disproportionately high costs (including deaths, injuries, and environmental degradation) and duties (of safeguarding
life, safety, property, ecology and livelihood of Nagarjuna) violated of a very great number in Nagarjuna village, and
the disproportionately high benefits realized and many rights upheld of GAIL and its 37 industrial clients in Andhra
Pradesh, the GAIL pipeline enterprise grossly violated distributive justice principles. Though the pipeline supplied
essential CNG used for transportation in the surrounding cities including Hyderabad, and helped thereby GAIL earn
profits and growth, it does not justify the miseries of families of several people who died and others who suffered
injuries.

Corrective Justice Based Analysis: Regardless of the nature, magnitude and distribution of the benefits and costs,
rights and duties of the GAIL pipeline tragedy, the GAIL service-strategy is a moral action if it set up just processes
and procedures to correct the existing violations of rights and duties, and unjust distribution of costs and benefits in
relation to the largest numbers of internal and external stakeholders. Judged by the lack of any corrective processes
and procedures disproportionately high costs (including deaths, injuries, and environmental degradation) and duties
(of safeguarding life, safety, property, ecology and livelihood of Nagarjuna) violated of a very great number in
Nagarjuna village, and the disproportionately high benefits realized and many rights upheld of GAIL and its 37
industrial clients in Andhra Pradesh, the GAIL pipeline enterprise grossly violated distributive justice principles.

First corrective step to take in this case is to stop using the pipeline any further until it has passed all health integrity
checks and maintenance work. Lives can never be returned, but at least the Government and GAIL authorities
should take responsibility of the family members of the deceased by compensating them and providing them with
livelihood. Precautionary steps and proper maintenance could have averted the whole situation. Poor maintenance
always leads to final breakdown one day or the other. Hazardous things if not handled with enough care can be very
detrimental to human lives. Second, for the disabled and injured, they should provide best medical and healthcare so
that they can recover quickly and help them to get employment, either through jobs or skill trainings. Thirdly, all
victims should be more than adequately compensated. However, instead of distributing huge compensation to the
victims if Government and GAIL authorities had used the same money for maintenance and pipeline health integrity

47
checks we would not have to sacrifice 21 lives and accept sufferings of so many. Fourthly, for all losses to crops and
houses and other public utilities, they should rebuild all the facilities and houses of the people, help them rehabilitate
and also compensate at market rate all their losses.

As part of corrective justice procedures, government should form a high priority committee to check all pipelines
laid across the country immediately within next couple of months and the ones which are not fit should be replaced
and repaired as necessary. Petroleum and Natural Gas Regulatory Board of India should come up with stringent
guidelines for safety and security and penalize any corporation or firm whether public or private for any negligence
in this regard. Officials handling such sensitive operations which can cause havoc if neglected should be periodically
sensitized about all safety measures. More invigilation of pipelines and general awareness among people staying in
areas where the pipeline is laid is also very important. Proper safety message boards should be installed at the major
junctions all along the pipeline so as to make people aware of the risks in those areas and what are the preventive
measures.

Virtue-Ethics Based Analysis: Virtue ethics is a framework that focuses on the character of the moral agent rather
than on the rightness of an action. In considering human relationships, emotional sensitivities and motivations that
are unique to human society virtue ethics provides a fuller ethical analysis and encourages more flexible and creative
solutions than deontological or consequentialist teleological analysis. In order to do something we must first
perceive that an action is necessary, and often, mere cost-benefits analysis (teleology), or rights-duty analysis
(deontology) may not trigger quick action. We must observe what is going on and study a crisis situation like the
GAIL pipeline disaster from a person-based ethical and moral perspective such as virtue ethics. Emotional reactions
make us sensitive to particular circumstances, and virtue based sensitivities illuminate our perceptions. It is possible
to perceive a situation dispassionately but we would then have an incomplete appreciation of the circumstances.
Thus perception and affect are closely intertwined in informing our choices. Virtues of honesty, integrity, due care,
and compassion would have precipitated proactive actions that were remedial, pre-emptive and reactive.

Trust-Ethics Based Analysis: Among virtues, one of paramount importance is the executive virtue of trust and the
practice of building trusting relations among critical stakeholders. Trust has both intrinsic and instrumental value.
Trust is intrinsically important because it is a core characteristic that affects the emotional and interpersonal aspects
of owner/stakeholder relationship. As an instrumental value, trust is widely believed to be essential for effective
emotional encounters. Sadly, in this situation, the executives did not pay heed to or trust the complaints of the local
residents which led to the tragedy. The village of Nagarjuna might have gradually lost its trust in GAIL, OISD,
PESO and ONGC owing to their inactions, insensitivities to their concerns, and their general malaise in dealing with
their GAIL pipeline related problems and concerns. Lack of mutual trust and trusting relations can precipitate
tragedy; converse is also true.

Concluding Remarks
To summarize the main imperatives of critical thinking, a turnaround executive should be a critic of
one’s own thinking and test the validity and reliability of one’s turnaround thinking and solution against
the following heuristics:

▪ Does this thinking and your “best solution” make a better sense of the world? (Chaffee 1988)
▪ Does the best solution help me to be unbiased and unprejudiced in my thinking? (Paul and Elder
2002).
▪ Does it help me to understand the assumptions and presuppositions behind this thinking? (Collins
2001; Collins and Porras 1989)
▪ Does it help me to appreciate the positive and normative content in this thinking? (Hunt 1991;
2002)
▪ Does it inspire me with spiritual meaning, vision, value and motivation to reach out to others?
(Covey 1989)
▪ Does it help me to rise beyond data, information and knowledge to lasting values and wisdom?
Does it empower me to be a servant leader for others? (Kahl 2004).

48
 A hundred years from now, the economic system may be very different. Technology may be
unrecognizable; education and consumption levels will be far greater. New information and media
technologies will continuously modify human behavior. Will this be still a capitalist system? The present
imbalance between a scarce supply of capital and employment opportunity and an abundant supply of
labor is producing a substantial shift of income growth from wages to profits. The modern corporation
has shown considerable ability to shift incremental taxes forward to customers through higher prices, and
shift them backward to workers through lower wages, or shift them to Washington by finding new
loopholes to avoid taxes.

A major question now debated is: is the American Capital System worth saving? The answer is a
qualified YES: as long as increasing income inequalities and other social inequities of American
capitalism can be gradually eliminated. The choice is not between pure competition and government
socialism, nor between "more competition" and "more socialism", but between monopolistic capitalism
and social capitalism. The former is industrial concentration, a few manufacturers and sellers controlling
prices and wages and avoiding taxes, which quickly results in distressing income inequalities. Social
capitalism is politically monitored private competition.

With recent increased deregulation and continued privatization of hitherto government controlled
industries, and with gigantic banks controlling credit and money supply, the U.S. federal government has
been incapable of fighting the evils of monopolistic capitalism. Recent administrations at the Capitol and
state capitals have consistently failed to bring about economic rejuvenation when needed. If free
enterprise system cooperates (e.g., via business expansions, less indiscriminate plant relocations or
downsizings, more employment, price decreases) with federal fiscal and monetary policies, then social
capitalism can lead to integral humanism. If corporate executives, and marketing executives in particular,
agree to be "good corporate citizens" (Nesteruk 1989) promising to "engage in full and fair competition
without deception or fraud" (Friedman 1962), then the free market system can succeed. Our market
system must operate on trust to be successful during any long-term relationship (Friedman 1962).

49
 Table 13.1: The Prevailing System of Management with its Constraints and
Regimentation

Prevailing System Obsessive Preoccupations, Generalizations and

of Management Overemphasizing “Best” Corporate Practices
Management by Focusing on short term metrics.
measurement Overvaluing tangibles - Devaluing intangibles.
“You can only measure 3 percent of what matters” (W. E. Deming).
Compliance-based Getting ahead by pleasing the boss.
Cultures Compliance is rewarded - Non-compliance is punished.
Management by fear, rewards and punishments.
Managing outcomes Management sets goals and targets. Employees must accept them.
Employees are held accountable to realize them (regardless of whether they are possible
within existing systems and processes).
Realizing targets is considered success worthy of promotions
Not realizing targets is deemed failure and disloyalty, punishable by firing.
Problem-Solving “Right answers” versus “wrong answers”
Technical and linear problem solving is emphasized
Short-term solutions are readily accepted
Non-linear or circular innovative thinking is held suspect.
Diverging (systemic) problems are discounted.
Uniformity and Diversity is either discouraged, or is a problem to be solved.
Conformity Uniformity and conformity are praised and institutionalized.
Consensus-building is stressed at the expense of suppressing individuality.
Conflict is suppressed in favor of superficial agreement.
Employees are cog in the wheel or “factors of production” (Frederick Taylor)
Predictability and To manage is to command and control
controllability The “holy trinity” of management is: planning, organizing, and controlling
Linear analysis of data to explain, predict and control
Quantitative analysis based on systematic variance in data
Qualitative analysis of non-systemic variance (e.g., outliers; beyond 6 ∑) is discouraged
Excessive Success is to suppress competition – win-lose game!
Competitiveness Competition between people is essential to achieve desired performance
“Without competition among people, there is no innovation.”
“We have been sold down the river by competition” (W. E. Deming).
Fighting competition is the only source of SCA and not “blue oceans.”
Bigger the better: growth is by destroying competition
Loss of the whole Excessive fragmentation/compartmentalization of functions - divide and rule
The efficiency of the whole is the sum of the efficiency of its parts
Optimizing each part optimizes the whole!
The whole is defined by its parts, and not vice versa.
Interconnectedness and interrelationships are ignored
Interactive effects are either not considered or irrelevant
Equality and We are not equal but unequal in talents, skills, intelligence and possessions.
Inequality Hence inequality of income, wealth and opportunity is essential for progress!
Egalitarianism is a myth; it defies and negates reality.
Management
Inequalities between the rich and the poor spur growth and innovation.
Creation of wealth and not redistribution of wealth is the engine of growth
Survival of the fittest, the best, and the most productive is the law of evolution.
Hence cultivate the best in this limited world; flotsam and jetsam the rest (Club of Rome)

50
 Table 13.2: Traits of Disciplined Critical Thinking versus those of
Undisciplined, Uncritical and Blind Thinking
[Based on Paul and Elder 2002: 17-36]
Critical Thinking as Disciplined
Unbiased Thinking
Intellectual Operational Definition and
Virtue Applications
Intellectual Holding us to the same standards
Integrity of evidence and proof to which we
hold our opponents. Practice what
you preach. Acknowledging and
sensitive to inconsistencies and
contradictions in our own thinking.
Intellectual Being aware of our own ignorance,
Humility biases and prejudices, and
limitations. Claim to know what
we know.
Intellectual Not giving up but working one’s
Perseverance way through intellectual
complexities despite the frustration
involved in the task. Struggling
with confusion and unsettled
questions till one reaches some
insight.
Intellectual Intellectual sense of justice and
Fair- fairness: Objective and unbiased
mindedness understanding and assessment of
others’ viewpoints. Giving credit
to each one’s ideas and insights
Intellectual Recognizing that good reasoning
Confidence in has proven its worth; Faith in the
Reason unbiased reasoning capacity of
oneself and others in arriving at
truth and certainty
Intellectual Our willingness to challenge one’s
Courage pet ideas, beliefs or viewpoints;
our willingness to challenge the
same set of ideas, beliefs or
viewpoints in our society.
Courage to unlearn in order to
learn
Intellectual Understanding opposite views:
Empathy Putting oneself in the place of
others in order to understand them,
their ideas and values, premises,
presuppositions and assumptions
Intellectual Being an independent thinker; self-
Autonomy authorship of one’s beliefs, values
and behavior
Uncritical Thinking as Undisciplined
Biased or Blind Thinking
Intellectual Operational Definition and
Vice Applications
Intellectual Egocentric thinking that imposes
Hypocrisy standards on others that we do not live
by or accept. We preach values and
excellence without practicing either.
Insensitive to inconsistencies and
contradictions in our own thinking but
sensitive to those of others.
Intellectual Refusing to be aware of our own
Arrogance ignorance, biases and prejudices, and
limitations. Claim to know more than
we know.
Intellectual Intellectual indolence: Giving up quickly
Laziness when confronted by intellectual
confusion and complexity. Low
tolerance for intellectual pain and
frustration that is called for in
understanding others
Intellectual Intellectual injustice and unfairness:
Disregard for Unjust assessment of others and their
Justice ideas and work; i.e., using different
criteria and standards than those used to
assess one’s own ideas and work
Intellectual Cognitive nihilism: Belief in the basic
Distrust of irrationality and incapacity of the human
Reason mind in relation to obtaining truth and
certain principles, connections and
causalities
Intellectual Fear of ideas, beliefs or viewpoints that
Cowardice do not conform to our own. Hence, a
refusal to be challenged. Irrational
defense of one’s own “sacred” identity
rooted in absurd and dangerous
doctrines
Intellectual Thinking and attention centered on self:
Self- Refusal to understand thoughts, feelings
Centeredness and emotions of others. Inability to
consider issues, problems and questions
from the viewpoint of others
Intellectual Being totally dependent upon others for
Conformity one’s thinking, ideas, beliefs and
motivations
51
 Table 13.3: The Domain of Business Executive’s Critical Thinking:
The Three Dichotomies Model
[See also Hunt 1991: 10-11].
General General General Problems, Issues and Imperatives
Business Business Business For Critical Thinking
Phenomena Orientation Analysis
Business mission, goals and objectives
Business suppliers, creditors and employees
Individual business producer-distributor behavior
New products and services development
Old products/services maintenance and phase-out
Positive Packaging, labeling, pricing and distribution policies
Communication and promotion policies
Product liability and customer redress policies
Marketing and customer feedback research
Profit What should a company produce? (Product-mix)
What should a company market? (Marketing-mix)
To whom should the company market? (Customer-mix)
What is an equitable wage or salary?
Normative What is a fair executive compensation?
Micro
What is an equitable price for products and services?
What is non-deceptive honest advertising?
What is non-deceptive securities-trading?
Institutional mission, goals and objectives
Positive Institutional stakeholders
Institutional offerings and services
Institutional communications and promotions
Non-Profit Institutional dues, pricing and distribution
What should be institutional mission, goals and objectives?
Normative Who should be institutional stakeholders?
What should be institutional offerings and services?
What should be institutional communications & promotions?
What should be Institutional dues, pricing and distribution
Industry markets, suppliers, brokers, and distributors
Positive Domestic, international and global markets, trades and tariffs
Domestic, international and global labor markets, wages & benefits
Domestic, international and global media and communications
Profit Laws regarding industry suppliers, brokers, and distributors
Normative Laws on domestic, international and global trades and tariffs
Laws on domestic, international and global labor wages & benefits
Laws on domestic, international and global communications
Federal and state business mission, goals and objectives
Macro
Positive Federal and state transportation & communication infrastructure
National and international sources of scares resources
International & global communication & transportation networks
What should be federal and state mission, goals and objectives?
Non-Profit What is an equitable interstate transportation & communication
infrastructure?
What is an equitable distribution of national, international and
Normative global non-renewable sources of scares resources?
What is an ethical and educative international & global media and
communication network?

52
 Table 13.4: Comparing and Synthesizing Various Definitions of and
Approaches to Critical Thinking
Definition of Inputs to Critical Process to Outputs to Remarks
Critical Thinking Critical Critical Thinking
Thinking as: Thinking
(Proponents)
Making sense Our own thinking and Active, purposeful and Clarify and improve Epistemological approach to
of the world the thinking of others organized effort to make our understanding of thought and truth about the
(Chaffee 1988) about this world sense of the world by the world Active and world
examining thinking independent thinking Restrictive to this world – a
patterns and thoughts Receptive to new cosmological inquiry
ideas and evidence
Thinking Our thinking and the Reflection – to think back Serious study of A cognitive or gnoseological
critically (Paul thinking of others on what we are thinking thinking To be a critic approach to thinking that
and Elder First-order thinking or feeling of our own thinking focuses on the mechanics of
2002) Second-order thinking Unbiased thinking - A good and sound thinking An
disciplined mind ethical treatise on intellectual
“virtues”
Thinking that What you learn from Questioning and Updated and revised A verification-falsification
Challenges your peers and challenging what you facts, events data and based methodological approach
teachers, the media and learn, its premises and information, and to findings and theory
Thinking
the books principles, assumptions hence, revised theory
(Collins 2001; and prejudices No blind and knowledge, laws
Collins and acceptance Let evidence and generalizations
Porras 1989) speak
Positive- Organizational Analyzing their positive Positive versus An axiological (value-based)
normative practices that are micro versus normative content normative benefits analysis of institutional
or macro, profit or in relation is/ought, and values of all phenomena and practices
approach to
nonprofit in nature and relative/absolute or human institutions,
thinking content descriptive/prescriptive especially business
(Hunt 1991; values organizations
2002)
Spiritual Physical intelligence An abiding human quest SQ as meaning, vision, A theological and eschatological
Intelligence (PQ), intellectual for connectedness with value and motivations assessment of human and
intelligence (IQ) and something larger and for humanization of institutional routines, practices
(SQ)
emotional intelligence more trustworthy than our doing, becoming and orientations SQ is the
Covey 1989; (EQ) as lived and ourselves and our world and being source of all critical thinking,
2004) experienced by including IQ, PQ and EQ
individuals and
organizations

Building on Our self-awareness of Identify your talents, You will discover, Most HR managers build
your strengths talents, knowledge, accumulated knowledge develop, and live your strengths on eliminating one’s
(Buckingham skills, and their and skills, and the strengths, and weaknesses. Instead, discover
and Clifton combined result – our combination – your manage around your employee strengths and
strengths defining strengths. weaknesses. talents, and build them to the
2001) full.
Hierarchical Facts, figures, data and The hierarchical process Information, theory, A hierarchy of resources for
Thinking statistics about our of deriving information knowledge, values critical thinking, research
(Mascarenhas world of subjects, from data, theory from and wisdom, in that methodologies and building
2011) objects, properties and information, knowledge order of sequence and critical thought and wisdom
events from theory, values from subservience Real education is a journey of
knowledge, and wisdom critical inquiry from data to
from values information to theory to
knowledge to values to wisdom

53
 Table 13.5: A Fourfold Typology of Critical Thinking
Employing:
Right Ends or Outcomes
Critical Thinking to
Achieve:
Theory, Value and Wisdom
Moral and Intellectual Virtues
Spiritual Intelligence (SQ)
Right
Means Examples:
Fortitude, Courage
Compassion, Kindness
Fairness, Justice
Truth and Rectitude
Honesty and integrity
Balance and maturity
Critical Thinking to
Prevent:
Manipulation and doctoring
Deception, misrepresentation
Trickery, chicanery
Wrong Examples:
Means
Villain’s courage
Murderer’s fortitude
Preemptive war
Stealing to donate
Lie to save one’s life
Losing to win
To Achieve
Wrong Ends or Outcomes
Critical Thinking to
Discourage:
Cunningness, thrift, street smartness
Shrewdness, calculating, scheming
Worldliness, extravagance, exotic
Examples:
Collateral damage
Love to kill
Serve to dominate
Dieting to anorexia
Merger to kill competition
Acquisition to kill competition
Critical Thinking to
Denounce:
Wickedness and maliciousness
Vice and tools of vice (e.g., bribery)
Evil (e.g., genocide, terrorism)
Examples:
Avarice, greed
Verbal or physical violence
Coveting neighbor’s goods
Coveting neighbor’s spouse
Conspiracy, terrorism and murder
Exploitation and oppression
54
 Table 13.6: Critical Analysis of the U. S. Free Enterprise Capitalist System
(FECS): Values versus Disvalues

Adam Smith’s Market Values Market Social Disvalues

Qualities of
FECS

Labor productivity Employee alienation, exploitation, Maquilladora

Management of Labor specialization Forced unemployment or under employment
Labor enrichment Child labor, sweatshops, hiring illegal immigrant labor
Productive Skills Labor remuneration Under waged, underinsurance, forced part-timers
Skills development Planned skills obsolescence via outsourcing and Downsizing

Product innovation Planned product obsolescence

Diffusion of Service innovation Planned service obsolescence
Innovations diffusion Diffusion not reaching developing countries;
Technology and Technology transfers Diffusion of outmoded technologies
Innovations Enriched lifestyles Enslaving consumptive lifestyles jeopardizing family stability

Strong skills base Cheap in-sourcing and outsourcing

Human and Strong equity base Growing income inequality & inequities
Strong infrastructure Social de-structure and destruction; ghost towns
Financial Capital Strong capital base Liquidity crisis; low interest rates; inflation
Accumulation Strong money base Weakened dollar; reduced fixed income among the elderly.

High growth, GNP Uneven distribution of growth & opportunity

High buying power Uneven distribution of consumer buying power
Consumption multipliers Forced consumer overspending
Large Market Investment multipliers Corporate frauds and scams
Base Market-based pricing Profiteering and predatory pricing

Higher incomes Income inequality and marginalization

Improved life-quality Ghettos, slums, ghost towns, pollution, AIDS
Longer life-expectancy High infant mortality; poor neonatal care
Raising General High consumer convenience Created needs and desires beyond convenience
Living Standards Advanced healthcare Large uninsured and underinsured in terms of healthcare;
overpriced drugs and hospitalization; mismanaged Medicare,
Medicaid and Disability Programs in the USA;
Lack of a national healthcare scheme in India.

55
Table 13.7: Corporate Executive Responsibilities under Opportunistic Conditions
Definition Factors
Of Stimulating
Opportunism Opportunism
“Asset specificity”
whereby predators can
hold large assets or asset-
specific skills and investments
as hostage
for control
Is seeking self-
interest with guile or When outcomes of transaction-
seeking self-interest exchanges
unconstrained by are highly uncertain,
morality opportunistic behavior
can go undetected and
Opportunistic untethered.
behavior manifests When measurability of
individual or group
itself in various ways performance is uncertain, and
such as lying, when rational control on such
stealing, behaviors cannot be cost-
and cheating effectively enforced.
Or other calculated When short-term gains of
efforts to mislead, opportunistic behavior are very
distort, disagree, large
obfuscate, or
Otherwise, confuse
partners in business. When the predator nurses
negative feelings regarding
Opportunism itself is a transaction partners
tendency, which in
turn, may condition When the predator perceives
or be conditioned by biases, inequities or unfairness
one's upbringing, in the organization he or she
childhood and works for.
adolescent exposures,
and social heredity.
Opportunism may be tendency
in the executive ingrained from
upbringing and environment.
56
Corporate Executive Responsibilities
Under Exchange that imply:
Transactional Transactional
Contracts Relations
Resist intentions to Encourage long-term asset
hostage asset-specific specific investments to
skills or investments or promote long-term
transactions for lucrative relationships.
gains.
Be accountable for all Long-term relationships thrive
outcomes even though in integrity and honesty,
they may be uncertain. especially when opportunistic
and hence, are not behaviors cannot be detected.
controllable.
Reduce transaction costs Long-term open relationships
by honest behavior, can make-up for uncertainty
especially when detecting of individual or group
and controlling performance measures.
opportunistic behaviors is
cost-prohibitive.
Resist opportunism Preserve and nurture lone-
especially when short- term honest relationships,
term gains of despite large short-term
opportunism are very opportunistic gains.
attractive.
Minimize negative Avoiding negative feelings
feelings in every exchange about transaction partners can
transaction. nurture long-term
relationships.
Minimize biases, Avoid all biases, injustices,
inequities or any other prejudices and other unfair
prejudices in any business practices to generate long-
transactions. term healthy exchange-
partner relationships.
Hiring policy should Foster ethical climate within
detect and avoid innate the firm to counteract innate
opportunistic tendencies. executive tendency for
Also, watch for such opportunism.
tendencies in every
transaction.
 Table 13.8: Critical Questions for Managing Required Change in
Organizations

Strategy Strategic Arenas

Implementation
Stages The Head: The Heart: One’s The Hands: One’s
One’s mindset emotions ergonomics

▪ Do the people ▪ Do they still resist or ▪ Where are we going?

involved perceive deny the problem ▪ Why are we going there?
and acknowledge the and the need for ▪ What change of behavior
problem? change? can get us there?
Coming to Grips ▪ Have people’s ▪ Do they have a sense ▪ Do we have the energy to
with the Problem mindsets changed? how their reach there?
▪ Do they intellectually organization must
recognize the need respond to the
for change? problem and the
change it demands?

▪ Are people intensely ▪ Are people ▪ Is there a lead team to

and honestly wholeheartedly help them work through
working to accept facing the problem the problem?
Working through and internalize the in all its dimensions? ▪ Has the lead team
the Problem and required change and ▪ How do people feel changed enough to
Change its implications? about the changes? demonstrate to others the
▪ Have the things that ▪ Are they adequately need for change?
must change been ready in mind, heart ▪ Are we ready to cooperate
well communicated? and hands for the with the lead team to
change? change ourselves in the
required direction?

▪ Is the organization ▪ Is the management ▪ How do we know that we

Maintaining committed to bring committing its best
about this change? resources to bring
Momentum through ▪ Is the organization about change?
Strategic Change keeping the required ▪ Is the organization
pace of change? ready to incorporate
the change into its
management
practice, climate and
culture?
are really changing?
▪ How do we measure the
change in behavior and
outcome?
▪ How do we know we have
really changed for the
better?

57
 Table 13.9: A Set of Biases, Prejudices, Presumptions and Human
Imperatives

Thinking Biases Prejudices Presumptions Value Imperatives

Base
Wealth is limitless We are the world. America is or should be the The wealth of the nations is
Wealth possessions of the few. We are the superpower. wealthiest and most the prosperity of all people.
Wealth is individual The world is for USA. powerful nation in the The primacy of human
aggrandizement. world. dignity is the condition of all
Wealth is power. progress.
Profitability is the Profits of one corporation Profit is the bottom line of Shared profitability is the
necessary condition for are the losses of its all business. engine of growth.
Profit growth. competitor (the Win-Lose High buying power and The poor can be profitable
prejudice). high market demand assure too (CK Prahalad).
profitability.
The primacy of Productivity is the Industrial concentration All human beings are ends in
productivity is a supreme increased efficiency of all spurs productivity. themselves and cannot be
Productivity principle. resources. used for the ends of others.
Humans are mere factors
of production.
Big is better. Limitless growth is Larger corporations are Small is beautiful.
Scale corporate prosperity. more productive than small
ones.
Mastery over nature is Mankind will always Human life and the life of Harmony with nature is
critical. achieve a technical break- our environment will growth.
Control Technology is conquest through into all the always adjust to each other Respect for nature is
of nature. problems that arise in its civilization.
technical environment
We ought not to create a Manipulation of the world Science and technology in Our commitment to quality
new humanity that and its resources (which themselves are neutral life and moral values should
Research & intends to solve all the includes humans) for the (a-moral or trans-ethical), impose limits on human
Experi- problems of nature. betterment and survival of and must be freed from any inquiry on the one hand, and
mentation mankind is not only a ethical or moral impositions on technological progress on
human right and duty, but of a few, lest humanity's the other.
is essential for a better progress be impeded.
understanding and
realization of human
destiny.
The mobility of Respect for the dignity Current international laws Shared values, including a
employment, capital, and interests of all its and market forces are commitment to shared
Globali- produce and technology stakeholders are necessary but insufficient prosperity are as important
zation across countries and fundamental to guides for global business for a global community as
trade regions is critical globalization. conduct. for communities of smaller
for globalization. scale.

Our responsibility is for Compensating peoples and The only responsibility of Accepting global
Respon- ourselves. nations for the harm that corporations is to make responsibility for the politics
sibility our global greed and profits. and actions of business is
actions cause is global imperative.
justice.
Limitless consumption is Individual claims of rights Global social and economic Scarce resource conservation
Rights and our birthright. are more important than betterment is the duty of all. is our global duty.
Duties claims of duties toward
others.
Happiness Limitless possession is Happiness is the Money is the root of all Happiness doubles when
supreme human fulfillment of all our wants unhappiness. shared.
happiness. and desires.

58
 Table 13.10: Typical Sets of Biases, Prejudices, Presumptions and
Presuppositions in Business Education and Learning
Component of Management
Uncritical
Thinking
Humans are not equal.
Men are superior to
women.
Caucasians are superior to
others.
Western models of
freedom, democracy and
civilization are benchmarks
Biases for other continents to
follow.
Work is duty; wage is
privilege.
Education and employment
are rights.
Healthcare is a right.
American Capitalism is the
best free market system in
the world.
Big is better and beautiful.
More is satisfying.
Higher market demand is
prosperity.
Prejudices
America is the superpower.
World’s energy resources
should be governed by
USA.
Presum- USA should control nuclear
ptions weaponry and proliferation.
Humans can be used for
experimentation.
Stem-cell research is a
necessity.
Presuppo- This world is for us;
sitions posterity will take care of
itself.
Marketing
Consumers are only
means and not ends-in-
themselves.
Consumption is
happiness.
Higher consumption
implies growth.
Immediate gratification
is better than its delay.
Consumers: be aware.
Planned product
obsolescence is growth.
Outdated products are
best exported to
developing nations.
Consumer delight and
satisfaction is the goal of
marketing.
American fads and
fashions are the norm for
the world.
Predatory and exorbitant
pricing are normal.
Not all product defects
and risks can be
eliminated.
Consumer risk is OK.
Credit based
consumption is growth.
Allopathic medicine is
the best and should be
nationally
institutionalized.
Fast foods do not lead to
obesity.
Tobacco products do not
lead to cancer.
Some drugs need to be
legalized.
Product safety is a
consumer duty.
59
Economics, Technology and
Accounting & Information
Finance Systems
Human labor is a factor Innovation is power.
of production; hence, Innovation is ethics
exploitable. neutral.
Plant closings, mergers, Automation and
acquisitions, robotics spell growth.
outsourcing… are Innovation is conquest
necessary and natural and control of nature.
means of growth. Planned technology and
Granting credit spurs skills obsolescence are
consumption. growth.
Debt-leverage is better Outdated technologies
than equity. should be exported to
Seeking bankruptcy developing countries.
protection is normal. Over-consumption of
Federal and trade energy is not an
deficits are normal. ecological hazard.
Labor is just a cost and All technology implies
not a human process. an ecological cost.
Dignity of labor is its Harmony with nature is
productivity. weakness.
Labor should be paid by Innovation is useless
efforts and outputs. without
commercialization.
Market success defines
innovation and
technology.
No work is risk-free. The larger the number
No working conditions of new products and
are totally safe. services the market
Worker safety is a offers each year, the
luxury. better.
Workers: be aware! Globalization is
progress.
Globalization
eliminates global
inequalities.
Shareholder Consumer privacy is a
profitability is the end consumer problem.
of capitalism. Privacy invasion is a
Corporations exist for necessity in emergency.
shareholders. Environment-
All corporate friendliness is a
responsibility is for weakness.
shareholders.
 Table 13.11: Alternative Ways of Corporate Thinking in Complex
Environments
Hierarchical Object of Frequently asked Type of Outcomes of
Level of Corporate Questions Corporate Corporate
Corporate Thinking Explanation Explanation
Thinking
Inactive Every day events None Passive explanation Inaction, Ignorance
Status Quo
Reactive Every day events Who did, what, to Event explanation Description
whom, and when? Narrative
Proactive Past events Who will do? Prospective explanation; Anticipation
Current events What? When? Futuristic explanation Speculation
Future events To whom? Forecasting
With what results? Foreseeing

Interactive Past events Who did, what, to Consensual explanation Dialogue-discussion

Current events whom, and when? Discursive explanation Team learning;
Future events Shared meaning
Interpretive Language of Who are these people? Linguistic explanation Linguistic analysis
events How do they think? Hermeneutic Interpretation
Meaning of How and why and with explanation Human archetypes
events whom do they Archetypal explanation Social archetypes
History of events communicate?
Responsive Patterns of What happened? Trend explanation Analysis-synthesis
behavior; Long- How did it happen? Pattern explanation Patterns, trends;
term trends How long did it happen? Significance explanation History; social fabric;
With whom did it Causal explanation Meaning waves
happen? Shared meaning
Why did it happen? Culture
With what Civilization
consequences?
Creative All or none of the What are market Creative explanation Market opportunities
above trends? Inventive explanation Undertaking risk
What are market needs? Discovery explanation Entrepreneurship
What are market wants? Innovative explanation Incremental Innovation
What are market Adventurous Radical innovations
desires? explanation Market breakthroughs
What are market gaps? Tech breakthroughs
What are market Institution building
niches? Venture creation
Founding corporations

Generative Structures and What are the underlying Structural explanation Hypotheses
processes of structures, Mental model Theory
behavior and determinants, explanation Knowledge
events; your antecedents and causes Inductive explanation Structures
mental models of current and past Deductive explanation Mental models
events? Causal explanation Change and growth
What causes patterns of Metaphysical Truth and wisdom
human or social, explanation Philosophy
national or global Theology
behavior?
What are your mental
models that underlie
your current
explanations of events
and patterns of
behavior?

60
Appendix 13.1: “Rules versus Principles:” Andy Fastow’s Critical Thinking
after his Prison Sentence Experience
Released from the Prison in 2011 after serving a sentence for six years, Andy Fastow, ex-CFO Enron, addressed
University of New Mexico (UNM) B-students. The presentation, titled “Rules versus Principles,” was put on by
the Daniels Fund Ethics Initiative at UNM, which supports business ethics education .

In a rare public lecture, former Enron Chief Financial Officer Andy Fastow held up his “CFO of the Year” award in
one hand, and his federal prison ID card in the other.

• “I got both of these for doing the exact same thing,” he said before a crowd of eager UNM business students.
• Fastow went on to talk about his role in the biggest corporate scandal of the century and the lessons he learned
about the ethics of business.
• In 2001 the Securities and Exchange Commission investigated Fastow’s role in hiding massive amounts of Enron’s
debt using off-balance sheet accounting and special-purpose entities. Fastow was eventually convicted of fraud,
money laundering and conspiracy, and was forced to forfeit nearly $24 million in assets. He was sentenced to six
years in federal prison and was released in December 2011.
• At the start of the lecture, Fastow joked with the audience about being confused each time he is asked to speak on
the topic of ethics.
• “I think inviting me to talk about business ethics is a bit like inviting Kim Kardashian to talk about chastity,” he
said.
• The collapse of Enron was a dramatic example of the failure of business people to put principles before rules,
Fastow explained — a mistake that corporations and governments still make to this day.
• For six years in a row Fortune magazine named Enron the “Most Innovative Company,” and Fastow himself was
praised for his creative use of structured finance and off-balance sheet accounting.
• “I didn’t set out to commit fraud,” Fastow said. “I cannot remember any time that I ever considered I was
committing fraud.”
• Fastow described the strange world that a CFO operates in, a gray area where the rules set by regulators are
complex, vague and sometimes non-existent. This gray area can be seen as an opportunity, a chance for businesses
to interpret the rules to suit their needs, he said.
• In these situations it is incredibly important for individuals and organizations to recognize unethical behavior and
determine the best ways to proceed, he said.

61
 • “I thought I was so smart; I thought I was a hero for bending the rules,” Fastow said. “It comes down to individual
people making a decision — we always asked ‘is it allowed?’ not ‘is it the right thing to do?’”
• “A lot of business schools may be covering these issues in a few classes, or they may have one elective class students
can take. But they’re not pervasively thinking about having speakers in like Andy Fastow, and talking to diverse
audiences that are not just a class here or there in the college of business,” Ferrell said. “It cuts across and creates a
dialogue around ethical leadership in organizations, and the challenges that people are going to face when they start
their careers.”
• Fastow discussed corporations like General Motors and IBM, and entire governments like Greece, which have used
creative work-around and took advantage of regulatory loopholes to achieve short-term gains that resulted in long-
term disasters.
• Every day, corporate accountants cut and paste numbers in spreadsheets to magically turn problems into profits,
kicking the can down the road until their problems become unmanageable, he said.
• The obsession of the corporate world with short-term profits, huge bonuses and stock prices has created a
dangerous culture in which business people look for every shortcut and loophole they can find to make their
numbers, despite the long-term consequences, he said.
• His message to the students was simple: rules and regulations are not enough. Only employees can make a
difference by standing up and saying “no” when they encounter unethical practices in their business careers.
• “You can always find an attorney to get you the answer you want. You can always find an accountant to get you the
answer you want,” Fastow said. “There’s only one gatekeeper — you.”

[Linda Ferrell, a UNM professor of marketing who also works as the Bill Daniels Professor of Business Ethics, helped to
secure Fastow as a speaker in the Daniels Fund Ethics Initiative series. The Daniels Fund Initiative is involved in principle-
based business ethics education mostly for students in institutions of higher learning: something that is vital to the future of
corporate America, Ferrell said].

Source: Jonathan Baca is the news editor at the Daily Lobo. He can be contacted at news@dailylobo.com, or on Twitter
@JonGabrielB.

Assignment: Examine these observations of Andy Fastow from a critical thinking point of view.

62
 Chapter 14
The Ethics of Corporate Stakeholder Rights and
Duties

Rights and duties are involved in every area of business and markets, society and governments. Most often,
rights and duties involve serious ethical and moral issues of conflict. A good theory of the ethics of rights and
duties, obligations and responsibilities will empower us to understand the impact of our actions on various
stakeholders. Additionally, a deep understanding of rights and duties could help us to analyze better the
impact of our executive actions on various stakeholders, and in particular, to fathom the damaging effects of
rights and duties violated by the man-made current financial crisis when seen from an ethical and moral point
of view. Our coverage on the ethics of rights and duties will comprise of three parts: Part One: The Nature of
Business Rights and Duties; Part Two: Respecting Rights and Duties in Business, and Part III: The Ethics of
Competitive War: Rights and Duties of Citizens. The Chapter will feature Newcomb Wellesley Hohfeld’s
framework of legal interests such as claims, privileges, power, and immunity and its various applications to
contemporary market and corporate executive situations. The theory of rights and duties is illustrated by
several contemporary cases from the marketplace such as The Glory and Decline of Merrill Lynch, and Apple
(iphone) vs. FBI in relation to National Safety and Security, Rights and Duties

“Ethics is knowing the difference between what you have a right to do and what is right to do”
(Potter Stewart Associate Justice of the United States Supreme Court).

Case 14.1: Apple’s Rights versus those of FBI or Terrorists

Tim Cook, CEO Apple, has been tweeting for months playing on media interest. On February 16, 2016,
after consulting with his cabinet of advisers, Tim Cook made a vigorous statement on privacy rights that
attacked the governments. He vowed to fight government “overreach” and help “people around the
country to understand what is at stake.” “We feel we must speak up in the face of what we see as an
overreach by the US Government,” said Tim Hook, when he explained on February 16 why he felt his
firm should refuse to comply with an FBI request to break into an iPhone used by Fyed Sharook, a dead
terrorist, but one of the terrorists involved in the San Bernardino, California shootings in December 2015.
Sharook and his wife Tashfeen Malik, who were sympathizers with the Islamic State (IS), shot and killed
14 people in San Bernardino, CA, December 12, 2015, before both were gunned down by the police. The
US government dismissed Tim Cook’s letter, tweet and statement as a stunt to bolster Apple’s sales.

Ever since 2013, Edward Snowden leaked sensitive information to the public, the issue of public security
and private privacy has been surfacing and getting to be conflicting and expanding. Lately, the problem
has taken national and global dimensions.

The files on any phone or iPhones are encrypted. Unless the correct code is entered to unlock the phone,
the files are meaningless gibberish. By itself, such a code provides little security. It is, by default, a mere
four digits long passcode, easy to memorize; but it has 10,000 possible combinations. One could try every
combination until by chance you hit the right one, a process called “brute-forcing.” Of course, there are
methods to make brute-forcing harder. For instance, after six wrong tries a user has to wait a minute
before trying a seventh. That delay rises rapidly to an hour. That is, on an average, brute-forcing a four
digit iPhone passcode could take 5,000 hours – nearly seven months. This could be surmountable for
some hackers, but for the fact that some computers automatically wipe themselves clean after every ten
failed attempts to log in.

1
But all this process of brute-forcing can be circumvented by the phone’s internal operating system (IOS),
and an IOS can be changed. Apple does so regularly, issuing updates that add new features or fix bugs.
In essence, the FBI is just asking for such an update which can brute-force quickly, (albeit with reference
to Farook’s phone). Theoretically, the FBI’s office could write such an update, but in can do so only with
Apple’s help, as Apple itself uses a special cryptographically signed certificate. Currently, only Apple
possesses this long, randomly generated number code as a key to this process.

FBI’s request for that code may not be that simple. Many security officials are skeptical; they do not
believe looking inside Farook’s phone is the only motive of FBI. Possibly knowing this, Farook and his
wife destroyed two phones and a laptop, while leaving the iPhone in tact. The iPhone, incidentally,
belonged to Farook’s employer. In fact, a few weeks before the rampage, Farook did disable the phones’
online backup feature, data from which the FBI would have access to.

The Apple-FBI Confrontation Problem

When Public Security is threatened whose rights should prevail: Apple or FBI? Do citizens have a right
to privacy or security, both or none? The issue at stake is as old as mass communication: how much
power the governments should have to subvert regular innovative communication products and services
that citizens and companies use to keep their private business private?

The problem endangers the rights and duties of at least four groups: a) privacy and security rights of the
American public; b) the right and duty of American IT firms who create privacy-security devices to
safeguard them as strictly as possible c) the right and duty of the US government represented in this case
by the FBI to protect the safety and security of the American people, and do whatever it takes to fulfill
their duty, and d) the rights of over a billion phone and iPhone users (such as Syed Farook) to remain
private and secure in the use of their devices.

The problem arises when two or more sets of rights are in conflict. Indeed such is the case with Apple and
FBI, and on a larger scale, the rights of American information technology (IT) firms that have been
locked in battle with their own government in this regard, and the safety-security rights of the American
public.

On the other hand, the issue of “trade-off is not security versus privacy, but security for everyone versus
the police’s ability to investigate specific crimes,” argues Dr. Kenneth White, a director of the Open
Crypto Audit Project, an American Charity [The Economist, February 27, 2016, p. 70].

Some defend Apple and for Valid Reasons:

Apple, arguably the most valuable company in the world, has refused to comply with a court order from
the FBI as the order fundamentally compromises the privacy of its users.

Those who defend Apple argue: the firm has the right to appeal against a court order, especially when
that court order seems to be an overreach by the US government. If Apple eventually loses the legal
battle, it will have to comply. But currently, Apple is right in refusing to comply.

FBI’s request to Apple will create a precedent that cannot be justified on legal or moral grounds. As a
legal precedent, the FBI case would let policemen and other spies break into private computers and
iPhones more easily and wantonly. Moreover, soon defense lawyers would use the unlocking code, and
so would court-appointed experts given the job of checking crimes or verifying evidence.

2
Apple is global. It has governments beyond that of USA that it must respond to. Deliberately
compromising its security for the Americans will encourage other countries to make similar, even perhaps
broader requests for access, says Dr. Kenneth White. Having conceded the point once, Apple will find it
hard to resist in the future. In countries less concerned with human rights, civil liberties and the rule of
law, this compromise would have even more serious consequences.

Once Apple succumbs to PR pressure that the FBI’s request is staging and creating, it will find impossible
to refuse similar requests from domestic and foreign governments. In fact, the department of justice
(DOJ) was demanding Apple’s help in at least nine similar cases, seven of which Apple has been
resisting. Some IT experts fret that the FBI might even require Apple to start sending subverted codes to
specific suspects over the air, using the technology it employs to distribute legitimate updates. Cyber-
security experts feel aggrieved that policemen and politicians do not seem to grasp what they view as a
fundamental point: weakening security for the benefit of the police will inevitably weaken it for everyone.

Some defend FBI and Governments and for Valid Reasons:

FBI, the most famous law enforcement agency in the USA, feels right in ordering Apple to help it to
unlock an iPhone used by Syed Farook. It is a request to unlock a specific device, akin to wire-tapping a
single phone line. Apple and other tech firms regularly cooperated with the authorities on criminal cases;
this is no different.

FBI has argued many times that encryption can thwart legitimate investigation, leaving vital clues
undiscovered. But security experts also argue that what works for the good guys can also for the bad
guys. If a subverted operating system managed to escape into he “wild’ even once, then the security of
every iPhone could be at risk.

The phone as a public service belongs to the government department, not Farook. Farook was a
government servant.

The FDI wants help unlocking Farook’s iphone because it may contain information on the motive or
contacts of a dread terrorist. What could be more reasonable?

FBI says that Apple’s defiance jeopardizes the safety of Americans. National security is more important
than a private firm’s patents and IPR, or Farook’s right for privacy!

The Apple and FBI Debate Implications

Will FBI’s request create a precedent? The law enforcers say: No. This is not an attempt to build a
generic flaw in Apple’s encryption, through which the government can walk as needed.

Yet Apple feels it is being asked to do something new: to write a piece of software that does not currently
exist in order to sidestep an iPhone feature that erases data after ten unsuccessful password attempts. But
Apple and IT firms have other commercial interests as well: they have made privacy and security
important selling points for their products and services.

If the court order is upheld, it signals that firms can be compelled by the state to write new operating
instructions for their devices. That breaks new ground. If the courts rule against Apple, it will work to
make its devices so secure that they cannot be over-ridded by any updates. On the other hand, if courts
succumb, and that means, Farook wins, legislators will be tempted to mandate backdoor access via the

3
statute book. If Tim Cook is not to hasten the outcome he wishes to avoid, he must lay out the safeguards
that would have persuaded the firm to accede to the FBI’s request. If Apple rejects FBI’s request, then it
must propose its own solution.

Another major issue is when and whether a precedent is justified. This entails a judgment call on whether
security would be enhanced or weakened by Apple’s compliance. In the short-term, security will be
enhanced. Farook was a terrorist; his phone is the only one being currently unlocked; and the device may
reveal the identity of other malefactors. If information is needed to avert a specific and imminent threat
to many lives, then the end justifies the means, as long as the means are not something intrinsically evil.
But in the long-term, this invasion of privacy may lead to other cybercrimes. Are cryptographic
backdoors and skeleton keys the only way to unlock terrorists?

Moreover, security does not just mean protecting people from terrorism, but also warding off the threat of
rogue espionage agencies, cybercriminals and enemy governments. If Apple writes a new software that
could circumvent its password systems on one phone, that software could fall into the hands of hackers
and be modified to unlock other devices.

Concluding Thoughts
All these arguments will be rehearsed when Apple meets FBI in court, March 22, 2016. That will not be
the last word on the matter. It could reach the Supreme Court. Meanwhile, Apple and other IT firms are
taking steps to lock themselves out of their own customers’ devices, deliberately making harder to fulfill
official requests for access.

Perhaps, the ultimate question would be if the American government could be trusted not to abuse its
powers of surveillance. People now trust businesses more than their governments, according to surveys
by Edelman, a PR agency. Firms like Google and Facebook have taken over the role of dissemination of
information that governments once claimed. Tim Cook and Mark Zuckerberg often publish their views in
blog posts rather than give interviews, often taking no questions [The Economist, February 27, 2016, p.
58].

References:

“Code to Ruin: The Right and Wrong of Apple’s Fight with the FBI,” The Economist, February 27, 2016,
p. 12.
“Schumpeter on the Stump: Why Tech Bosses are playing at being Statesmen,” The Economist, February
27, 2016, p. 58.
“Cryptography: Taking a Bite at the Apple,” The Economist, February 27, 2016, pp. 69-71.

Corporate Ethical Questions

1. What is the crucial legal issue in this case: legal compliance? Apple’s defiance? Legality and
legitimacy of FBI’s request, or brute-forcing total transparency?
2. What is the crucial ethical issue here: Using legal defiance as a sales-stance? Defense of free-
enterprise capitalism? Industry-government non-interference?
3. What is the critical moral issue here: moral obstinacy? Moral courage? CEO statesmanship? Moral
corporate citizenship?
4. Of the four parties identified in this case, whose rights/duties should prevail and why? Under what
circumstances: non-emergency? Emergency of national threat because of persistent IS-related
terrorism? Under peaceful negotiations?
5. In the light of your answers to QQ 1-4, if you were Apple’s head, how will you resolve this matter

4
 and most effectively?
6. In the light of your responses to QQ 1-5, if you were the FBI head, how will you resolve this matter
and most resolutely?
7. Terrorism thrives on global networking of the IS, conspiracy, complicity, secrecy, information,
financing, and arms. What should be the collective roles of various agencies involved, including IT
companies, Swiss banks, Private Equity Funds, Airlines, NGOs, NRIs, and private and public
investigative agencies?
8. Or is the real solution to this global threat beyond law, ethics and morals? Should we have recourse
to corporate executive spirituality that surpasses corporate egos, to political transcendence that goes
beyond political agenda, to national and international cooperation for religious tolerance, racial
harmony, human solidarity, and global peace?

Case 14.2: The Glory and Decline of Merrill Lynch:

Violation of rights and Duties?

Merrill Lynch is headquartered in lower Manhattan, New York. The year 2006 was exceedingly prosperous for
Merrill. The firm’s performance was breathtaking - revenues and earnings had soared, and its shares were up 40
percent for the year. Merrill’s decision to invest heavily in the mortgage industry was paying off handsomely. E.
Stanley O’Neal was chairman, president and CEO of Merrill Lynch in 2006. He had three indispensable lieutenants
to achieve and reap this harvest, Dow Kim, Ahmass L. Fakahany and Osman Semerci.

o Dow Kim, born in Seoul, schooled in Seoul and Singapore, and fresh from Wharton, moved to New York to
oversee Merrill’s fixed-income business in 2001. He became co-president in 2003 when he began to oversee
Merrill’s traders in mortgage business. By 2006, Dow Kim was executive head of global debt markets, executive
vice-president and co-president of investment banking and global markets of Merrill Lynch and was the
executive who oversaw the growth of the fixed-income and mortgage units.
o Fakahany, 50, an Egyptian-born former Exxon executive, was the firm’s vice chairman and chief administrative
officer.
o Semerci, 41, was a native of Turkey who began his career trading stocks in Istanbul. He oversaw Merrill’s
mortgage operation.

All four did marvelously well in base salaries and extraordinarily well in bonuses in 2006. In a self-justificatory
mode Mr. O’Neal explained in March 2008, “As a result of the extraordinary growth of Merrill Lynch during my
tenure as CEO, the board saw it fit to increase my compensation each year.” He was paid $46 million in 2006,
$18.5 million of it in cash. In fact, other Merrill Lynch top management did extremely well too.

Mr. Kim‘s total paycheck arose from $6 million in 2001 to $9 million in 2002 to $17 million in 2003 to $22
million in 2004 to $25.5 million in 2005 (an annual compound growth rate of 43.6% during 2001-2005). Mr. Kim’s
fixed-income unit generated more than half of Merrill’s revenues in 2006. Hence, his base salary in 2006 was raised
to $350,000 and his total compensation to $35 million ($14.5 million in cash), 100 times his salary. Both O’Neal

5
and Kim received about 57% of their paycheck in stocks in 2006, which would lose much of its value the next two
years, as Merrill began to experience turbulence in its mortgage business (Story 2008b).

Bonus, the difference between the two amounts, was a rich reward for the robust earnings made by the traders
in Merrill Lynch in 2006. In general, salaries are merely play money – a pittance compared to bonuses. Bonus
season has become an annual celebration in the New York area of the Wall Street. Bankers celebrated with five-
figure dinners, and vied to outspend each other at charity auctions and spent their newfound fortunes on houses
priced at millions of dollars, on exotic cars and antique art.

Even as tremors began to reverberate through the housing mortgage market and through Merrill Lynch, Dow
Kim exuded undue optimism. When several of his key deputies left Merrill Lynch in the summer of 2006, Kim
appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Semerci, Kim installed Dale
M. Lattanzio and Douglas J. Mallach. With these three new additions, Merrill Lynch entered a new phase in its
mortgage buildup. September 2006, Merrill Lynch spent $1.6 billion to buy the First Franklin Financial
Corporation, a mortgage lender in California, in order to capture the Californian mortgage market, as well as it could
bundle its mortgages into lucrative bonds. Back in New York, Mr. Kim’s team kept eagerly bundling risky home
mortgages into bonds.

Semerci made $20 million in bonuses in 2006; Lattanzio and Mallach, each earned more than $10 million in
bonuses the same year. Further, O’Neal and Kim paid nearly a third of Merrill’s 2006 bonus pool, about $5 billion
to $ 6 billion, to the 2000 professionals in the divisions, about $2.75 million apiece. About 20 analysts with a base
salary of $130,000 each collected a bonus of $250,000; around 30 traders with a base salary of $180,000 won a
bonus of $5 million each. More than a 100 professionals in Merrill’s bond-unit alone broke the million-dollar mark
in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people in 2006 (Story 2008b, A1, A28).

One of the last deals they pulled off was “Costa Bella” (presumably, in memory of the Pebble Beach, CA, a
three-day golf tournament that Merrill Lynch celebrated in November that year with avid golfer Dow Kim and other
celebrities such as William H. Gross, a founder of Pimco, the big bond house, and Ralph R. Cioffi, who oversaw
Bears Stearns’ hedge funds). Costa Bella represented $500 million bundle in loans, a type of investment known as
collateralized debt organization (CDO); this was managed by Pimco. Merrill Lynch collected about $5 million in
fees for concocting Costa Bella, which included mortgages originated by First Franklin. By the time Costa Bella ran
into trouble, Merrill Lynch bankers had collected their bonuses for 2006 (Story 2008b).

For Wall Street, much of this decade represented a new Gilded Age. The bonus bonanza has redefined success
for an entire generation of college graduates. Shunning the traditional, challenging and prestigious professions of
medicine, law, engineering and teaching, graduates of top universities sought fortunes in banking in New York.
Wall Street worked its rookies hard, but it held out promise of rich rewards. In college dorms, tales of some thirty-
year olds pulling down $5 million a year were legion (Story 2008b: A 28).

Paycheck and bonus were tied to profits, and profits were tied to the easy, borrowed money that could be
invested in markets like mortgage securities. As the role of the financial services industry in the U. S. economy
grew, workers’ pay ballooned, leaping six-fold since 1975, nearly twice as much as the average American worker.
As a percentage of the U. S. total, the share of profits by the financial services industry rose from around 10% in
1985 to a peak of 41% in 2000 and was at 30% in 2008. Similarly, as a percentage of the U. S. total, the share of
wages and salaries in the financial services industry had steadily risen from around 5.2 % in 1980 to 10% in 2008.
Obviously, the financial services industry got a bigger share of the economic pie.

Merrill’s 2008 Sale to Bank of America

Merrill Lynch reported record earnings in 2006 - $2.5 billion. In fact, it was a mirage. After the blowout of
2006, Merrill pushed even deeper into the mortgage business, despite growing signs that the housing bubble was
starting to burst. That decision proved to be disastrous. As the problems in the subprime mortgage market exploded
into a full-blown crisis, the value of Merrill’s investments plummeted. Merrill collapsed by September 15, 2008 to
almost zilch in market cap. Merrill has since then written down its investments by more than $54 billion, selling
some of them for pennies on the dollar. The company lost largely because the mortgage investments that supposedly
had powered those extraordinary profits in 2006 had plunged in value.

6
 Merrill Lynch’s losses in 2007-2008 exceeded all the profits it made over the previous 20 years. On Sept. 15,
2008 — less than two years after posting a record-breaking performance for 2006 and following a weekend that saw
the collapse of a storied investment bank, Lehman Brothers, and a huge federal bailout of the insurance giant
American International Group — Merrill was forced into a merger with Bank of America. It was an ignominious
end to America’s most famous brokerage house, whose ubiquitous corporate logo was a hard-charging bull. That
ended the 94-year history of this once proud giant firm.

The fire that Merrill was playing with was an arcane instrument known as the synthetic collateralized debt
obligations (CDO). CDOs are pools of loans that the originating company bundles for subsequent investors as debt
securitizers or debt-risk sharers. The final product sold was an amalgam of (CDOs) and credit-default swaps (CDS:
which essentially are insurance that bondholders buy to protect themselves against possible credit defaults). [The
synthetic CDO grew out of a structure that an elite team of J. P. Morgan bankers invented in 1992. Their goal was to
reduce the risk that Morgan would lose money when it made loans to top-tier corporate borrowers like I.B.M.,
General Electric and Procter & Gamble]. Synthetic CDOs, in other words, are exemplars of a type of modern
financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to
limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock
futures, for example, are a common and relatively simple derivative. Among the more complex derivatives,
however, are the mortgage-related varieties. They involve a cornucopia of exotic, jumbo-size contracts ultimately
linked to real-world loans and debts. As the housing market went sour, and borrowers defaulted on their mortgages,
these contracts also collapsed, thus amplifying the meltdown (Morgenson 2008).

Ethical Fallouts

Fakahany oversaw risk management at Merrill and kept the machinery humming along by loosening internal
controls, according to the former executives. Semerci often played the role of a tough investor silencing critics who
warned about the risks the firm was taking. Their combined actions ultimately left their firm vulnerable to the
increasingly risky business of manufacturing and selling mortgage securities. To make matters worse, Merrill sped
up its hunt for mortgage riches by embracing and trafficking in complex and lightly regulated contracts tied to
mortgages and other debt (Morgenson 2008). While questionable mortgages made to risky borrowers prompted the
credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products
known as derivatives — like those that Merrill used — transformed a financial brush fire into a conflagration. As
subprime lenders began toppling after record waves of homeowners defaulted on their mortgages, Merrill was left
with $71 billion of eroding mortgages on its books and billions in losses. All these events eventually precipitated
the financial crisis of September-October 2008 (see Table 4.1).

Critics question why Wall Street embraced the risky deals even as the housing and mortgage markets began to
weaken. Some Wall Street executives argue that paying a larger portion of the bonuses in stock, rather than in cash,
keeps executives from making shortsighted decisions. However, this hardly justifies the fat compensation packages,
with substantial cash payments. As the damage at Merrill became clear in 2007, Mr. Kim, his deputies and finally,
Mr. O’Neal left the firm. Mr. Kim opened a hedge fund, but it quickly closed. Semerci and Lattanzio are working
for a hedge fund in London, UK. Kim, Semerci and Lattanzio left Merrill without collecting bonuses. Mr. O’Neal,
however, was awarded an exit package worth $161 million!

Merrill Lynch had 56,200 employees in 2006. Its enormous compensation and benefits package, however,
mostly reached a few: only about 100 professionals who worked in fixed-income unit received at $1 million each,
averaging to $5 million in this group, and another 1,900 professionals in the same unit received an average bonus of
nearly $700,000 each. The rest of the 54,000 employees received little or nothing beyond their regular base salary.
It was so much for so few!

In June 2014, Merrill Lynch was charged with fines up to $100 million related to overcharges to retirement
accounts and charities that invested in mutual funds. Bank of America’s Merrill Lynch paid $8 million to settle
allegations that it excessively charged over 47,000 charities and retirement account owners in fees. As part of the
settlement, the company is supposed to reimburse $24.4 million to its affected customers and has already repaid
$64.8 million. The total restitution was set at $97.2 million for its “disadvantaged investors,” according to a release
from the Financial Industry Regulatory Authority, Inc. (FINRA), a private corporation in the USA that acts as a self-

7
regulatory organization. Merrill Lynch failed to provide promised sales charge waivers on many retirement accounts
for more than five years beginning in January 2006, relying instead on financial advisers it did not properly
supervise to do so. As a result, about 41,000 small business retirement plans, and 6,800 charities and 403(b)
retirement plan accounts available to ministers and public school employees, improperly paid sales charges on Class
A shares or bought other share classes carrying higher fees, FINRA said.

The glory and decline of Merrill Lynch raises several ethical and moral issues regarding rights and duties,
responsibilities and obligations of various actors in the company.

Sources:
Morgenson, Gretchen (2008), “How the Thundering Herd Faltered and Fell,” New York Times, Saturday, November 8, A1.
Story, Louise (2008a), “The Broker Rebellion,” New York Times, Saturday, October 25, 2008, B1.
Story, Louise (2008b), “Wall Street Profits were a Mirage, but huge Bonuses were real,” New York Times, Thursday, December
18, 2008, A1, A 28.
www.randomhouse.com/book/202414
www.investopedia.com
www.Wikipedia.com
http://fortune.com/2014/06/16/merrill-lynch-overcharge/
http://www.reuters.com/article/2014/06/16/us-bankofamerica-merrilllynch-mutualfund-idUSKBN0ER1KN20140616

Ethical Questions:
1. Analyze the legality and ethics of opaque financial instruments such as synthetic collateralized debt obligations
(CDOs), credit-default swaps (CDS), mortgage securities, and derivatives.
2. Discuss the role of all these financial instruments in the collapse of Merrill Lynch as also of other mega investment
banks that traded with CDOs, CDS, mortgage securities and derivatives.
3. Can capitalism be saved and strengthened without these complex and opaque financial instruments, and why?
4. To what extent were Merrill Lynch’s top management aware of the housing mortgage crisis and did not do anything
about their duty to respond proactively?
5. To what extent was the top management bound by corporate duty to its stakeholders in forestalling and preventing
the debacle it faced?
6. To what extent was the top management bound by corporate duty and responsibility to protect the good-will
investments of its shareholders who lost almost everything owing to massive losses in market capitalization?
7. To what extent was the top management bound by corporate duty and social responsibility to the country and its
global communities for forestalling and preventing the debacle it faced?
8. How could the top management defend the corporate legitimacy of Merrill Lynch given its corporate greed for
massive irreversible bonuses, mostly in cash, while the rest of its stakeholder world suffered massive losses?

Case 14.3: The Debacle of “Paid News” Media in India

India has every reason to be proud of the strength and diversity of its mass media, said Vice-president Hamid
Ansari in Aligarh on Saturday, June 15, 2013 (Hindustan Times, June 16, 2013, p. 07). Ansari was inaugurating the
17th Biennial Session of the National Union of Journalists (India) – NUJ(I). The Indian Media has grown in size and
coverage, said Ansari. There are 93,985 registered publications, 850 permitted TV channels under news and current
affairs category, and 437 under non-news category. Doordarshan, National TV, itself runs 37 channels. A robust
economic growth and demand from an emerging urban and literate middle class that is enjoying higher incomes and
standards of living explain the media explosion phenomena.

The Media Empire in India

Indian Media has grown tremendously in the last two decades. Over 100 million copies of newspaper are sold
every day. The number of news channels has grown to 80 dedicated ones, whereas originally there was just one
national news channel, Doordarshan. From the black and white TV broadcasting on a single national TV channel
(Doordarshan) in the 1980s, the Indian TV broadcasting media has grown to almost 600 channels with about one-
third operating in the General Entertainment Channels (GEC) space. Exhibit 14.3.1 provides a comparative media
picture of India with USA, UK and China. Exhibit 14.3.2 provides a brief timeline of the growth of the Indian
Media Empire.

8
 Exhibit 14.3.1: The Media Market in the Big Country World

Newspaper Publishing Market 2006-2010

Country 2006 2007 2008 2009 2010 Growth (CAGR)
(US$ (US$ (US$ (US$ (US$ 2006-2010
Million) Million) Million) Million) Million)
USA 59.897 55.740 48.045 37.771 35.570 - 40.6%
UK 10.402 11.340 10.695 9.333 9.592 - 7.8%
China 9.892 10.347 11.020 11.318 12.105 + 22.4%
India 2.491 2.922 3.126 3.173 3.544 + 42.3%
Source: PricewaterhouseCoopers (2011): Global Entertainment and Media Outlook 2011-15

Daily Newspaper Print Unit Circulation 2006-2010

Country 2006 2007 2008 2009 2010 Growth
(Millions) (Millions) (Millions) (Millions) (Millions) (CAGR)
2006-2010
USA 54.829 53.492 51.497 48.025 44.800 - 18.3%
UK 16.650 16.074 15.500 14.900 14.340 - 13.9%
China 98.700 102.500 107.000 117.815 134.190 + 36.0%
India 79.000 83.000 85.000 88.000 91.000 + 15.3%
Source: PricewaterhouseCoopers (2011): Global Entertainment and Media Outlook 2011-15

Exhibit 14.3.2: A timeline of Indian Media Growth

Year Media Growth Event

Up to 1980s Doordarshan was the national single broadcaster.
1985s Ramayana and Mahabharata were very popular shows with record viewership.
1992 Five new channels were introduced by Hong Kong based Star TV.
1996 More than 50 channels were available to Indian viewers.
2002-2003 More International Channels such as Nickelodeon, Cartoon Network, VH1, and Disney were
introduced in India; the number of channels increased to 100.
2003 Entry of authentic news channels such as AajTak and Star News.
2006 Two million Digital TV Households in India.
2009 394 TV Channels. Non-news and Current Affairs TV Channels grew from 0 to 183.
News and Current Affairs TV Channels grew to 211.
2010 Over 500 Channels in India and another 100 waiting to go live.
Launch of HD Channels, Food First, Movie Now; launch of HD feed of Star, Zee Channels.
2013 The Indian press is over 220 years old, the Indian Radio, about 100 years going, and
Doordarshan was half a century strong.
2010-2015 Annual growth rate for the TV industry is projected to be 12% over the next five years.

Paid news has increased with the increase in media power concentration. Most of the media are controlled by a
few corporate and politicians powerhouses. For instance, the father-in-law of Congress MP Naveen Jindal holds a
15% interest in NDTV. Aditya Birla Group owns 27.5% in India Today Group. CA Media owns 49% stake in
Endemol India (famous for Big Boss). Reliance Industries Ltd (RIL), India’s largest Private Corporation,
transferred Rs 2,100 crore to enter into India’s media industry with strategic associations with the Network 18
Group and the Enadu Group (for more details on RIL’s media expansions, see Case 7.3).

The business tycoons control news coverage. The presence of conglomerates in the Indian media is currently
posing a serious threat to democracy. Collusion may erode the plurality of ideas and diversity of opinion, both of
which are essential for the smooth running of a democracy. However, the ownership patterns of the media in India
and abroad is alarming. A higher concentration of media increases the risk of a monopoly and hence, the
phenomenon of captured media. Worse, major national newspaper editorials in India are biased, and even controlled
by politicians, and corporate powerhouses that own them. This has seriously endangered media objectivity and

9
credibility in news coverage and in serving public interest. Paid news is a serious malpractice as it deceives the
innocent citizens into believing a paid political campaign or product advertisement as real news.

Few years back, the Radia Tapes clearly indicated the cross-linkages between industrialists and politicians and
how the media acts as an interface between them. Over the years, Securities and Exchange Board of India (SEBI)
has observed and warned that media companies have been entering into agreements with listed companies and in
return were providing coverage through favorable news reports, editorials and advertisements – a clear case of
conflict of interest and dilution of independence of the press.

In 2008, the Ministry of Information and Broadcasting sponsored a study through the Administrative Staff
College of India (ASCI), Hyderabad. The ASCI Report argued for some regulatory framework to curb cross-media
ownership, especially in the regional Indian markets where there is significant concentration and market dominance
in comparison to national markets (say, for the Hindi and English Media). The ASCI recommendations, however,
were not followed through and both horizontal integration (across different media such as TV, radio, print) and
vertical integration (control of the creation and distribution of control) continues as seen in Exhibit 8.2.3. While UK
and Canada have regulation preventing horizontal integration of the media, USA does not have. India seems to
follow suit, despite ASCI recommendations.

Exhibit 14.3.3: Horizontal Integration of Indian Media Groups

Companies Broadcasting Distribution Platform
Print TV FM Radio DTH MSO
Channels Stations
Sun TV x x x x x
Essel Group x x x x x
Star India x x x x
Ushodaya (Eenadu) x x x
India Today x x x
The Times Group x x x
HT Media x x
ABP Group x x x
Bhaskar Group x x x
Jagran Prakashan x x x
[Source: www.trai.gov.in/WriteReadData/ConsultationPaper/Document/CP on Cross Media % 2013]

For instance, in South India, different political parties espouse their own newspaper that they own and control:
e.g., the Andhra Pradesh YSR Party has Sakshi newspaper and news channel; the TRS party has T news channel and
the Namaste Telangana newspaper; the TDS party has Studio N channel and the support of Eenadu newspaper.
Such party-owned and party-based newspapers abound in the rest of India and the world. All such deals spell
conflict of interests and produce inevitable bias, and the people as voters get thoroughly confused. This
phenomenon can destroy the very purpose and legitimacy of the media and the nation’s democracy it should
support. It jeopardizes objective reporting – the raison d’etre of media. For instance, the over-representation of
crimes in mass media is a cause of great concern: it makes media fundamental subversive, or a subtle form of social
and public control – both defeat the purpose of the media.

A major news report on the phenomenon of paid news in India’s media was submitted to Parliament in 2013 by
the Standing Committee on Information Technology. The report pointed out that self-regulation by India’s media
has failed to stop the practice of paid news. It suggested a more-powerful regulator and stiffer penalties, including
criminal charges possibly leading to imprisonment, for those who accept payment for news. It lambasted the
Ministry of Information and Broadcasting for “dithering” by failing to tackle the issue. “The rise of ‘Paid News’,”
the report says, “has undermined the essence of a democratic process.” But the document, submitted to the Lok
Sabha on May 6 generated little media coverage.

Bennett Coleman was among the few media companies mentioned by name in the report. The quoted portion
named Bennett Coleman as a pioneer of the private-treaty agreement, an arrangement by which Indian media firms
accept an equity stake in an advertiser’s company in lieu of payment for ad space. The committee report found this

10
practice, initially meant to pay for marketing, as being used by companies to ensure “favorable coverage.”

India is the largest democracy in the world, and the media has a powerful purpose and presence in the country
for safeguarding its democracy. Of late the abuse of “paid news” has corrupted the media. Paid news indicates
favors towards the institution which has paid for it. The news is more like an advertisement praising the person or
hiding the faults of the institute or ruining the reputation of the opposition party, all these for some significant
payment. Paid news is also called as one sided news in which privilege is given to an individual or group of
individual. Paid news is advertorial, that is, it is an advertisement in the form of an editorial. The advertorials are
designed to look like articles of objective new which they are not.

Sometimes, there is no money paid: media houses show favoritism towards the groups having more power.
Paid news became widespread during the 2009 elections. Most campaigning politicians paid media heavily for
positive coverage and for ignoring obvious skeletons in the closet. Also, the mode of payment in paid news can
violate tax laws and election spending laws of the country. It can seriously buy and bias national and state elections
thus ruining democracy at its roots.

The alarmingly increasing phenomenon of “paid news” transcends the corruption of individual journalists and
media companies. It is omnipresent, structured and highly organized; it has been steadily destroying the concept of
democracy in India. For instance, in the April-May 2009 general elections to the Lokh Sabha, despite the clear
guidelines of the Press Council of India, a number of political candidates had started paying generous sums of
money to the media personnel for giving them benevolent spotlights. Such “paid news” disables the public in
making right franchise decisions. The paid news phenomenon was ten times worse during the 2014 general
elections.

With massive paid news by the powerhouses, the Indian media is not available to the powerless in India for self-
publishing newsworthy items. Open confessional criticisms by marginalized people include:

▪ “I offered to pay for positive coverage.”

▪ “A TV channel demanded Rs 2.5 lakhs to cover a Rahul Gandhi visit.”
▪ “I was told to pay up like others had.”
▪ “No one covers my party (BSP). So we pay.”
▪ “I paid Rs 50,000 for three featured articles.”
▪ “Every paper in my constituency was on sale.”
▪ “Take an ad if you want to get the news, we were told.”

It was advertising that financed the media originally and set it free from Government subsidies. Now that
advertisements liberated the press for giving us objective and accurate news, we hope the advertisements via paid
news will not take this freedom back via corporatization.

Sources:
“Indian Media: Irresponsible or Ignorant?” (http://www.viewpointonline.net);
“Paid News: The Bane of Ethical Journalism,” (http://esternpanorama.in);
“Paid News: The Cancer in India Media,” (http://theindianeconomist.com);
“Paid News: How Corruption in the Indian Media is undermining Democracy,” (http://www,realpolitik.in);
“Paid News Pandemic undermines Democracy,” (http://ww.thehindu.com);
“India’s Dodgy ‘Paid News’ Phenomenon,” (http://www.guardian.co.uk).
http://www.dnaindia.com/india/report-almost-700-paid-news-cases-detected-in-2014-lok-sabha-elections-1989485
http://www.aljazeera.com/indepth/features/2014/04/paid-news-clouds-india-elections-2014416121619668302.html
http://blogs.wsj.com/indiarealtime/2013/06/18/india-media-buries-paid-news-report/

Ethical Questions:
1. How can paid media reflect objective reality when it is obliged to patronize the views and news of the owners or of
those why pay? Explain.
2. What is the overall positive and negative impact of paid media upon people’s right for all important and objective
news? Discuss.
3. How do “paid media” violate the rights of the Indian consumer public? Explain.

11
4. How do “paid media” violate the duties of the Indian media to the consumer public?
5. How do “paid media” compromise news reporting and coverage rights in a democratic country?
6. Can media assume to be the national or state conscience of India without jeopardizing individual and collective
consciences resulting from one’s religions and cultures?
7. What corrective measures would you suggest for immediate enforcement such that democracy and freedom of the
press and of the citizens are safeguarded?

Case 14.4: Vedanta and Bauxite Mining in Niyamgiri Hills, Odisha

The seventh gram sabha held on Monday, July 29, 2013 at Phuldumer village in Kalahandi district, more than
500 km southeast of Bhubaneswar, Odisha, to overview the proposal for bauxite mining in Odisha’s Niyamgiri Hills
for Vedanta Group’s alumina refinery, voted against it for the seventh time. Out of the total 67 voters in the gram
sabha, 49 (including 32 women) were present. The resolution reflected the same view as the earlier six gram sabhas
held in the Rayagada and Kalahandi districts chosen by the state government for a referendum on Niyamgiri mining.
The previous six villages that turned down bauxite mining were Serkapadi (71 voters), Kesarapadi (64 voters),
Tadijhota (31), Kunakudu (19), Palbiri (29), and Baturi (62). Villagers yet to vote include Ijrupa (80 voters),
Khambesi (90), Jarapa (46), Lakhapadar (290) and Lamba (96 voters). The remaining five village gram sabhas are
scheduled for August 19, 2013, and are expected to vote along the trend set by the previous 7 villages.

Latest news: all twelve gram sabhas held in July-August 2013 have unanimously expressed opposition to the
mining operation in the hills saying it would violate their social, cultural and religious rights.

Opposition to mining even from a single gram sabha was enough to attract the attention of the Union ministry of
environment and forest. The Supreme Court ordered that all the twelve tribal villages in and around the Niyamgiri
bauxite hills will hold gram sabhas and decide on the mining issue. The tribals asserted their religious and cultural
rights over the hills. “The whole of Niyamgiri is our God Niyamraja,” the resolution said. The presiding deity,
Niyam Raja, however, is located at Hundaljali, about 10 kms from the proposed mining site. But the villagers in all
12 gram sabhas have claimed religious and cultural rights over the entire hill range – not just Hundaljali. “The
entire Niyamgiri range is sacred for us and is our source of our livelihood” was the common message and cry from
the villages thus far.

This resolution would also hurt the state-owned Odisha Mining Corporation (OMC) that was supposed to supply
bauxite from the hills to the Vedanta refinery. Vedanta Aluminum Ltd (VAL) had set up its one million ton per
annum Lanjigarh alumina refinery plant at the cost of Rs 5,000 crore in 2010 at the assurance of bauxite supply from
the Niyamgiri mine owned by OMC.

Vedanta will have to source bauxite for its Lanjigarh refinery from other states – a proposition that could cost an
extra Rs 600 crore to Vedanta Aluminum Ltd. A similar village protest could be expected in nearby bauxite
territories of Odisha or Jharkhand. Niyamgiri Hills have a bauxite capacity of one million tons per annum (mtpa).
Vedanta requires 3 mtpa. Cost of bauxite at Niyamgiri Hills would be Rs 700-750 per tonne. Sourced from outside
such as Jharkhand, Maharashtra and Chhattisgarh, bauxite would cost (including logistics and transportation)
between Rs 1,600-2,000 per ton, thus a likely extra burden of Rs 600 crore annually to Vedanta.

According to a top VAL official, the Apex court had pointed out in its Order over forest clearance for the mining
project in 2008 that opinion of gram sabha is required only for minor minerals and not for major ones like bauxite,
iron ore, and the like. The Supreme Court had only asked for settlement of individual and community religious
rights of tribals through gram sabhas. As far as religious rights are concerned, it should pertain to particular places
of worship, not the entire hill range, said the VAL official. VAL has applied for 26 alternative mines in the radius of
150 kms of Niyamgiri and also urged the state government to expedite processing of OMC’s pending applications,
especially those bauxite leases that fall under non-forest areas.

As of May 2014, Vedanta Resources said it would not look at mining bauxite from the Niyamgiri hills to feed its
Rs 5,000 crore Lanjigarh alumina refinery in Odisha until it got approval from the local community. This came after
the Indian government had rejected UK Vedanta’s proposal to develop a bauxite mine in a hill in Odisha, reviving
the environment versus development controversy in India. Vedanta had to shut down a proposed aluminum refinery

12
at Lanjigarh in Kalahandi district after failing to run it at full capacity—of one million tons per annum—due to a
shortage of bauxite, a key mineral needed to produce alumina. The one million tons per annum (mtpa) Lanjigarh
alumina refinery and mining in the Niyamgiri hills have been surrounded by controversies since the beginning.
Currently, Vedanta and its partner Odisha Mining Corporation (OMC) have seemingly capitulated to village
pressure.

Sources:
“Jolt for Vedanta as Mining in Niyamgiri Hills voted,” Business Standard, Kolkata, Tuesday, July 30, 2013, p.1, 8;
“Seventh Consecutive No to Vedanta Mining Plans in Niyamgiri Hills,” Hindustan Times, Tuesday, July 30, 2013, p.6.
http://businesstoday.intoday.in/story/vedanta-says-no-bauxite-mining-at-niyamgiri-till-local-nod/1/206027.html
http://www.livemint.com/Politics/RfscBlhoFhQDapFA6uU7UK/Government-rejects-Vedantas-bauxite-mining-plans-in-
Niyamgi.html

Ethical Questions:
1. Discuss the legality, ethicality and morality of the 12-village gram sabha strategy in stalling the Niyamgiri
bauxite mining project of national importance.
2. Do you suspect self-serving, vested, vote-bank-driven political interest groups mobilizing otherwise quiet
and peace-loving Niyamgiri and vicinity villages to block a national bauxite project? Discuss the ethics and
morality of such blocking.
3. What are the deontological, distributive justice and corrective justice issues involved in the Niyamgiri
bauxite mining project, and why?
4. What are the distributive justice and corrective justice rights and duties involved in the Niyamgiri bauxite
mining project, and why?
5. In a situation like this when multiple parties have legitimate rights and duties, how would you bring about
teleological, deontological, distributive and corrective justice to all stakeholders concerned?
6. Is there a better solution to this problem based on the ethical theories of virtue, and those of trust, and why?
7. Apply the theory of “eminent domain” in resolving the stalemate of Niyamgiri Hills. In relation to major
mineral mines (such as iron, bauxite, manganese, uranium) that belong to the nation than to any given
state, whose rights should prevail, those of the nation, the OMI, Vedanta Aluminum Ltd (VAL) or of the 12
villages in the vicinity of the mines, and why?

13
 The Ethics of Business Rights and Duties

Beginning in 2006, falling U. S. real estate values and the collapse of the subprime mortgage
market exposed an epidemic of overleveraging in financial credit markets. Faced with dramatic declines
in collateral values and capitalization and a consequent weakening ability to back their credit products,
major financial banks and institutions faltered. Many Wall Street icons facing insolvency and distress-
sale petitioned for federal bailouts or declared bankruptcy. By October 2008, despite massive injection of
funds by the United States and other countries, an enormous breakdown of trust in credit and financial
markets infected the global economy. The cumulative result of events during 2006-2008 was the Wall
Street meltdown and the great recession in the American and global markets, the worst since the Great
Depression of 1931. The cascading impact of this financial crisis on local, national, international and
global economies and markets is yet to be seen, experienced, and estimated, especially on the already
poverty-stricken regions and families (Hinze 2009: 161-162). The financial debacle violated the rights
and duties of millions of stakeholders, especially, those of the poor and marginalized nations.

Currently, heated topics of managerial debate in India revolve around labor rights and duties versus
management rights and duties. In the recent past, India has experienced a series of strikes in the
manufacturing units and other business sectors. The militant attack by labor at the Maruti Suzuki’s
Manesar Plant was not an isolated episode. Violence, bloodshed and killing are becoming commonplace
outcomes of worker protests. In some instances, the angered workers even assaulted the managers, killing
some of them. From Coimbatore in Tamil Nadu to Nagpur in Maharashtra to Ghaziabad in Uttar Pradesh
there have been “labor homicides.” These disturbing developments should challenge us to rethink and
renew our commitment to uphold labor rights and duties at all levels of the corporation. Instead of
commoditizing, monetizing and dehumanizing labor into mere factors of production that can be hired and
fired at will, corporate executives must constantly endeavor to humanize and transform the business
system, mindful of workers, fostering their human dignity, family commitment, and national responsible
citizenship.

India is an emerging Brick country with increased productivity and GDP, enhanced buying power
and augmented wealth and prosperity. But these benefits are distributed very unevenly across the labor
masses. Worker faith in the future can only be restored when the benefits of higher productivity translate
into a significantly better and more humane economy for the greatest number of people (Atkinson 2006).

The rest of this Chapter discusses the tropic of rights and duties under three heads: Part I: The

14
Nature of Business Rights and Duties; Part II: Respecting Business Rights and Duties, and Part III: The
Ethics of War: Rights and Duties of Citizens.

Part I: The Nature of Business Rights and Duties

Thomas Jefferson once wrote, "We hold these truths to be self-evident, that all men are created
equal, they are endowed by their creator with certain inalienable rights, which among these are life,
liberty and the pursuit of happiness" (Declaration of Independence of the United States of America, July
4, 1776). The Declaration said that “all men are created equal,” it did not mean that all were of equal
ability. It possibly meant that all men should be equal in their political rights. Even this was not clear in
the USA when even though every citizen had a right to vote, the rules of the game affected the ability and
likelihood of exercising that right. For instance, by making it more difficult to register to vote, or even to
vote, for certain groups (e.g., those without driver’s license, the usual ID in the USA) who were
discouraged from voting (Stiglitz 2015: 71-72).

Thus, in the Declaration of Independence, the Founding Fathers spoke of the “natural” inalienable
rights of life, liberty, and the pursuit of happiness. Today, we prefer to call these rights “human.” The
American Constitution upholds some fundamental God given human rights. Currently, almost all nations
and their Constitutions grant human beings the rights of life, liberty, property, and the pursuit of
happiness. To begin with, all corporate executives should recognize, protect and respect the human or
natural rights of all their stakeholders for life, liberty, property, and the pursuit of happiness.

Rights are important to our lives. We are ready to defend them, demand their recognition and
enforcement, and to complain of injustice when they are not complied with or violated. We use them as
vital premises in arguments that proscribe courses of action. When we receive no redress for violations of
our natural rights, we even consider civil disobedience. At a larger collective level we are even prepared to
undertake civil war. Thus human rights were the justification for the American and the French Revolutions
in the eighteenth century and for a succession of revolutions for political independence in the nineteenth and
twentieth centuries. The basic motivation for the American civil rights movement in the 1960s and the
women's movement in the 1970s was also the defense of human rights.

There are many approaches to the subject of rights and duties. One is based on prima facie
principles such as autonomy, nonmaleficence, beneficence, and justice (Beauchamp 1983; 1993;
Beauchamp and Childresss 2001). The others, in contrast, are based on the development of character and
virtue, as well as on social, religious, and cultural determinants of moral experience and moral agency
(e.g., Dubose, Hamel and O’Connell, eds. 1994). The former is more Western or Occidental, while the
latter is more Eastern or Oriental. We advocate a combined orientation, focusing on the plus points of
both approaches.

Allegedly, some, especially the young, focus excessively on rights, to the detriment of duties and
responsibilities. During the bicentennial year of the ratification of the Bill of Rights, Harper's asked a
group of scholars and political figures to "carry on the founders' conversation." They pondered whether a
"Bill of Duties" should complement the Bill of Rights, taking as their point of departure the claim that
although "the vocabulary of rights is nearly exhausted . . . the vocabulary of responsibilities has yet to
emerge" (Harper’s Forum, “Who Owes What to Whom?” February 1991: 43-44). Although most of the
respondents declined to endorse a bill of enforceable duties, some of them (along with other people)
launched a new communitarian movement and drew up The Responsive Communitarian Platform: Rights
and Responsibilities. The Platform "holds" that "a communitarian perspective (balancing rights and
responsibilities) must be brought to bear on the great moral, legal, and social issues of our time" and

15
suggests an array of duties and responsibilities to achieve that balance.

What are Rights?

The term “rights” is used in many different ways in relation to different types of rights versus duties we
have. Much would depend upon what legal, social, ethical, moral, philosophical or theological principles
from which we derive our rights (and duties). Often legal, social and moral rights come into conflict, and
hence, a common universal definition of “rights” is not possible or necessary.

A right is a claim we make on others regarding something about us, our human dignity, our life and its
basic needs, our talents and our accomplishments, and certain objects and property. Every right implies a
freedom to possess a claim, and a claim to safeguard that possession. Thus, a right is a conjunction of a
freedom and a claim-right.

Rights are basically relational in character: If A has a right against B regarding X, then B has a duty to
A regarding X. In such cases, all rights have a correspondence of duties. Every right of A in relation to
X implies a corresponding duty of B in relation to X. If we had a right to life, and others did not have a
duty to respect this right, our right to life would be futile. If consumers had a right to product safety, and
manufacturers and marketers did not have a duty to produce and market safe products, then consumer
rights to product safety would be meaningless.

Some regard rights as entitlements. Rights entitle you that you act in some way or that others act or
treat you in some way without asking permission of anyone or being dependent on other people’s
goodwill. Entitlement enables and empowers us to make claims on other people either to refrain from
interfering in what we do or to contribute actively to our well being. Voting, K-12 education, access to
colleges and universities, unemployment compensation, disability claims, veteran claims, pension claims,
severance compensation claims, senior citizen claims, healthcare claims, gainful employment claims,
safety and privacy claims, and the like may be better explained as entitlements or privileges rather than
rights. Entitlements are bestowed on us for being bona fide and one-time contributing citizens. Some
philosophers explain rights this way (e.g., McCloskey 1965; Wasserstrom 1964).

In this connection, moral philosophers distinguish several types of rights:

a) Natural rights are those fundamental human rights we have because of our human nature. These rights
accrue to us naturally because of our inalienable God-given human dignity. Such rights include right to
life, liberty, and the pursuit of happiness.

b) Moral rights are those rights justified by a moral system (e.g., Deontologism, Utilitarianism, and
Distributive Justice Canons). For instance, the right to work is not guaranteed by the American
Constitution, but is based on the moral principle that all human beings have a right to work in order to
sustain themselves and their families. Similarly, rights to education, healthcare, shelter, welfare, and the
like basic necessities may be construed as moral rights that belong to us as humans in a civilized society.

c) Positive rights or legal rights are those that law or society, state or government provide for its members;
e.g., the Bill of Rights for Americans; e.g.: the right to freedom of speech, the right to practice one’s
religion, and the right to vote. Economic rights (e.g., rights to subsistence, welfare, education,
employment) are often positive rights. Legal rights derive from and are rooted in law of a given nation.

d) Negative rights require others to forebear acting in certain ways such that the bearer of the rights can act
without impediment (e.g., All humans have negative rights not to be killed, raped, maimed, abused, or
emotionally destroyed). Positively stated, I cannot kill, rape, abuse or maim others because of their right
to life and the pursuit of happiness; I cannot trespass on my neighbor’s property since it impedes the

16
 neighbor from using it. These negative rights are important, precisely because they protect the basic
preconditions of participation in society. Often, the line between positive and negative rights is not clear.
For instance, the state may have to legislate (positive rights) in order to protect our negative rights.

e) Prima facie rights are presumptive rights that may not necessarily be actual or written rights in a given
situation but they just seem obvious (e.g., my right to listen to loud music in my car or backyard may be
overridden by somebody's right to peace and quiet).

f) Absolute rights are those rights that cannot be overridden (e.g., right to life, right to basic freedom) by
any utilitarian considerations. Most agree that few rights are absolute, total, and without infringement
on the rights of others (e.g., right to life, right to marriage, right to procreation, right to subsistence, and
other basic necessities). In principle, these absolute rights are inalienable, and cannot be overridden by
other rights. Most of these are natural rights that God endows us with.

Natural rights have three important properties:

• Universality: they are possessed by all persons regardless of race, color, nationality, creed, gender, age, or
socio-economic status.
• Unconditionality: these rights are not dependent upon any human or social condition such as particular
social practices, institutions or situations.
• Inalienability: these rights cannot be terminated or taken away from any human person. There is nothing
that humans can do to abdicate, relinquish or deprive themselves of such rights, nor can anyone deprive
them to others. That it, natural rights are imprescriptible; they cannot be prescribed, or de-prescribed; they
cannot be rightfully taken away, lost, or revoked; they are inviolable.

Since rights often conflict with one another and there is no widely accepted hierarchy of rights,
some moral philosophers have concluded that rights should be accorded prima facie validity. That
is, rights should be respected unless there are good moral reasons for violating them; the moral
force of a right depends on its “strength” in relation to other moral considerations applicable to the
context in question (Jones, Felps and Bigley 2007: 139).

Some divide rights into positive and negative rights. Positive rights require either the government or
other individuals to provide the bearer of the rights certain positive goods and opportunities. Economic
and political rights such as right to subsistence, right to education, right to vote, right to free speech, right
to freedom of religion, right to a healthy environment, and right to property are positive rights. Every
positive right implies a negative right. For instance, my right to subsistence requires: a) that the state and
others do not prevent me from getting what is necessary for subsistence (negative right) and b) that the
state and others provide me what is necessary for subsistence if we are unable to do so for ourselves
(positive right). Negative rights protect individuals from interference from both the government and the
people, while positive rights promote individuals in realizing the objective of those rights.

Thus, despite the great variation in classifying and defining rights, most agree that a right is an
individual’s entitlement for something (McClosky 1965). That is, a right is a justifiable claim or entitlement
against others that at the same time includes a liberty on one's own behalf (Nickel 1987; Rowman and
Allanheld 1985). The British philosopher, John Locke (1632-1704) defended the right to property as a
natural right. Moral rights are normative, justifiable claims or entitlements derived from some fundamental
moral principles. Moral rights are also rooted in the morality of a given society and in the nature of the
members of that moral community (Baier 1965; Durkheim 1957/1996). Most of these fundamental rights
are applications of the second version of Kant’s Categorical Imperative which stresses that human beings
are ends in themselves, worthy of respect, and should be always treated as such (de George 1999: 98).

Thus, we speak about ordinary rights at different levels:

17
 • Our freedom to make choices in a variety of situations; (e.g., ability or right to product variety);
• The absence of prohibitions restricting choices; (e.g., freedom from forced choices such as oppression,
suppression, colonization, deprivation, slavery, monopoly or monopsony);
• I am empowered or authorized to do something; (e.g., right of delegation);
• I own property that I use or dispose as I please; (e.g., right to property);
• I am free to express responsibly my opinion in public; (e.g., right of freedom of speech);
• I am entitled to free basic public education; (e.g., free K-12 public education in certain states);
• I am entitled for federal assistance when disabled (e.g., American Disabilities Act of 1988; Medicaid).

Most of these rights are positive and are provided by the state or government, and hence, they have
certain limits or boundaries imposed by one’s family, society, markets, state or the governments.

Against this initial statement of rights and duties, a number of ethical questions regarding Merrill Lynch
can be partially addressed:

• To what extent were Merrill Lynch’s top management aware of the crisis and did not do anything about it
proactively? The top management was bound by corporate duty to its stakeholders in forestalling and preventing
the debacle it faced. The top management violated the moral, positive rights of its stakeholders.
• To what extent was the top management bound by corporate duty and responsibility to protect the good-will
investments of its shareholders that lost almost everything owing to massive losses in market capitalization? The
top management was bound by corporate duty and social responsibility to the country and its global communities
for forestalling and preventing the debacle it created.
• How could the top management defend the corporate legitimacy of Merrill Lynch given its corporate greed for
massive irreversible bonuses, mostly in cash, while the rest of its stakeholder world suffered massive losses? The
top management had specific corporate rights, duties and social responsibilities to reasonably good asset
management worldwide (both tangible and intangible) at Merrill Lynch and protecting them from impairment.
These are positive, ethical, moral, prima-facie duties of Merrill Lynch towards its stakeholders.
• These duties and responsibilities derive from deontological, teleological, distributive justice, corrective justice,
procedural justice, protective justice, preventive justice, and beneficent justice.

Hollenbach (1979) provides a comprehensive schema of human rights from the viewpoint of general
justice. He distinguishes three types of rights (personal, social, and instrumental) that are refracted
through eight different realms of human concern (bodily rights, political rights, rights of movement,
associational rights, economic rights, sexual and family rights, religious rights, and communication
rights). Table 14.1 spells out these rights from the perspective of what human rights business executives
should be aware of and recognize in arriving at business turnaround and transformation decisions. Taken
together, these rights constitute a framework supporting human dignity, understood as dignity in and
supported by the community (Baier 1965; Hollenbach 1979: 98). The protection of this framework is
within the purview of general or legal justice and ruled by common good. Judges, community leaders,
business executives and local and federal governments will have to protect this framework, and specify
the content of each right. For instance, the employee’s right for a “living wage” (an economic right that is
both personal and social) is something that must be protected by private social contracts between
employers and employees, which is a matter of particular justice.

Table 14.2 lists some basic rights and duties of employers and employees in relation to several
contexts such as hiring, firing, promoting, retaining, quitting, complaining, due process, worker safety
and privacy. 1

1 There is some debate on every aspect of employee right. For instance, some companies may honor complaints and grievances
and treat them justly, but will not grant the right to due process to employees. Employers may dismiss workers only for good
reasons and only after a thorough and impartial hearing, but there is no contractual right given to the employee for due process.
That is, due process is granted by voluntary acceptance of certain personnel policies that allow due process, but not by granting
contractual rights to employees for due process. Thus, a dismissed employee may not challenge employers or have recourse by

18
The Theory of Natural Rights
The Preamble to the American Constitution upholds some God-given human rights. Some prefer to call
these as "natural rights." Today, almost all rights systems grant human beings the rights of life, liberty,
property, and the pursuit of happiness. These are rights that belong to all human beings or persons purely by
virtue of their being human. These come from God as creator of human beings; they are embedded and
endorsed in one’s human nature, and not from any earthly power such as monarchies, polities, cultures or
conventions. The idea of such natural rights goes back to ancient Greeks, who held that there is a “higher”
law that applies to all persons everywhere and serves as a benchmark or standard for evaluating the laws of
the states.

John Locke (1690) questioned the theory of natural rights. He imagined a primitive state of human
nature, which is the condition of human beings in the absence of any government. This could be a very
vulnerable state with no state or law to defend one’s rights. Locke then justifies the establishment of a
political state to remedy the defects of the state of human nature. Locke argued that human beings have
rights, even in the state of nature, but humans needed a state or government to protect those rights. Natural
rights are therefore protections against the encroachment of the state in certain spheres of our lives such that
individuals have moral standing as human persons independent of their role as citizens (Boatright 2003: 60).

Foremost among these natural rights, according to Locke, is the right to property. Even though God
provided the earth for all human beings, no one can actually make use of it without taking some portion as
one’s own private property. This is done by means of labor, skills and talents, which are also a form of
property. Thus property, the fruit of the labor of one’s body and the work of one’s hands, should be one’s
own. Locke’s theory, therefore, advocates the theory of free markets (long before Adam Smith). It was
important for the rise of modern capitalism.

In contrast to John Locke, Immanuel Kant (1724-1804) grounds rights on his conception of humans as
rational agents, that is, beings who are capable of acting autonomously. Such rights must be in accord with
universal law; that is, we have rights that justify our limiting the freedom of others only to the extent that
others have the same rights to limit us. (This is an application of Kant’s principle of Universalizability).
Kant believed that we have one fundamental innate right – the right to be free from the constraint of the will
of others insofar as this is compatible with a similar freedom for all. (Hence, this is a negative right of
noninterference and not a positive right to human wellbeing). From this fundamental right other subsidiary
rights follow such as right to equality, right to equal treatment, and right to property. In order to be rational
agents, it is necessary for human beings to be free from limitations imposed by the will of others such as
society or state or governments.

Complete freedom, however, is impossible because one person can be free only if others are constrained
in some way to respect that freedom. For instance, my freedom of speech is real only if everyone else is
prevented from interfering. That is, as rational agents we have rights whereby we can justly restrict others
from interfering with us when we behave as autonomous rational agents. [In this sense, we need society,
state or governments to impose such restrictions – this goes back to John Locke again]. Moreover, Kant’s
theory does not provide us with principles for determining what rights we do have. Thus, extreme violations
of noninterference (slavery, torture) granted, what minimal conditions or levels of freedom do we need in
order to be rational or autonomous agents?

right (but only by sufferance). Rights are a function of employer’s goodwill, and not a function of employee claims. Some
philosophers explain rights this way (e.g., Joel Feinberg 1970).

19
 Utilitarianism, in general, does not emphasize on individual autonomous rights as they interfere with the
greater good of the greatest number. John Start Mill defended rights that foster the overall good of the
society. Thus, following John Locke, utilitarian Jeremy Bentham (1845) rejected the idea that citizens have
any rights apart from what law happens to give them. On the other hand, Dworkin (1977) following John
Locke (1690) defends citizens' rights (e.g., natural or human rights) quite apart from any law. These rights
are inalienable or imprescriptible; that is, we do not give them to people, nor can we take them away from
them or abdicate our own rights away. Some rights can be even moral rights against their government.
Finally, there are others who hold that rights are simply entailments of moral obligations (e.g., Kant, Ross,
Frankena), or are simple derivations from our understanding of utility (e.g., John Stuart Mill).

According to Kant, deontology is the belief "…that there are certain sorts of acts that are wrong in
themselves, and thus morally unacceptable means to the pursuit of any ends, even ends that are morally
admirable, or morally obligatory." Example: mercy-killing the terminal patient to save from extreme
suffering; killing the rapist to save the victim of rape; killing the robber to save oneself; exterminating the
Jews to preserve German ethnic purity. Although at first glance this position seems to be a very moral
position, it fails to take into account consequences of decisions especially when the decisions are in grey
areas of large and complex business problems that do not have a clear right or wrong attached to them.
Examples: merging with business in the enemy territory during war; selling war weapons to enemy
countries; selling uranium deposits to produce nuclear bombs. These decisions however could materialize
in grave ethical issues if the outcomes are not considered.

On the other hand, Teleology, also known as utilitarianism only focuses on the ultimate outcome and
the greatest utility. The philosopher Alasdair Macintyre "…rejects the enlightenment view of ethics as
rational action based on duty or rules (deontological), or the greatest happiness for the largest number
(utilitarianism or consequentialism)." Both normative views are lacking a complete picture of ethical
decision-making. A motivation beyond utility and defining attention to character is needed to move past the
current stalemates and to move into a model that will help businesses make ethical decisions that are
embedded within the fabric of the organization and its people in light of new era of globalization.

Rights are valid moral claims that give us inherent human dignity (Feinberg 1970). Conversely, the
dignity of the human person means nothing if by virtue of natural law the human person has no human
rights apart from any law (Maritain 1944). Dworkin (1978) argues further: the collective goals of the state
(such as prosperity, legitimate national defense, political efficiency) are not a sufficient justification for
denying individuals their rights: rights are like trump cards that prevail over all other political
considerations. Gewirth (1984) argues that rights are the basis of morality: on the basis of generic features
of action, freedom and purposiveness, we can conclude that there are universal human rights.

A Hohfeldian Analysis of Rights and Duties

According to Newcomb Wellesley Hohfeld, an early 20th century American philosopher and
jurisprudential scholar, the nature and extent of a person’s rights are dependent upon the correlative duty
of others. Hohfeld (1913, 1919) argued that any legal right or interest we have could be of four types:
claim, privilege, power, and immunity, and reasoned that each legal right type relies on a structure of
correlatives and opposites. That is, each type of legal interest (e.g., claim, privilege, power, and
immunity) is accompanied by a matching interest held by at least one person. Hohfeld called this
matching interest a “jural correlative.” Thus, Hohfeld argued that the correlative of a claim is duty, the
correlative of a privilege is no-right, the correlative of a power is liability, and the correlative of immunity
is disability.

Further, each legal interest has also a “jural opposite.” Like jural correlatives, Jural Opposites are

20
 fourfold: right versus no-right; privilege versus duty; power versus disability; and immunity versus
liability. Whereas a jural correlative is what others must have if I have a legally protected interest,
a jural opposite is what I cannot have if I have a legally protected interest, both with respect to a
certain type of act (Hohfeld 1913: 32-33). Thus, if one has a right, one cannot simultaneously have a no-
right; if one has a privilege, one cannot also have a duty; having a power precludes having a disability,
and having immunity, precludes having a liability (Hohfeld 1913: 30).

Thus, Hohfeld distinguished four different levels of legal interests or concepts of rights and identified
each with its appropriate “jural correlative” and “jural opposite.”

1. The first concept of “right” is that of “claim.” Hohfeld uses the word “right” (or claim, demand)
specifically for the case in which one says: “X has a right to something from Y,” and its correlative is duty
(obligation) whereby “Y has a duty to do something for X, if X demands so.” This does not imply that
every right has a corresponding duty. What characterizes a right-duty relationship is that Y is obliged to
act only if X demands that Y should do so. There are some duties, however, such as duties of benevolence
or compassion, where no one has a corresponding right to demand their performance.

2. The second concept of right is a “privilege” or a “liberty,” the opposite of a duty, and its correlative is “no-
right.” Thus, “X has the liberty to do L” entails both that X has no duty to do or not to do L and that Y has
no right (i.e., no basis for claim) that X shall or shall not do it. Consistent with this, however, is that Y has
no duty to urge or prevent X from doing L. This is the case with two people in legitimate competition.
Hence, a no-right is distinct from a duty not to interfere, and correlatively X may possess both a liberty to
do L and a right (claim) that Y (and others) should not interfere. The right of freedom of speech, the right
to vote, and in general, the Bill of Rights, is privileges or “protected liberties” of American citizens.

3. The third concept of right is a “power,” a legal capacity for altering the jural relations of another person;
e.g., the power to make a will, power to transfer ownership by sale, or to appoint an agent. For instance,
“X has power against Y” implies that X can change Y’s legal relations in some way, and Y has liability with
respect to X. For example, an employer has power against the employee if the latter signs a contract of
employment under which he/she will work for the employer; the signing of the contract generates a set of
claim-rights and duties (as specified in the contract) between the employer and employee. The correlative
of power is “liability” (risk or subjection) that one’s jural relations may be changed, for better or for worse,
at the instance of the other person.

4. The fourth concept of right is “immunity” (or no-liability) when Y is “disabled” from making (or has no
power to make) changes in X’s jural relations. For instance, X has an immunity against Y means that Y
cannot change X’s relations in some way; i.e., Y has a “disability” with respect to X. For example, A has
signed a contract of employment with employer B, but A is a minor. Then A is immune from liability from
B; i.e., B does not have power to bring the set of contractual claim-rights between A and B.

From (1) follows: the [claim] right and the duty share the same content [e.g., “that Y stay off X’s
land”]. They share a content that is satisfied by “Y’s staying off X’s land” (Sreenivasan 2002). In this
sense, there cannot be a right without a duty; right in one person presupposes a duty in another person or
institution. The concept of right without corresponding duty is meaningless. As a corollary it also
follows that there is no right unless there is someone who is subject to that right accepts that duty (Cooray
1998).

From (1) and (2) follow: A right is an entitlement, while a privilege is available from sufferance;
the latter is a discretion vested in the person granting it. Hence, what are commonly called rights to
education, employment, welfare, healthcare, etc., are not rights, but privileges given to certain persons by
those who had discretion to grant them, such as employers or the government. A right to employment or
welfare is meaningless because there is no person under a duty to employ you or provide you with welfare
(Cooray 1998). Exhibit 14.1 presents the symbolic Logic of Hohfeldian analysis of rights and duties.

21
 Hohfeldian analysis can be easily applied to everyday events or properties. For instance,
following Exhibit 14.1, a simple assertion such as “As a shareholder, I have voting rights” implies the
following embedded legally protected interests or rights:

1. RIGHT: “The board must have elections each year.” I have a RIGHT to demand elections be held in a
timely way. The board has a correlative DUTY to hold elections. Without this right, I would have NO-
RIGHT.

2. PRIVILEGE: “Shareholders may vote as they please.” I have the PRIVILEGE to vote as I choose, or just
not to vote. The board has NO-RIGHT to demand that I vote a certain way. Without this privilege, I
would have a duty to vote only in a particular way.

3. POWER: “Shareholders can vote to mend the bylaws.” I have POWER (shared with other shareholders)
to amend the bylaws, for instance, to change the venue, date and timing of annual meetings. The board has
a LIABILITY to abide by shareholder-initiated bylaw changes, if so specified. Without this power, I would
be DISABLED from changing the bylaws; that is, I would be disempowered.

4. IMMUNITY: “The board cannot manipulate the voting process during an insurgency.” I have
IMMUNITY from the board manipulating with the voting process. That is, the board is DISABLED from
interfering with my voting rights. Without this immunity, I would be LIABLE to (i.e., forced to accept) the
board’s actions.

Exhibit 1 4.1: Hohfeldian Symbolic Logic of Rights and Duties

Legally Jural Jural Jural Correlates Illustrated Jural Opposites Illustrated
Protected Corre- Opposite Symbolically Symbolically
Interest lative
or Right
Claim Duty No-right X has a claim to demand P from Y; X has a claim to demand P from Y;
Y has a duty to give P to X, if X Without this claim, X would have no-
demands P; right to demand P from Y.

Privilege No-right Duty X has a privilege to obtain or not X has a privilege to obtain or not
obtain P from Y; obtain P from Y;
Y has no-right to force P on X. Without this privilege, X will have a
X has no right to force P from Y. duty to demand P from Y.

Power Liability Disability X has a power over Y in regard to P. X has a power over Y in regard to P.
Y has liability to abide by X in Without this power, X would be
regard to P. disabled by Y in regard to P.

Immunity Disability Liability X has immunity against Y in X has immunity against Y in relation
relation to P; to P;
Y is disabled to impose P on X. Without this immunity, X would have
liability to Y regarding P.

Also, using Hohfeld’s logic we can define property ownership precisely. For instance, ownership of
physical objects (e.g., property, investment items) would be defined as a bundle of legal properties (or
jural relations) as follows:

• A claim to exclusive physical control of the object against other persons; that is, other persons would have
a duty not to use the object in any way, or would have no-right to take any actions that would harm or
destroy it.

22
 • A privilege or liberty to use (or consume, destroy) the object; and others will have no-right or duty to
oppose or prevent or restrain such use.
• A power to transfer all (or some) of these rights to another person or persons (via sale, gift, rent, lease, will,
legacy); others will be liable for blocking such a transfer or disabled from doing it.
• An immunity from the involuntary expropriation of these rights by other persons; others will be disabled
from doing it and held liable for such appropriation.

That is, by Hohfeldian framework, if I own a piece of land, a) then I have a claim-right that no one
can interfere with the exercise of these liberties; b) I must have certain privileges (or liberties) as to what I
can do with it; c) I also have power with respect to other parties: for example, I can transfer the right to a
third party, under certain conditions; d) I have immunity in that my rights with respect to my property
cannot be altered by others unilaterally. This is how Hohfeld (1913, 1917, 1919) would define property
ownership. Subsequent authors (e.g., Honoré 1961), however, have added further relations such as the
duty that the object not be used to cause harm, and the liability that the object might be seized to satisfy a
judgment. Legal rights do not include a right to be irresponsible (McClain 1994). But the basic
Hohfeldian concept of property is sufficient: it does not define as a relation between the owner and the
thing, but as an abstract “bundle of rights” given by the state or the public; it also implies that “private”
and “public” property concepts are not entirely different (Grey 1980: 85, n. 40).2 Thus, generally, any
right is best understood when disaggregated into claims, privilege or liberties, powers, and immunities.

Hohfeld insisted on the differences between natural and legal relations; he even believed that there
was a world of legal relations alongside the world of natural relations. However, Hohfeld’s four
distinctions of right express primarily “legal relations” between persons, and not natural relations. That
is, law lays down the rules and conditions under which persons may enter into binding relations with
another, by contract, joint venture, marriage, sale, alliance, and so on. Hohfeld also believed that most
jural relations could be satisfactorily analyzed only as complex bundles of relations of different types.3

Hohfeld argued that legal rights are usefully understood in terms of several possible pairs of jural

2 There is a long standing debate over whether the corporation is the private property of the stockholders who choose to do
business in the corporate form, or if it is a public institution sanctioned by the state and legitimized by the society for some social
good. The former position is called the property rights theory, and one’s right to incorporate is considered as an inherent
component (hence, also called inherence theory) and extension of one’s property rights as a person. The latter view is called the
social institution theory (Boatright 2000: 348) that believes that one’s right to incorporate is a privilege conceded by the state
(hence, also called concession theory) whereby all corporations have an inherent public dimension. As an intermediate position,
the contractual theory holds that the right to incorporate or contract belongs to several constituencies such as the stockholders,
suppliers, employees, customers, and other investors. The private property theory held sway as long as the number of
stockholders was small and as long as stockholders managed the company. However, over the years, with the number of
stockholders of a corporation dramatically increased, and the management of a company went into the hands of a few
professional executives, there has been a separation between ownership and control. With this separation, shareholders
relinquish both control and responsibility, and the corporate managers assume the position of trustees for the resources of a
modern corporation. While the managers are still accountable to the shareholders whose trustees they are, they have also an
obligation to the public (e.g., employees, suppliers, customers, governments) who are affected by the corporation. [See Boatright
2000: 348-56 for further insights into these positions].

3
This notion comes very close to that of H. L. A. Hart. Hart (1954) argued that it is a mistake to ask for a definition of
“right” or “duty” because legal words can only be illustrated by considering the conditions under which certain statements (such
as “X has a right to $10 from Y”) are true. The conditions are: a) there is a legal system in existence, and b) under the rules of
that system some person Y, given the events that have actually happened, is obliged to do (or abstain from doing) something for
X provided X or his agent chooses that Y should. Under these conditions, the statement “X has a right” is used to draw a
conclusion of law in a particular case falling under those rules. However, not all rights are conclusions of the law. For instance,
the Second Amendment to the U. S. Constitution (the right of the people to keep and bear arms shall not be infringed) and the
Sixth Amendment (in all criminal prosecutions the accused shall enjoy the right to a speedy and public trial) are not conclusions
of law, but “rules” of law.

23
relationships or correlatives. Of particular interest with respect to the “immunity critique” are the first two
pairs: right/duty and privilege/no right. In the first pair (for Hohfeld, the only technically proper usage of
the term "right"), my right or claim to X or to do X correlates with your duty either to provide me with X
or not to interfere with my doing X. Although not all legal rights entail legal duties on the part of others,
and vice versa, the "logical correlation" of legal rights and legal duties, at least with respect to rights
having the structure of "claim-rights," seems "logically unassailable." In Hohfeld's second pair of jural
relationships, privilege/no right, my privilege or liberty to do X correlates with your having no right to
require that I do otherwise nor any legal claim against me regarding my privileged action (or inaction).

As another illustration of assurance of learning model 4 (AOL4), and using Exhibit 13.1, we check
the last three cases 14.2, 14,3 and 14.4 situations against the four legally protected interests or rights of
Hohfeld. We do this in Exhibit 14.2.

Hohfeldian Analysis and Legal Realism

Based on Hohfeld’s analysis, a distinction might be made between first-order relations (such as
claims-duties and privileges-no-rights) and second-order relations (such as power-liabilities and
immunities-disabilities). The first-order relations can be expressed in terms of prescription or the absence
of them (permissions), while the second-order relations define the conditions under which actions will be
legally significant, and hence, under which new rules and changes in legal relations can be made. If
powers and immunities can be treated as rights at all (e.g., power to offer a sale, and immunity of
ambassadors from libel proceedings are often referred as rights), then some rights are neither correlated to
sanctioned duties nor expressive of the absence of such duties. Such rights require a conception of law
that is not simply prescriptive and permissive but regulatory, in the sense that the law lays down
conditions under which persons can enter into binding relations with one another.

It follows from Hohfeld’s work that what constitutes a legally protected interest (e.g., claim,
privilege, power or immunity) is arbitrary, and is not defined by the nature of things; rather it is defined,
shaped and created by mutually defined legal and political rights, powers and duties. Concepts like
private property, consent, and liberty do not simply re-present previously existing things in the world;
rather, they result from the system of differences between legal and moral concepts, and in so doing
constitute the political world we live in (Balkin 1990: 5).

When one asserts that A has a right to contract (or not to contract) with B, one is simultaneously
making a statement about B’s rights. The allocation of rights and duties between A and B is not derived
from the inherent meaning of contract, consent, duress, or bargain, but is a demarcation of power created
by the state’s common law for which the state is ultimately responsible (Cohen 1933: 586). The concept
of property itself has no essential content, but is merely defined in opposition to other rights of contract,
criminal law, and so on. Contract and property rights do not refer to real entities, but to particular
contingent allocations of power created and enforced by state actors that divide up the permissible forms
of private power. It is the state and the law that gives property, liberty, power and immunity their
meaning and relevance. This position is called legal realism, an offshoot of Hohfeldian analysis (Balkin
1990).

Thus, according to Hohfeld, a right is an entitlement, while a privilege is available from sufferance.
The latter is a discretion vested in the person granting it. Hence, what we commonly call rights to vote,
education, or employment are not really rights but privileges given to certain persons by those who had
the discretion to grant it, such as employers or governments. A right to employment is an abstraction that
is meaningless because there is no one who has an enforceable duty to employ us.

24
 Exhibit 14.2: Analyzing Cases 14.2, 14.3 and 14.4 using Hohfeldian Analysis of Rights &
Duties
Legally Protected Interest Merrill Lynch (ML)
or Right
The top management at ML has
a duty-claim to pay its top
Jural
brokers a reasonably fat
Correlate as compensation for their
Duty successful brokering activities,
if the latter demand it.
Claim But the top management at ML
has no right to pay unjust or
Jural
exorbitant compensation for the
Opposite as same brokerage activities at the
No Right expense of its shareholders and
stakeholders.
If the top management at ML
has a privilege to pay its top
broker managers reasonably fat
Jural compensation for their
Correlate as brokerage initiatives, then it has
No Right no right to lavish them with
exorbitant compensation for the
Privilege same.
In which case, the top
management at ML has a duty
Jural
not to pay unjust or exorbitant
Opposite as compensation for the same
no Duty brokerage activities, especially
at the expense of its
shareholders and stakeholders.
The top management at ML has
some power over fixing salaries
Jural
and commissions to their top
Correlate as brokers, but they also are under
Liability liability not to harm other
stakeholders.
Power The top management at ML has
some power over fixing salaries
Jural
and commissions to their top
Opposite as brokers, but they also are
Diaability disabled from doing so owing to
their duty to other stakeholders.
The top management at ML has
some immunity from being
Jural
prosecuted for granting fat
Correlate as compensation to their top
Disability brokers, but they also are
disabled from doing so as not to
harm other stakeholders.
Immunity The top management at ML has
some immunity from being
Jural
prosecuted for granting fat
Opposite as compensation to their top
Liability brokers, but they also are under
liability if they did so and
thereby proved harmful to
other stakeholders.
25
Paid Media
Paid media may have some duty
to satisfy their paying clients in
terms of covering news and
information that positively
features them, especially if the
latter demand them.
But by the same token, paid
media has no right to feature the
clients exclusively nor portray
the competition or opponents
negatively, or deny the general
public’s right for a broader
coverage of news and services.
Media may have some privilege
to accept paid media contracts
but they have no right to give
them exclusive coverage on
several channels thus virtually
shutting the public from
alternate news and information
sources.
In fact, paid media has the duty
not to exclusively feature the
client at the expense of other
claimants and the general
public’s right for news on other
parties and issues.
The paid media has some power
to cover their clients in news
coverage, but it is under liability
not to harm by blocking the
completion and opponents
thereby.
Paid media has some power to
cover its clients in coverage, but
it is thereby disabled from
exclusively doing it because of
its duty to protect the rights of
the general public, competition
or opponent parties.
The paid media has some
immunity from being sued for
over-covering its paying clients,
but it can also be disabled from
doing so, especially if thereby it
is forced to under- or not cover
opponents or competition.
The paid media has some
immunity from being sued for
over-covering their paying
clients, but they can also be
under liability for doing so,
especially when thereby they
undercover opponents or
competition.
Vedanta and Bauxite
Mine Rights
The Odisha Mining
Corporation (OMC) has a duty
to honor Vedanta’s claims on
the Bauxite mines because of its
prior contract with Vedanta
and especially if Vedanta
demands them.
But Vedanta has no right to
claim Bauxite mining rights
unconditionally given villager-
rights over the same and
subsequent to Supreme Court
(SC) legislation that protected
Village rights.
The top management at
Vedanta may have some
privilege over Odisha Bauxite
mines because of their contracts
with OMC, but they have no
right to mining that are absolute
and unconditional.
Moreover, Vedanta has a duty
not to claim Bauxite rights
unconditionally given that
villager-rights over the same
mining area have been upheld
by subsequent SC legislation.
Vedanta has some power to
claim its mining rights in
Odisha, but it is also under
liability not to violate the rights
of the villagers over the same
mines.
Vedanta has some power to
claim its mining rights in
Odisha, but it is also disabled
from doing so owing to their
duty to honor the rights of the
villagers over the same mines.
Vedanta has some immunity in
claiming Bauxite mining rights
from OMC, but they can also be
disabled from doing so, if
thereby they also violate the SC-
protected rights of the villagers
over the same mines.
Vedanta has some immunity in
claiming its legal Bauxite
mining rights from OMC, but
they can are also under liability
for doing so, if thereby they also
violate the SC-protected rights
of the villagers over the same
mines.
Stakeholder Hohfeldian Rights in Corporate Situations
Table 14.3 is a sample application of Hohfeldian “symbolic logic” (see Exhibit 8.1; Balkin 1990) to
derive rights and duties of major stakeholder groups under a merger, acquisition, divestiture, turnaround
or bankruptcy situation. The conflicting rights involve basically two parties: the corporation which
undertakes merger, acquisition or turnaround and its executives versus the corporation’s stakeholders
(e.g., customers, employees, governments, creditors and suppliers). The rights and duties of each
stakeholder group are predicated along a) the four Hohfeldian concepts of right: claims-right, privilege,
power, and immunity and b) under each concept, along corresponding jural correlates and jural opposites.

Thus, for instance, under a claim-right and its jural-correlative duty, the responsibilities of executives
include respecting the rights of all stakeholders by providing them the right financial information (e.g.,
accurate financial reports such as profit and loss statements, balance sheets and cash flow statements) at
the right time, by not over-marketing or inappropriately promoting the company when it is declining or
bankrupting, and the corresponding duties of the stakeholders would include seeking clear and adequate
information on corporate performance, studying it, so that they could make timely decisions of investing
or disinvesting in the said corporation. Assuming an equally balanced relationship between the
turnaround executives and the stakeholder public, under claim-right and its jural opposite no-right,
turnaround executives have ‘no-right’ to deceive stakeholders by false financial statements, round trip
sales, exorbitant compensations (e.g., high severance compensations such as golden parachutes or
handshakes) or any other fraudulent practices or declarations, while the stakeholders cannot claim
ignorance of the turnaround situation when by due diligence they must assess their commitments to the
failing corporation.

Under privilege and its jural-correlative no-right, it is clear that turnaround executives have no-right
(but only a privilege) for claiming turnaround privileges of plant closings, massive employee layoffs,
payroll freeze or deferrals, tax havens, creditor-waivers, or bankruptcy provisions. Similarly, affected
stakeholders have ‘no-right’ to invest or disinvest in the failing companies either as employees,
customers, suppliers or creditors. Under privilege and its jural opposite “duty,” failing corporations or
their turnaround executives have a duty to stakeholders to turn the company around, not to abuse the
Chapter 7 or 11 bankruptcy provisions, and the stakeholders have a duty to be forewarned about the
distressing situation in the company they have stake in.

Under the third concept of right as ‘power’ different rights and duties follow. Turnaround executives
have the power to withdraw their operations anytime or sell them to approved buyers under prior
stipulated conditions, but they also bear the liability for creating “ghost towns,” significant labor layoffs,
and other undesirable social externalities. Similarly, stakeholders are empowered to equitable
compensations for what the corporation owes them. The jural opposite of power is disability. If
stakeholders claim too much power and interfere with honest turnaround operations, then they could
disable turnaround executives from the proper functioning of their duties. At the same time, if turnaround
executives deluge stakeholders with false financial reports or other fraudulent business practices, they
equally disable the stakeholders from their honest involvement in and compensation from the failing
corporation.

Lastly, under the fourth concept of right as ‘immunity’ there arise several forms of possible
‘disability’ and ‘liability’ outcomes to both executives as well as stakeholders. Thus, on the one hand,
while legally approved turnaround executives are immune from unfair external interference from
stakeholders and governments, they are also disabled from immunity and thus held liable for unjust and
illegal turnaround operations (e.g., deprivation of rightful compensation to stakeholders or for degrading
the social and/or physical environment). Equivalently, legally approved stakeholders may seek immunity

26
from disability of further losses by being timely warned and counseled on the distress or bankruptcy
situation of the company they have invested in, and they will incur liability if they unduly interfere with
business turnaround operations. When immunity is linked with its jural opposite of liability, then
turnaround executives may he held liable for generating to many losses or engaging in too many unjust
practices in bringing about turnarounds and transformation. Under the same conditions, stakeholders
would not be immune from liability if they unduly interfere executives in the execution of their duties.
Table 14.4 represents another sample application of stakeholder rights and duties in relation to the
Hohfeldian concepts of right and duties.

Post-Holocaust Jewish Philosophy on Rights and Duties

From a theoretical and legal point of view everybody has the same rights and the same
responsibilities (rights and responsibilities are just two sides of the same coin). However, argues
Bouckaert (2015), this is not the case from a genuinely ethical point of view. Emmanuel Levinas (1974)
and Hans Jonas (1979)—Jewish philosophers deeply shocked by the Holocaust and the failure of Western
ethics to prevent these eruptions of irrational violence—developed after World War II a notion of
responsibility that does not start from the point of view of universal rights and principles, nor from a
conceptual representation of a global and interdependent world, but from the contextual experience of the
vulnerability of life.

For Emmanuel Levinas, the original position that awakens our sense of justice and responsibility is
not a hypothetical situation under the veil of ignorance, as is the case with Rawls’ Theory of Justice
(Rawls 1971). The original position is a concrete position where I am personally affected by a non-chosen
confrontation with other peoples’ misery and vulnerability. This may happen when I am witness to an
accident, or confronted with seeing a demented person losing his or her dignity, or have a conversation
with someone who has lost hope. In such traumatic confrontations a feeling of being committed to doing
something is awakened and a sense of compassion and responsibility is left behind. Of course I can resist
the call to action or the flow of compassion. A powerless and vulnerable person can only touch but not
eliminate my freedom and capacity to act. We can neutralize our moral feelings. But the point here is to
realize that there is a primary sense of responsibility which is awakened by an immediate and non-
conceptual experience of the vulnerability of other people. This contextual experience of vulnerability
may grow into a universal ethic of compassion and responsibility.

While according to the philosophy of Levinas the original position is restricted to face-to-face
confrontations with others, Bouckaert (2015) argues we may enlarge the perspective. Today many people
do feel a deep sense of ecological commitment that has been awakened by observing how our planet is
fragile and threatened. The effect of this observation of planetary fragility is not only a sentiment of
responsibility but a call to act in a responsible way. In this transition from inner feeling to concrete
ecological action we need our rationality. We have to conceptualize our intuition, make a tradeoff
between different aims and allocate time and scarce means. But what is clear is that there is a spiritual
sense of responsibility that precedes the stage of rational conceptualization and implementation. When
applying this understanding to business ethics we must not focus too much on the rational foundation
underlying the ‘CSR principles’ but pay more attention to observing the vulnerability of people and the
planet. This kind of sensitive observation awakens a spiritual commitment to change things.

According to Hans Jonas, the primary sense of responsibility in our age has to be triggered from our
modern experience of fear. He criticizes the optimistic views of Max Bloch (1959) in his “Das Prinzip
Hoffnung” that we should imagine and conceptualize the future as a utopian project. In his writings Hans
Jonas developed a sense of responsibility generated by a ‘heuristic of fear.’ Confronted with the
planetary impact of modern technology and modern lifestyles we should realize that our planet and the
lives of future generations are under threat. As future generations do not exist as subjects who can claim

27
their rights, they are completely dependent on our good will and are thus extremely vulnerable. We may
be concerned for our children, grandchildren and great grandchildren but it is difficult for us to imagine
human persons four or five generations away.

Hence the more distant future generations are from us, the more they are voiceless and
‘unimaginable.’ They have no rights as there is no empirical subject to hold those rights. Nevertheless, as
we realize their increasing vulnerability we feel a sense of interconnectedness and responsibility for them.
We imagine them as future beings and give them virtual rights. But this is only possible because we have
already a notion of responsibility to them, which implies that future generations already exist as objects of
our responsibility before they become subjects and holders of rights. In defining sustainability as our
responsibility for future generations we should realize that this responsibility is not founded in claims to
rights but in the virtual presence of future generations as vulnerable beings.

Sustainability as ‘caring for future generations’ illustrates very well that, on the one hand, a spiritual
commitment anticipates every declaration of rights (and makes such a declaration possible) but, on the
other hand, this spiritual commitment must be implemented by giving people rights and by transforming
the economy according to these rights. Applied to business ethics this means that stakeholder
management and business plans must always be preceded by a spiritual commitment to future
generations. I call it a spiritual (and not just a moral) commitment because it does not follow from
recognizing existing rights or general principles but rather comes from a personal awareness of the
vulnerability of our planet and of future generations. This personal awareness that connects that which is
within us to the common good is the first and most intrinsic incentive which can lead us to set up a social
praxis of sustainability in business. However, if business leaders fail to take up this challenge,
government and the law should protect the virtual rights of future generations and enforce an ethic of
sustainability (Bouckaert 2015: 21-24).

The Sociology of Rights versus Responsibilities

In his book, The Ethics of Authenticity (1991, Harvard University Press), Charles Taylor argues that
modern society is affected by three malaises, each of which has its implications for rights and duties.

• Individualism: We live in a world where people have a right to choose for themselves their own pattern of life, to
decide in conscience what convictions to espouse, and to determine the shape of their lives. These rights are generally
defended by our legal systems. In principle, people do not feel obliged to the demands of supposedly sacred orders
(e.g., religion, ancestors, hierarchies, and old customs) that transcend them. Modern freedom is won by breaking
loose from older moral horizons – a facile moral relativism that allows everybody to have his or her own values
without a proper norm. People do not see themselves as part of a larger order (e.g., the society, the great “chain of
being,” or the cosmic order). Modern freedom came about by discrediting or “disenchanting” such orders that gave
meaning to our world and activities. People seem to have lost a sense of higher purpose, of something worth living for
and dying for. People lost their broad vision as they narrowly focused on their individual lives. The dark side of
individualism is a centering on the self (or self-absorption or the culture of narcissism) that both flattens and narrows
our lives, deprives us of meaning, and makes us less concerned about others or society. Currently, individualism has
newer formulations: the “me generation,” the “permissive society,” and the “narcissistic youth.”

• Instrumentalism: This is the primacy of instrumental reason – a rationality that calculates everything in terms of
costs and benefits, maximum efficiency, or the best cost-output ratio as a measure of success. Instrumentalism is a
consequence of individualism. When you give up higher orders of purpose, meaning, society, and destiny, you
automatically succumb to use everything (including people, labor, values, morality) as instruments or means to an
end, as factors of production for maximizing output, wealth and economic growth, even putting dollar assessment
value on human lives (See Bellah et al. 1992: 114-119 for a discussion of such absurdities). Accordingly, technology
and its power dominate our life, medicine and healthcare, our family and society, birthing and parenting, our
schooling and learning, working and careers; that is, our lives and values are getting progressively “commoditized.”
We are giving up the “manifold engagement” of interacting human beings to the individualism of “device paradigm”
of play-stations, cell phones, laptops, i-pods, i-phones and i-tunes, Facebook and What’sApp – which often translate
to what Nietzsche called “the procurement of frivolous comfort” (Borgman 1984: 41-42). Far from freeing us,

28
 instrumentalism can enslave us to secularization, commoditization, monetization, standardization, ruled by
technology and materialism – what Max Weber called the “iron cage.” The iron cage flaunts moral deliberation and
ethical considerations – the real elements that can free us.

• Structurism: As a result of individualism and instrumentalism, our lives are over-structured. The institutions and
structures of the industrial-technological society severely restrict our choices. For instance, ecological degradation
restricts our choices for clear air and water; over fertilization and pesticides control our choices for clean and
organic food and make them more expensive and scarce. Also, the design of certain cities (e.g., Detroit) makes it
hard to function without a car, particularly if public transport has been eroded in favor of the private automobile.
Structurism entails a great loss of freedom, and with the loss of freedom comes loss of rights and duties. This can
even demotivate active citizenship, participation in the government, perhaps allowing for the “sift despotism” (Alex
Tocqueville) of those few who want to be politically active – this may put us in danger of losing political control over
our destiny, something we could exercise in common as citizens. This is what Tocqueville called a loss of “political
liberty” that could threaten our dignity as citizens.

Thus, according to Taylor (1991), the first malaise of individualism results in loss of meaning, the
second malaise of instrumentalism implies a loss of freedom, and the third malaise of structurism forces a
combination of a loss of meaning and a loss of freedom – the loss of human personhood. Each malaise
diminishes our sense and obligation of rights and duties. The combination does not result not only in a
flawed epistemological position about the limits of reason of what one can establish, but also a bad moral
position that mandates that one ought not to challenge another’s values. Thus, this self-stultifying moral
relativism of individualism, instrumentalism, and structurism implies the following rights and duties
(Taylor 1991: 14-18):

• Everyone has a right to develop one’s own form of life, grounded on one’s own sense of what is really important or of
value.
• People have a duty (or are called upon) to be true to themselves and to seek their own self-fulfillment.
• What this consists of, each one, must in the last instance, determine for oneself. No one else can or has a duty or
should try to dictate its content.

This culture of authenticity is a form of liberalism of relativism and individualism, or at best, a

liberalism of neutrality. Society and governments must remain neutral as to what constitutes the “good
life.” This flawed epistemological position of seeking one’s own truth and form of life is bounded by
one’s limits of reason. It can fragment society into cultures of cocoon-enclaves isolated and independent
from one another. The First Amendment rights were no rights to individual liberalism; they invoke such
traits of character as self-control, self-restraint, and respect for the rights of others, as well as a
willingness to assume responsibility for oneself, for one's family, and for the health of America's
institutions. Freedom, in other words, depends on both responsibility as autonomy and responsibility as
accountability.

McClain (1994) argues that communitarian and liberal talk about responsibility emphasize two
different, although related, meanings of responsibility: responsibility as accountability and responsibility
as autonomy.4 According to him:

• Responsibility as accountability connotes being answerable to others for the manner and
consequences of the exercise of one's rights.
• Responsibility as autonomy connotes self-governance; that is, entrusting the right-holder to exercise

4 There are many other conceptions or constructs of responsibility. For example, there is legal responsibility for wrongs
committed in criminal law or responsibility in standards of care and causation in tort law. At the same time, distinctions between
the different meanings of responsibility are helpful. For instance, H.L.A. Hart (1968) in “Punishment and Responsibility” 211-12
(1968) distinguishes between role responsibility, causal responsibility, and capacity responsibility. Further, the nature of
responsibility and irresponsibility must be discussed with the question of human free will versus determinism. [See Chapters 10
and 11 of this Book for additional details].

29
 moral responsibility in making decisions guided by conscience.

The language of rights is morally incomplete. To say that "I have a right to do X" is not to conclude
that "X is the right thing for me to do." For example, I may have a First Amendment right to address
others in a morally inappropriate manner, since the First Amendment Rights give reasons to others not to
coercively interfere with the speaker in the performance of protected acts. But they do not in themselves
give me a sufficient reason to perform these acts. There is a gap between rights and rightness that cannot
be closed without a richer moral vocabulary - one that invokes principles of decency, duty, responsibility,
and the common good, among others (see Chapter 07). We need, instead, a refined logic of rights, one
that would keep "competing rights and responsibilities” in proper balance. In addressing rights we need to
keep minimally the following perspectives:

• Whether a particular issue is best conceptualized as involving a right;

• If so, the relation a given right should have to other rights and interests;
• The responsibilities, if any, that should be correlative with that right;
• The social costs of that right, and
• What effects a given right can be expected to have on the setting of conditions for the durable
protection of freedom and human dignity.

If liberal rights talk seems silent about responsibility, as the communitarians claim, it may be due in
part to their very different conceptions of responsibility. 5 Thus, normal objections to the “rights talk” are
(McClain 1994):

• The rights talk, in its absoluteness, promotes unrealistic expectations, heightens social conflict, and
inhibits dialogue that could lead toward consensus, accommodation, or at least the discovery of
common ground.
• Rights imply responsibilities, and strong rights presume strong responsibilities. But in its silence
concerning responsibilities, it seems to condone acceptance of the benefits of living in a democratic
social welfare state, without accepting the corresponding personal and civic obligations to contribute
to that state.
• In its relentless individualism, it fosters a climate that is inhospitable to society's losers, and that
systematically disadvantages caretakers and dependents, young and old.
• Our rights talk encourages a careless and exaggerated way of speaking and thinking about rights, as
if liberty meant license.
• In its neglect of civil society, it undermines the principal seedbeds of civic and personal virtue.
• In its insularity, it shuts out potentially important aids to the process of self-correcting learning.
• All of these traits promote mere assertions over reasons-giving.

Individual rights against government interference or the constitutional rights often used as examples
in the “irresponsibility critique” might be understood as taking the form of Hohfeld's first pair: an
individual right to do or not do X and a government duty not to interfere with that right. Arguably, one
could also regard constitutional rights as captured by Hohfeld's second pair: an individual liberty to do or
not do X and no right or authority for government to interfere. In either account, there is a realm of
activity or inactivity that is immune from legal interference or sanction, or at least from any claim of right
that one perform or refrain from activity (McClain 1994).

5 For details about the “rights talk” see Glendon (1991), Rights Talk: The Impoverishment of Political Discourse (1991). Mary
Ann Glendon is a law professor at Harvard Law School. For a review of communitarianism see Etzioni (1993), The Spirit of
Community: Rights, Responsibilities, and the Communitarian Agenda 161. Often described as the "father" of the new
communitarian movement, Amitai Etzioni is a professor of sociology at George Washington University.

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 Part II: Respecting Business Rights and Duties
Perhaps the most basic institution of civil society, the family, which should be a moral educator
schooling the next generation of citizens in the interplay of rights and responsibilities, is in peril and that
"the second line of defense" (schools and colleges) cannot alone prevent the decline of a responsible
citizenry. Although schools are reluctant to engage in moral education and character formation, they
must do so to combat the "moral deficit" among young people. There seems to be among the young an
increasing tendency to express needs and wants in terms of rights and to invoke rights talk, a tendency
summed up by social critics and popular media as "rights inflation" or a "rights explosion." For example,
people call for new rights without regard to the duties and obligations that a right creates (e.g., asserting
affirmative rights to health care without considering the implications for the public finance).
Exaggerated rights talk only shuts down debate and makes compromise difficult but also devalues rights.
We need a return to a language of social virtues, interests, and, above all, social responsibilities that will
reduce contentiousness and enhance social cooperation.6

Participative and Collaborative

Worker Rights, Duties and Responsibilities
Any discussion of rights and duties must be prefaced by a discussion of certain principles that rights
and duties are based upon: principles of distributive justice, contributory or participatory justice, social
and family justice. The approach allows for balancing the responsibilities of individual (contributive or
participatory justice) with that of family need (social and family justice) and that of institutions and
governments (distributive justice, corrective justice). An optimal situation of rights and duties should,
accordingly, include strategies for avoiding poverty, as well as emphasize the social duty emerging from
private property, all this in spirit of solidarity and subsidiarity. Lastly, any discussion of rights and duties
should be framed within the context of global and ecological sustainability.

Moreover, the discourse on human rights should be a systematic attempt to work out the implications
of the Golden Rule (see Table 1.7, Chapter 01) in political and social life. “Do unto others as you would
have them do unto you”– this rule encapsulates an ethic of reciprocity and serves as the logic of rights and
duties. By this golden rule, executives need to shift their consideration from the implications of their
strategies for their lives and that of the company to the implications of these actions for the lives of
employees, their families and local communities.

We need to understand the different ways in which rights implicate responsibility and irresponsibility
and the interplay of notions of responsibility as accountability and as autonomy. Libertarians justify rights

6
Communitarians appeal to use the moral voice of the community to exhort people to meet their responsibilities. They claim
responsibility originates in community. There is an implicit certitude about what the responsible choice is and a striking lack of
attention to the problems of conflicting responsibilities and values, particularly for people who are members of many
communities and who find themselves pulled by conflicting obligations. Moreover, the particularity with which some
communitarians are willing to spell out what responsibility requires and what fosters community seems to replace the role of
personal autonomy, of taking responsibility for one's own conception of the good life, with accountability to the prescriptions of
the community. But what they mean by “community” is far from clear. Often such definitions and discussions are amorphous
and wishful. Communitarians are vague on such issues as the relationship between community and polity, the possibility of
consensus on values and responsibility, the role of law in achieving a communitarian moral revival, and the role of rights in
responsive communities.

31
by asserting that responsibility should be understood as the opportunity to exercise one's moral and
intellectual capacities, which requires individual freedom. On this account, loss of the opportunity to
develop and exercise moral responsibility, to take responsibility for and act on one's life plan, is a casualty
or cost of not protecting individual freedom. In this context, responsibility is understood as autonomy.
Although protecting responsibility as autonomy may entail some irresponsible decisions, this conception
considers it a more serious cost to move the locus of such responsibility from the individual to the
community or state.

According to Chris Argyris (1986, 1991), we need to redesign organizations for a fuller utilization of
our most precious resource, the workers, in particular, their psychological energy. Giving up the
pyramidal and hierarchical structure of decision-making, Argyris (1993) suggests that decisions should be
undertaken by small groups rather than by a single boss. Satisfaction in work will then be more valued
than material rewards. Work should be restructured in order to enable individuals to develop to the fullest
extent. At the same time, work will become more meaningful and challenging through self-motivation.
Rensis Likert confirms this trend of thought. He identified four different types of management styles:
exploitative-authoritative, benevolent-authoritative, consultative, and participative. He found the
participative system to be most effective since it satisfied a whole range of human needs. For instance, if
major decisions are taken by groups this results in achieving high standards and targets and excellent
productivity.

Participative management can generate complete trust within the group, and high participation can
lead to a high degree of human motivation and conflict resolution (Weiss and Hughes 2006). As
Rosabeth Kanter (2003) observes, open dialogue in a group setting where decisions are made fosters
mutual respect. When employees feel self-confident enough to actively participate and where corporate
leaders move them toward respect and reconciliation, the organization is more likely to transform itself
from a dysfunctional, under-performing organization into one that raises the quality of its products and
services, formulates stronger customer relations and interface, and thus, improves its strategic financial
position. All this success emanates from small group team work. In any organization, once the beliefs
and energies of a critical mass of people are engaged, conversion to a new idea will spread like an
epidemic (Kim and Mauborgne 2003: 62).

Corporate negative behaviors destroy employee rights, duties and responsibilities. According to
Theory X of McGregor, common such behaviors include:

• Being intolerant, vindictive, recriminatory, and punitive;

• Being aloof and arrogant, distant and detached from the workers;
• Unconcerned about worker welfare, morale and family problems;
• Blaming, finger-pointing, and imposing guilt upon workers;
• Being unjust, unsympathetic, not-listening, short-tempered, proud, elitist and anti-social;
• Being non-participative, non-team-building, one-way-communicating and not fostering worker-
learning.
• Not inviting suggestions, feedback or interactions, and being ungrateful.
• Taking criticism badly from one’s reports or peers, and tendency to retaliate.
• Poor in delegating, but good in giving orders and commands.
• Issuing threats to enforce people follow instructions;
• Issuing mandates, directions and edicts to force worker obedience and submission.
• Withholding pay, rewards, bonuses, commissions and other remunerations to demand obedience.
• Suppressing pay-raises, promotions, recognitions, and acknowledgements of challenging workers.
• Scrutinizing work-expenditures to the point of mistrust and false economy.

Obviously, the opposite of these negative behaviors (i.e., positive corporate behaviors) will produce

32
positive effects of empowering and upholding everyone’s rights, duties, and worker and management
responsibilities. Opening channels of communication and transparency, starting from the top, is the best
way for resolving problems. Open dialogue means that everyone deserves a response; it exposes facts
and tells the truth. It is hard to play politics when everyone discusses and everything is discussed openly.
Successful turnarounds and transformations arise from long-term relationships built on mutual trust and
reciprocal openness (Kanter 2003: 64).

According to Herzberg’s (1968, 1996) two-factor theory of motivation, workers are affected by
biological or hygiene factors, and psychological or motivation factors. Hygiene factors are extrinsic to
the job and relate to dissatisfaction-avoidance; hence, they indirectly motivate the worker on the job (such
as pay, safe working conditions, non-boredom, and social interaction on the job). Motivation factors are
intrinsic to the job and make the job interesting, enriching and rewarding (e.g., training, recognition,
respect, promotion, and personal growth on the job). In energizing, motivating and empowering
workforce, one could emphasize on the psychological and motivation factors, however, not to the
exclusion of hygienic factors. The former empower rights, duties, and responsibilities.

How do employees find work exhilarating and perform best on their job? According to Mihalyi
Csikzentmihalyi, who pioneered the research on workflow, the key to worker-exhilaration is not the task
itself (which often could be routine), but a special state of mind that the workers create as they work, a
state called “flow.” Csikzentmihalyi (1990; 1997) found that the most successful workers were in flow
most of the time, while those who were apathetic and dissatisfied were the least in flow. The feeling of
work flow is analogical to the feeling or emotion of being in the zone or in the groove. The flow state is
an optimal state of intrinsic motivation, where the person is fully immersed in one’s work or duty.
Following Csikzentmihalyi, we must first define “work flow” in a firm, its nature and properties,
especially in the critical departments. Next, one could incorporate the following findings in order to
optimize the workflow in your employees under a rights-duties claim situation:

a) Those who control and organize their job had the maximum flow.
b) Flow is maximized with control of critical parts of the job.
c) For some, excellence and pleasure in work are the same, and workflow was very high.
d) Flow moves people to do their best at work, no matter what work they do.
e) Flow blossoms when the workers’ skills are fully engaged.
f) Flow enhances when the challenges of work stretch workers to new and creative ways.
g) Flow is heightened when workers are fully absorbed in their work, handle the demands of work
effortlessly and nimbly adapt to shifting demands.
h) It is not so much the work, but what you bring to the workplace, your mind and heart, skills and
talent, passion and emotions, commitment and dedication, that create the flow.
i) Workflow itself is a pleasure.
j) Encouraging and supporting supervisor presence can increaser workflow.
k) Intensifying one’s psychological presence by being empathetic, understanding, recognizing and
rewarding, compassionate and caring, can empower and maximize workflow and best
performance.
l) Psychological absence, on the other hand, characterized by suspicion, mistrust, eves dropping,
interference and impersonal vigilance can minimize workflow, productivity and worker-
involvement.

In general, the higher the work flow and its internalization, the higher is the perception of worker
duties, worker rights, and worker responsibilities. Similarly, Amabile and Kramer (2007) believe
strongly that job performance is positively linked with inner work life of the workers. People perform
better when their daily work-day experiences include more positive emotions, passion for work, and more
favorable perception of their work, their team, their leaders, and their organization (Amabile and Kramer
2007: 77). The dynamics of inner work life of people, their mind and heart, their emotions, perceptions
and motivations, do affect work performance, and hence, by implication, the organization.

33
 Every worker’s performance is affected by the constant interplay of perceptions, emotions, and
motivations triggered by workday events, including managerial action – yet inner work life mostly
remains invisible to management (Amabile and Kramer 2007: 75). The knowledge-based worker’s inner
life is “the dynamic interplay among personal perceptions, ranging from immediate impressions to more
fully developed theories about what is happening and what it means; emotions, whether sharply divided
reactions (such as elation over a particular success or anger over a particular obstacle) or more general
feeling states, like good and bad moods; and motivation – your grasp of what needs to be done and your
drive to do it at any given moment” (Amabile and Kramer 2007: 76).

Virtue Theory as supportive of Rights Theory

The theory of rights should be considered within the framework of virtue ethics, and vice versa. The
two are intimately connected. But there is a woeful disconnection between the two in the theological and
philosophical literature (for a review see Kaveny 2009: 115-117). A fully adequate virtue theory must
include a significant discussion of what it means for a virtuous person to develop the skills of identifying,
protecting, and promoting rights (Kaveny 2009: 117-118). MacIntyre (1988) argues that a given catalog
of virtues, including most prominently a thick understanding of the virtue of justice, is connected to a
given conception of practical rationality or prudence, to a broader connection of human flourishing,
which, in turn, is instantiated by a particular set of practices initiated by a particular set of institutions.

Human nature, argued Aquinas, gives rise to requirements that need to be accounted for and
organized by all stable societies. They do not, however, need to be accounted for and organized in
precisely the same way. That is, different societies will respond to the basic requirements of the natural
law, as well as to the basic requirements of justice, in ways appropriate to their context, community, and
tradition (ST I-II, q 95, a 2, rep to obj. 3).

MacIntyre (1990: 247-248) observes: “From the standpoint of a virtue ethics, rights would not
primarily provide grounds for claims by individuals against other individuals or groups. They would
instead have to be conceived primarily as enabling provisions, whereby individuals could claim a due
place within the life of some particular community, and the question of what rights individuals have or
should have could be answerable only in terms of the answers to a prior set of questions about what sort
of community this is, directed towards the achievement of what sort of common good, and including what
sort of virtues.”

Thus, both Aquinas and MacIntyre seem to contend that culture-dependent human rights and basic
requirement s of justice are usefully discussed within a community context. Most judges articulate and
protect human rights within the matrix of human relationships mediated by the specific communities
bound by their ruling. That is, in the political and juridical realm, human rights to not identify, protect,
and promote themselves; they must be identified, protected, and promoted by persons with political
authority over a particular community (Kaveny 2009: 119). Thus, virtues (especially justice) and human
rights are both interior qualities of persons and a description of the relationship among a community’s
members. Virtues and rights should be discussed within this dual aspect of interior quality of persons and
the relationships of a given community dedicated to a given concept of common good.

We consider a rights theory from a virtues theory. Virtue theory focuses on the character of social (or
executive) agents, while rights theory demands that social agents consider how their actions affect the just
claims of others. Thomas Aquinas contended that a properly developed (Christian) virtue theory must
account for human rights. The nature of justice acts as a bridge between the language of rights and the
language of virtue. For instance, the term “just” is applied in the first place to a state of affairs in the real

34
world, a state of affairs that gives all persons their due. For Aquinas, the personal virtue of justice is the
settled disposition of character to render other persons their due, which, in contemporary language, is the
settled disposition to respect their rights (Kaveny 2009: 110).

According to Kaveny (2009: 111), these dispositions are helpfully understood as modes of
imagination that empower us to consider carefully the impact of our actions on other people in ways that
support the identification and protection of their rights. She suggests three expressions of human
imagination to facilitate the promotion of human rights:

• Ontic Imagination: This should assist decision-makers to perceive the fundamental human dignity
(i.e., the imago Dei) in all people, especially, the marginalized and the vulnerable, and in
circumstances where we might be tempted to ignore or overlook it. Ontic imagination enables us to
appreciate the true dignity of people unfamiliar to or different from us (e.g., aliens, ethnic groups,
aboriginal natives, the disabled, and the addicts). One needs the habit of compassionate
understanding and prudence as virtues that inform ontic imagination.

• Empathetic Imagination: This should empower decision-makers to exercise solidarity with others
and to recognize how our actions affect their status as members of the same community. This calls
for a commitment to the virtue of human solidarity, which, in turn, entails recognition of human
interdependence. Empathetic imagination may be considered as an instantiation of the habit of
circumspection, a subset of prudence that allows us properly to perceive the morally relevant
circumstances of our actions.

• Strategic Imagination: This allows decision-makers to deal appropriately with the fact that
advancing the protection of human rights in societies with limited goodwill and limited resources is
an incremental project. Strategic imagination may be considered as an instantiation of the habit of
moral courage, a subset of fortitude that allows us to act decidedly and clearly in upholding and
promoting human rights of all, especially, the powerless and the marginalized.

The exercise of these three forms of imagination comprises the habits that support the recognition
and protection of human rights in concrete situations. Such an imagination cannot be entirely unguided.
Nor is it morally neutral. It must be shaped by the three fundamental roots nurturing both respect for and
proper interpretation of human rights.

• The first root is an account of the nature and worth of a human being. Each human being
possesses an inalienable human dignity, made in the image and likeness of God. The first root of
human rights is a commitment to the fundamental dignity of all human beings, handicapped and
imbecile. The exercise of this commitment requires imagination.

• The second root is a vision of how human beings ought to relate one another. This is not a vague
feeling of compassion or shallow distress at the misfortunes of so many millions, both near and far.
It is a firm and persevering determination to commit oneself to the common good – the good of all
and of each individual, because we are all really responsible to all. In this sense, human rights
institutionalize solidarity (Hollenbach 2002: Ch 6).

• The third root relates to how to deal with contingency and finitude. It may not be practically and
economically feasible in certain political communities to protect certain human rights at a given
point in time. But we must move incrementally toward their protection without undermining our
ultimate goal – peace and harmony in the kingdom of God. Our works of peace and justice here
and now should contribute to the building up of that kingdom (Rom 8: 19-22; Gaudium et Spes:
39).

For instance, executive imagination should recognize that:

35
 a) All human beings have a sense of self that is dependent to a significant degree upon their bodily,
social, moral and spiritual integrity;
b) All human beings have a sense of self that is dependent to a significant degree upon their
extended body-spirit, their family integrity, solidarity and responsibility;
c) All human beings must cultivate a predisposition to be mindful of the potential effects their
actions have upon the lives and well-being of other persons, who are all equal to them in dignity.
d) That the lives of employees, suppliers, distributors, creditors, customers, and local communities,
for example, could be irremediably affected not only by the intended consequences of the
executive action, but also by the foreseen-but-unintended consequences, as well as consequences
that they should have foreseen but did not.

Connecting all three levels of imagination is an approach to morality that analyzes all moral actions
from the perspective of the acting agent. In Thomistic thought, the fundamental moral description of an
action is generally taken from an agent’s immediate purpose or “object” in acting (ST I-II, q 18). The
agent’s motives, as well the circumstances of the agent’s action, can affect the moral quality of the action,
which then affects the agent’s character. That is, the consequences of the agent’s action to other people,
while not irrelevant, do not stand at the center of the moral analysis of the action. If the “object” of an act,
the finis operis, is internal intention to the agent, that is not merely an external event that triggers an
action, but a purposeful endeavor on the part of a thinking, willing, human being, then, that action is
connected to one’s virtue, and one’s virtue is linked to one’s character (Kaveny 2009).

For the language of human rights it is important to focus our attention not so much on the
relationship between the acting person and his/her action, but the relationship between that action and the
third parties whose interests it affects.

Human Solidarity as a Commitment to Human Rights

To defend and recognize human rights, it is not enough to respect other human beings as possessing
fundamental human dignity. In a spirit of real human solidarity, we next need to recognize them as
partners or fellow members of a community.7 There are various degrees of solidarity with our fellow
human beings:

▪ On the negative extreme, we may totally ignore them; or, refuse to see them – this is crass neglect.
▪ To see them as mere pawns in our own plans and purposes – we use them as “factors of
production;” we use them as “instruments with a work capacity and physical strength to be
exploited at low cost and then discarded when no longer useful,” (see fn 4 below) - this is
exploitation or slavery.
▪ We can use legal rules as “masks” to render human beings invisible. In the legal realm, to pierce
the legal constructs that “mask” the plight of other human beings, and reckon the persons and
faces that are forced to lie behind suck masks.
▪ We can see the world of “others” as moral agents with plans and purposes of their own.
▪ We can recognize our commonality with all humans, despite differences in culture or native ability.
▪ Willingness to imagine ourselves in the concrete circumstances of the other in order to reshape our
perception of the other and of the right course of action.
▪ We maintain a community in which all persons are able to participate in a productive manner.
▪ We pledge to observe the Golden Rule in all that we do: Do unto others what you want done unto

7 One of the best definitions of human solidarity was provided by Pope John Paul II in his 1987 Encyclical Solicitudo Rei
Socialis: “Solidarity helps us to see the ‘other’ – whether a person, people, or nation – not just as some kind of instrument, with a
work capacity and physical strength to be exploited at low cost and then discarded when no longer useful, but as our ‘neighbor,’ a
‘helper’ (Gen 2: 18-20), to be made sharer, on a par with ourselves, in the banquet of life to which all are equally invited by
God.” [Pope John Paul II (1987), Solicitudo Rei Socialis, No 39; (http://www.vatican.va/holy_father/john_Paul_ii/encyclicals).

36
 yourself.

Ontic imagination and empathetic imagination are not enough to sustain hope for the recognition,
promotion, and protection of human rights; we need strategic imagination. Merely honoring human
rights does not necessarily imply appropriate and effective action. Each community or corporation needs
to strategize a step-by-step concrete approach to identifying, recognizing and fulfilling human rights of all
its members for the common good of all its inhabitants. For instance, the American Disabilities Act
(ADA) of 1990 is a good example of strategic imagination. The ultimate goal of ADA 1990 is a step-by-
step approach to enable the 43 million Americans with one or more disabilities to move from social
exclusion to actively contributing to society. Thus, Title I of the ADA requires businesses to provide
“reasonable accommodation” to protect the rights of individuals with disabilities in all aspects of
employment. Executives need moral idealism and moral realism that is the mark of strategic imagination
(Kaveny 2009: 137).

The Debate about Moral Rights

No body disputes about positive and negative rights. The debate surrounds moral rights. Some
philosophers (e.g., Bentham 1845) reject the idea that citizens have any rights (positive or negative) apart
from what law happens to give them. Others (e.g., Dworkin 1977) following John Locke (1632-1704)
defend citizens' rights (e.g., natural or human rights) quite apart from any law. These rights are
inalienable or non prescriptible; that is, we do not give them to people, nor can we take them away or give
our own rights away. Some rights can be even moral rights against the government (e.g., conscientious
objector’s rights against war-draft). Dworkin (1977) argues that the collective goals of the state (such as
prosperity, legitimate national defense, and political efficiency) are not a sufficient justification for
denying individuals their rights; rights are like trump cards that prevail over all other political
considerations.

Moral rights are important, normative, justifiable claims or entitlements, often argued from a moral or
ethical theory, but are rooted in morality and in the nature of the members of the moral community. They
are rooted in the fact that human beings are rational beings that are ends-in-themselves (Cfr. “ens pour
soi” of J. P. Sartre ) and not means unto others, that they are worthy of respect, and should be treated with
dignity. Hence, human rights cannot be overridden by other rights or by considerations of utility. Legal
rights are rooted in law and protected by it. In a just society, moral and legal rights often overlap.

Rights are valid moral claims that give us inherent human dignity (Feinberg 1970). Conversely, the
dignity of the human person means nothing if by virtue of natural law the human person has no human
rights apart from any law (Maritain 1944). Finally, there are others who hold that rights are simply
entailments of moral obligations (e.g., Frankena 1973; Kant 1964; Ross 1930), or are simple derivations
from our understanding of utility (e.g., John Stuart Mill 1974). Gewirth (1984) argues that rights are the
basis of morality; based on generic features of action, freedom and purposiveness, we can conclude that
there are universal human rights.

Rights can conflict. I compromise my right to life when I unjustly kill another. The right to life of
the unjust attacker may be overridden by the right of life of the innocent victim. In general, the right to
life is superior to the right to private property, and, in a conflict, the former takes precedence. For
instance, Jean Valjean (in Victor Hugo’s Les Miserables) steals a loaf of bread because he is starving and
that is the only way he can survive. Jean’s right to life overrides the baker’s right to private property
(e.g., the loaf). The conditions necessary for one right to override another, however, are very stringent.
The point of the story of Jean Valjean is not so much to justify his taking or stealing the bread as it is to
condemn an unjust society that makes it impossible for people to exercise their right to life (De George
1999: 100).

37
Labor Law Reform and Labor Rights and Duties in India
During the last decade, the corporate world has argued that labor laws in India are excessively pro-
worker in the organized sector, and this has led to serious rigidities and adverse consequences in terms of
productivity. Hence, the corporate world has asked for labor law reform. One of the chief reasons for
such a reform is that many labor laws in India are ancient, irrelevant and do not reflect the requirements
of the day. For instance, the Industrial Disputed Act, the Trade Unions Act, among many others, were
crafted in an era when concepts like liberalization, privatization and globalization were either not fully
evolved or understood. Indian labor laws need reform to give appropriate flexibility to the management
side to compete with the international world markets of intense competition. Existing laws are also less
employment friendly – despite GDP growth there has not been proportionate growth in employment in
India as robotics, automation, outsourcing, and plants redesign and relocation have adversely affected
jobs in India. Trade Unions have indirectly stimulated capital-intensive manufacturing in India,
especially in the organized sector.

While labor law reform has been both on supply and demand sides, employee and employer sides, the
exact content and direction of labor reform is far from clear. The pluralist industrial relations paradigm
(traced to Sidney and Beatrice Webb in England, to John R. Commons, the father of US industrial
relations, and to members of the Wisconsin School of Industrial Relations in the early 20 th century)
analyzes work and the employment relationship as a bargaining problem between stakeholders with
competing and conflicting interests. John Commons proposed a balancing paradigm that focused on the
need for equilibrium between capital and labor rather than the dominance of one over the other.

Whatever and whenever the labor law reform in India, it should safeguard all stakeholders, especially
labor and customers as human beings and not as economic agents, as partners in production and not
economic factors of production. That is, rights and duties on both sides must be recognized, upheld, and
enforced. Moreover, labor law reform should consider the nature of work and the lives of workers. A
new industrial relations paradigm is needed that explicitly considers the interest of the employees,
employers, the employment relationship, humanization of labor and labor markets via equity and self-
actualization, and not mere productive efficiencies and profitability. John Budd (2004) extends the
content of labor reform by including efficiency and equity with “voice.” Equity reflects fair employment
conditions and standards, while voice is the ability to have meaningful input into employment related
decisions, including both industrial democracy and personal autonomy.

Media’s Violation of Rights and Duties

“A free press should be neither an ally nor adversary … but a constructive critic” (Mahatma Gandhi).
Media is the bridge between the ruler and the ruled for transport of information inputs. The media,
particularly the Press, the Radio, the Television and the Cinema, together or independently, have the
potency to either make or mar, and reform or deform the society.

The advancement and diffusion of knowledge is the only guardian of true liberty (James Madison).
Media, one of the four pillars of modern democracy, is entrusted with the responsibility of providing and
diffusing truthful and objective information to all people. By definition, media collects, frames, and
objectively communicates non-trivial worthy information to the public it serves. The way information is
collected, stored, sorted, structured and disseminated has a deep impact on how it is read and interpreted
by the public. Hence the media can and does wield much power and control in informing the public and
even in “forming” its economic, ethical and moral conscience. People form views and beliefs, values and
lifestyles often on the basis of what they see and hear in the media. “Whoever controls the media,

38
controls the mind” (Jim Morrison). Knowledge is power, and the media that collects, stores and
disseminates knowledge is power. Hence, the critical need of media scrutiny and media ethics – an ethic
of rights and duties.

In general, information has four dimensions: structure, content, provision and dissemination
understood as follows:

▪ Structure: this determines what of the information (if at all) will be remembered by the audience
and how. It encompasses not only the mode of presentation, but also the modules and the rules
of interaction between them.
▪ Content: incorporate ontological (reality) and epistemological (truth) elements; “hard” data that
can be verified represents the reality; “soft” data or data interpretation offered with the hard
data represents the truth of reportage. A message comprises both world-view (theory) and an
action and direction-inducing element (practice).
▪ Provision: this comprises the intentional input of structural content into information channels.
The equation of provision also includes the timing, quantities of data fed into the channels, and
their quality.
▪ Dissemination: these are channels that bridge between the information providers (media) and the
information consumers. Some channels are merely technical with respect to bandwidth, noise to
signal ratios and the like. Other channels are metaphorical, and the relevant determinants are
effectiveness in conveying content to target consumers.

Today in 2013, the Indian press is over 220 years old, the Indian Radio is about 100 years going, and
Doordarshan is half a century strong. Media has about five main functions: information, interpretation,
education, entertainment, and evaluation. While some of these functions are still provided, the Indian
Media Empire is indulging in sensationalism, yellow journalism, paid news, TRP-domination, politician-
control, and corporatization. The Press Council of India that is supposed to enforce values and ethics in
the print medium is seemingly passive and teeth-less. “The sole aim of journalism is service. The
newspaper press is a great power, but just as an unchained torrent of water submerges the whole
countryside and devastates crops, even so an uncontrolled pen serves but to destroy. If the control is
from without, it proves more poisonous than want of control. It can be profitable only when exercised
from within” (MK Gandhi).

Article 19(1) of the Indian Constitution states that, “everyone has the right to freedom of opinion and
expression.” And so is the media – the Free Press. This right includes freedom to hold opinions without
interference and to seek, receive and impart information and ideas through any media, regardless of
frontiers. The successful survival and flourishing of the world’s largest democracy owes a great deal to
the freedom, power and vigor of the press. However, the freedom of the media is not absolute. Article
19(2) puts reasonable restriction on the media in the interest of the sovereignty and integrity of the
country, the security of the state, public order, decency or morality, or in relation to contempt of court,
defamation or incitement to an offence, and the like. The right of freedom of speech of individuals and of
the media is a great power; but with great power comes great responsibility.

In India, the media has specific rights provided by the Constitution and the Governments. Its rights of
freedom of expression and communication include:

❖ Personal Rights: Visibility rights; linguistic rights; K-12 Education rights; telecommunication
rights; freedom of speech rights, and freedom of writing.
❖ Social Rights: Social visibility rights, community lingual rights, social education rights, social
telecommunication rights, social freedom of speech rights, and social freedom of writing.
❖ Instrumental Rights: Freedom of self-expression, freedom of language rights, freedom of
education, freedom of communication medium, and freedom of speech rights.

39
 Corresponding media duties towards the public include: freedom of publications, plurality in media
ownership, diversity in information, culture and opinion, support for democracy, support for public order
and security, universal reach, quality on information and culture disseminated to the public, avoiding
harm to individuals and the society, respect for human rights, and informing citizens about current events
and developments in society. Media should be a fact finding body engaged in firsthand reports whenever
possible and presenting the facts to the public without much interpretation or representation. Media can
get into argumentation. More information is required to support the truths that media claims in a given
case. But arguments are not correct if the media does not back them with accurate facts, figures or events,
laws and doctrines. Arguments are not correct if the media neglects facts that actually support a different
claim.

World Media Ethics Code specifies the following media duties:

1. Honesty and fairness: duty to seek the views of the subject of any critical reportage I advance of
publication; duty to correct factual errors; duty not to falsify events and facts or to use them in a
misleading direction.
2. Duty to provide an opportunity to respond to critical opinions as well as to critical factual reportage,
3. Appearance as well as reality of objectivity; in this connection, some codes prohibit members of the
press to receive gifts.
4. Duty to respect privacy.
5. Duty to distinguish between facts and opinion.
6. Duty not to discriminate on such grounds as race, religion, nationality, color, gender or language;
some codes call on the press to refrain from mentioning the race, religion or the nationality of the
subject of news unless relevant to the story; some codes call for coverage that promote tolerance.
7. Duty not to use dishonest means to obtain information.
8. Duty not to endanger people.
9. General standards of decency and taste.
10. Duty not to prejudge the guilt of an accused and to publish the dismissal of charges against or
acquittal of anyone.

With all the mandates of the media ethics code, the fundamental media issues are:

a) Does media reflect reality or just presents a distorted version of the same?
b) What is the overall positive and negative impact of the media upon reality?
c) Ideally, what is the role of the media in society? Does it include to help and develop a viable solution
through building consensus so that the nation can march towards a better tomorrow?
d) Should media portray the world around us in its true form or present to us an ideal world?
e) Can media actually change reality, and has it been able to do so in the past?

In India, the legislature makes laws, the judiciary interprets them, and finally, the executive body
executes them. These are three pillars of democracy. The media can become a fourth pillar of democracy
by being a watchdog of all the three pillars. Unfortunately, in the last decade the media has become a
fourth pillar instead on its own right by being selective about news, by subjecting itself to “paid news,” by
faking sting operations to settle personal scores with rival firms, and by tabloidization of news. Further,
by assuming partisan affiliation with certain political parties, the India media has patronized those parties
and failed to objectively represent them to the voter public. By focusing on TRP ratings and due to fierce
media rivalries, the ethics of journalism has been seriously compromised.

India has several Media Regulations – The Indian Penal Code 1860; The Indian Telegraph Act 1885;
First Amendment Act 1951; The Copy Right Act 1957, the Sixteenth Amendment Act 1963, and so on
are also bearing on media regulation

40
Current Ethical Failures of the Indian media
But from time to time, said Hamid Ansari, there have been disconnecting developments that do raise
questions about the media’s objectivity and credibility. These include cross-media ownership, the
phenomenon of “paid news,” media ethics, the need for effective self-regulatory mechanisms, declining
role of editors and their editorial freedom, and the need to improve the working conditions of media
personnel. According to Prajnananda Chaudhuri, the national president of NUJ(I), most journalists were
not getting social benefits like gratuity.

Often media writes many articles in order to push an agenda. Some media writers try to convince us
what they believe by collection of facts that support their proposal or agenda. There is huge difference
between decision-based evidence making versus evidence-based decision making. There is a difference
between truth when an agenda is pushed and when the media lets the facts speak the truth. When media
content is biased towards certain race, sex, gender, religion, nationality, region or political party, then
media begins to lose its independence to observe and collect facts, and worse, it is difficult for the media
to “represent” truth with accurate facts and figures. A neutral and objective presentation of news is the
duty of the media and the right of the public.

Often, media can exceed its limits by itself becoming the newsmaker and attention seeker instead of
playing the role of a news disseminator. Media fails to reveal the deontological truth as and when it
happens; instead it garnishes it, sensationalizes, and thereby tries to gain TRP points.

India is the largest democracy in the world, and the media has a powerful presence in the country for
safeguarding its democracy. Of late the abuse of “paid news” has corrupted the media. Paid news
indicates favors towards the institution which has paid for it. The news is more like an advertisement
praising the person or hiding the faults of the institute or ruining the reputation of the opposition party, all
these for some significant payment. Sometimes, there is no money paid: media houses show favoritism
towards the groups having more power. Paid news became widespread during the 2009 elections. Most
campaigning politicians paid media heavily for positive coverage and for ignoring obvious skeletons in
the closet. Also, the mode of payment in paid news can violate tax laws and election spending laws of the
country. It can seriously buy and bias national and state elections thus ruing democracy at its roots.

The alarmingly increasing phenomenon of “paid news” transcends the corruption of individual
journalists and media companies. It is omnipresent, structured and highly organized; it has been steadily
destroying the concept of democracy in India. For instance, in the April-May 2009 general elections to
the Lokh Sabha, despite the clear guidelines of the Press Council of India, a number of political
candidates had started paying generous sums of money to the media personnel for giving them benevolent
spotlights. Such “paid news” disables the public in making right franchise decisions.

Worse, major national newspaper editorials in India are biased, and even controlled by politicians,
and corporate powerhouses that own them. This has serious endangered media objectivity and credibility
in news coverage and in serving public interest. Paid news is a serious malpractice as it deceives the
innocent citizens into believing a paid advertisement as real news. Few years back, the Radia Tapes
clearly indicated the cross-linkages between industrialists and politicians and how the media acts as an
interface between them. Over the years, Securities and Exchange Board of India (SEBI) has observed and
warned that media companies have been entering into agreements with listed companies and in return
were providing coverage through favorable news reports, editorials and advertisements – a clear case of
conflict of interest and dilution of independence of the press.

41
The Ethical Mission of the Media
The media in India was a mission soon after Independence; it soon grew to be a profession, and now
it has become a business, often without ethics or moral social responsibility. The media is no more
independent entities; they are mostly owned by giant business houses, financial institutions or political
parties (e.g., see Case 7.3) – hence the news they portray is often “paid news” defending and promoting
the owners or news that can be sensationalized to grab more TRF points. News in the hands of the
businesses that own them becomes a commodity – news from being a bare fact becomes angled, slanted
or sensationalized to make it marketable. Editorials have become dictatorial and proprietorial. The media
has no place for all the good things, events, achievements and accomplishments that happen in India;
instead, it is looking for “stories” that command and attract poplar attention. Media front lines carry
murders, rapes, gang rapes, molestations, celebrity divorces, bomb blasts, insurgent attacks, plane crashes,
road tragedies and the like in abundance – all vices, but no place for virtues. Religion, superstition,
crime, film and sex are weaved together as “Breaking News”- all depicting with an angle of
entertainment. Hence the often quote: “bad news is good news and good news is no news.” Or it is also
said: “Dog bites man is no news, man bites dog is news.”

The basic problem is media orientation in India: the media treats the medium as a product – it sells
what can be sold, what can be profitable. Hence the proliferation of magazines and TV shows devoted to
lifestyle, beauty, gadgets, music, sports cars, cosmetic products, celebrities, movie stars and the like –
“the India media prefers the relief of lightness,” said Manu Joseph, editor of the Indian Newsweekly
Open. Often, the media manufactures and bombards spurious realities – pseudo realities fabricated by
very sophisticated people using very sophisticated electronic mechanisms. We do not distrust their
motives; we distrust their power, and the media have a lot of it. It is an astonishing power – that of
creating whole universes - universes of the mind.

But from time to time, said Hamid Ansari, there have been disconnecting developments that do raise
questions about the media’s objectivity and credibility. These include cross-media ownership, the
phenomenon of “paid news,” media ethics, the need for effective self-regulatory mechanisms, declining
role of editors and their editorial freedom, and the need to improve the working conditions of media
personnel. According to Prajnananda Chaudhuri, the national president of NUJ(I), most journalists were
not getting social benefits like gratuity.

Often media writes many articles in order to push an agenda. Some media writers try to convince us
what they believe by bolection of facts that support their proposal or agenda. There is huge difference
between decision-based evidence making versus evidence-based decision making. There is difference
between truth when an agenda is pushed versus when the media lets the facts speak the truth. When
media content is biased towards certain race, sex, gender, religion, nationality, region or political party,
then media begins to lose its independence to observe and collect facts, and worse, it is difficult for the
media to “represent” truth with accurate facts and figures. A neutral and objective presentation of news is
the duty of the media and the right of the public.

Often, media can exceed its limits by itself becoming the newsmaker and attention seeker instead of
playing the role of a news disseminator. Media fails to reveal the deontological truth as and when it
happens; instead it garnishes it, sensationalizes, and thereby tries to gain TRP points.

What Went Wrong at Merrill Lynch?

While earnings declined, the fat bonuses were not reversed. They continued unabated. Merrill Lynch still keeps
lavishing humongous bonuses even after it has been bailed out currently by taxpayer’s money! Critics affirm
bonuses should never have been so big in the first place, because they were based on ephemeral earnings of 2006.

42
Merrill Lynch defends saying that the bonuses were based on Wall Street’s pay structure, in which bonuses are
based on short-term profits, encouraging traders to act like gamblers in casino – letting them collect their winnings
while the roulette wheel was still spinning. Even their bosses turned a blind eye because it was in their interest as
well, as their pay was tied also to it. Hence, to earn bigger bonuses, many traders ignored or played down the risks
until their bonuses were paid.

Lucian A. Bebchuk, professor at Harvard Law School and an expert on compensation, said, “Compensation was
flawed, top to bottom. The whole organization was responding to distorted incentives.” Bebchuk said that
investment banks like Merrill were brought to their knees because their employees chased after the rich rewards that
executives promised them. Currently, Morgan Stanley and UBS of Switzerland, in fact, are attaching new strings to
bonuses, allowing them to pull back part of such bonuses if they were based on illusory profits. For instance, since
2001, Dow Kim has been paid over $117 million, of which $55 million was in cash, and no part of this could be
withdrawn. After the collapse of the mortgage market in 2008, much of the profit that his pay was based on was
erased in write-downs.

David B. Armstrong was proud for a long time to be part of Merrill’s “thundering herd” — the brokers in the
storefronts and office buildings who are the face of Wall Street to many Americans. David struck out on his own in
May, relieved, he said, that he would no longer have to explain how Merrill traders far from his office in Virginia
had made investments that so weakened the firm. He said the Merrill name used to help him gain clients. Now, he
said, “I will never have to worry about another person in my firm making bad business decisions that can put the
entire business in jeopardy” (Morgenson 2008).

Brokers like Mr. Armstrong — not just at Merrill, but at other Wall Street firms as well — have been caught in
the middle of the credit squeeze and stock market downturn. Even as they perform their traditional role of
comforting their shaken clients, they find themselves having to explain the write-downs, losses, layoffs and capital
infusions that they had nothing to do with. Because some of their income was paid in company stock, their own net
worth has dropped along with the stock’s value. Brokers are staging an exodus. This is a rare opportunity for them
to leave, with the stock price down. The golden handcuffs which have tied them to these companies because of
deferred compensation are now essentially gone. It is too early to claim an all-out broker exodus, however, and
many who are leaving are simply going to competitors that are dangling better pay packages. Even as brokers are
leaving, Wall Street firms like Morgan Stanley and UBS are aggressively trying to hire more brokers and lure them
away from competitors (Story 2008a).

Several brokers who left recently said in interviews that they had talked to their clients before leaving and had
made sure that most would follow. When a broker leaves, banks select new brokers to handle the accounts. Investors
who want to follow their broker generally have to move their money on their own. Some investors, disappointed
with the market this year, may choose not to follow their brokers.

The problem is that the brokers have become more important to the bottom lines of their employers. Wall Street
firms like Merrill and Citigroup are increasingly reliant on their wealth management businesses because they
provide stable earnings. Merrill’s nearly 17,000 brokers were a driving force in its $50 billion sale to Bank of
America. The same is true for Wells Fargo’s $15 billion deal to buy Wachovia, which includes its A. G. Edwards
brokerage business (Story 2008a).

One of the latest broker defections was Friday (October 24, 2008) when a group of four Merrill advisers in
Westport, Connecticut, resigned to set up their own shop. The four had worked at Merrill since the late 1990s and
managed $1 billion. Now they are trying to attract clients to their newly created firm, called the LLBH Group. Of
course, not just any broker can hang up a shingle and lure clients from a former employer. The ones leaving tend to
have decades of experience and clients who will come to a company run in the broker’s name rather than a big
bank’s. Their new businesses, though, may not have access to as many alternative investments for their clients.

Brokers still far outnumber independent advisers, and banks will probably remain the training ground for new
brokers. There are just 10,000 to 15,000 independent advisers, fewer than Merrill’s herd alone, and those
independent brokers manage about $2.4 trillion in assets, according to a Citigroup report on the industry in
September (Story 2008a).

43
 Part III: The Ethics of War: Citizen Rights and Duties
On March 19, 2003, presumably as retaliation to September 11, 2001 attacks on America, the United
States of America launched an aerial bombarding of designated sites in Baghdad, Iraq. Months earlier, on
September 17, 2002, the Bush Administration had issued The National Security of the United States
(hereafter NSS), a document that announced substantive shifts in American policy on war. On December
11, 2002, President Bush released another document, The National Strategy to Combat Weapons of Mass
Destruction (both documents are on www.whitehouse.gov/index.html). These two documents represent the
“Bush doctrine” – U. S. willingness to initiate armed force in order to avoid the spread of weapons of mass
destruction, a highly controversial doctrine. We do not intend to discuss either of these documents. But
they do form the context of our discussion on the Ethics of War, especially the theory of just war and
nonintervention.8

War is and ought to be an issue involving broad civic discourse and political debate, and not left
primarily to the military and political strategists. Military decisions are a species of political decisions, but
these political decisions must be viewed, not simply in the perspective of politics as an exercise of power,
but of morality and ethics in some valid sense, and in the complementary dimension of virtue ethics and
rights ethics. If military and political decisions are not so viewed, the result is as history attests, the
degradation of those who make them and the destruction of those who execute them and the destruction of
the larger human community affected by these decisions. The people should be able to or given an
opportunity to judge the moral issues surrounding a war not only through the electoral processes that choose
political leaders who finally decide the war, but also through the medium of public debate that informs
public opinion and ultimately influences foreign policy. This people-based research presents one way of
assessing ethical perceptions of any war from the viewpoint of citizens as voters, tax payers, consumers, and
householders. Being a sensitive issue both on political, economic, ideological and religious grounds, the
war assessment methodology must be carefully dovetailed to account for various backgrounds and
persuasions of citizens as respondents.

The Doctrine of the Just War

The just war teaching has a long history. Conditions for justifiable war are found in seminal form in
Roman political thought and in the political theory of Augustine (354-430), Church father and philosopher,
and Aquinas (1225-74), an Italian theologian and philosopher. With the development of the nation states in
the sixteenth century (see footnote 8 below), international jurists, diplomats, writers of codes of military
conduct and church canonists have cited the just war conditions to restrain the ambitions of princes and to
limit the carnage of war. By history and intent, the just war theory is a political-moral doctrine, one that has
different implications and possible uses in both religious and secular spheres.

Different religions have differing views on the justification and morality of armed violence in general,

8 Recall the Treaty of Westphalia in 1648 that brought to a close Europe’s Thirty Years War. It set in motion the doctrine of the
national states and modern international law. The treaty ratified three points: a) national sovereignty, the belief that a ruler had
the right to exercise authority within a defined territory without deference to any other person claiming superior authority; b)
nonintervention, that bars coercive interference by outsiders in the internal affairs of a state, and c) secular state, the removal of
religion from the realm of international politics; the religion of the prince and his people was no longer to be factor in
calculations about war. In the light of this treaty, it is interesting to consider to what extent the U. S. attack on Iraq violated all
three orders (see Himes 2004). The norm of nonintervention has been violated many times by several nations, especially in the
context of genocides, ethnic cleansing, and currently, global terrorism (For a review on the norm of nonintervention, see Himes
1994, Laberge 1995, and Nardin 2002). In the early decade of the 21st century, President Bush and his advisors have argued
another rationale for intervention – to stop the proliferation of weapons of mass destruction (Bush, NSS 15).

44
and of war in particular. Cutting across many religious traditions, and common perhaps through all
Judaeo-Christian religious doctrines and originating presumably from the Roman law, the Jus ad Bellum
theory, is the classical theory of the just war.

At the same time, one should remember that the doctrine of the Just War was an attempt to avoid, or at
least, limit, war and violence that goes with it (Kerstiens 2006: 121). Presumably originated by Augustine
in the fifth century and perfected by Aquinas in the thirteenth century, the theory of the just war specified
conditions under which war would be justified as the “ultimate recourse” or a last resort, all other
alternatives being fully taken into consideration. Morally speaking, the presumption is always against war.

Conditions for Justifying War

The principles or conditions proposed by the just war theory are not meant to make war easier, but
harder. All of them, and not merely most of them, must be fulfilled for a war to be justified. Theory
proponents have enunciated two categories of criteria for a "morally" justifiable war: the jus ad bellum (right
for war) and the jus in bello (rights during war). The former criteria should be met before war is embarked
upon, and the latter while the war is engaged upon. These criteria are stringent enough to discourage war
and were not proposed as motivations for war.

The jus ad bellum (duties before engaging in war) criteria sought to prevent the outbreak of war by
requiring that war, in order to be morally justified, must be:

1. In pursuit of a JUST CAUSE (The reasons for engaging in war (e.g. unjust aggression) must be critically
important)
2. Undertaken by a RIGHTFUL AUTHORITY (i.e., the governments must conduct the war against military
opponents, and as far as possible, civilians must be spared).
3. Undertaken ONLY AS A LAST RESORT (i.e., all attempts at a civil resolution have failed)
4. Undertaken without an underlying MORALLY WRONG INTENT, (i.e., the proportionality of military violence
must be preserved, and realistic plans for a peaceful future between the warring parties must be present), and
5. Undertaken with a REASONABLE HOPE FOR SUCCESS (i.e., there must be a sure prospect for success, for
improving the situation, and for minimizing violence).

In addition, the jus in bello (duties while in war) criteria require that:

6. Non-combatants (e.g., innocent civilians) not be subject to direct attack (i.e., drastically reduce “collateral damage”
of innocent victims), and
7. The evil that can be reasonably expected from war should be proportionately lesser than the good being sought.

All of the first five conditions must be clearly verified before one engages in a just war.9 We also need
to democratize the just war teaching whereby the moral responsibility for the application of its criteria
belongs to the citizens as well as to political leaders. In a developed, educated, and conscientized society
such as the United States of America, and given mass and instant TV/radio communications network that
can connect every U.S. home, the American public cannot easily seek immunity from this responsibility for
morally and publicly scrutinizing political military decisions and operations. We must recognize that the
authority of the government to employ military force is not insulated from, but responsive to, the political

9
The just war theory was primarily developed during the Middle Ages and was eventually incorporated into the ethics of natural
law. Aquinas (1225-1274) justified war only on three criteria: rightful authority, just cause, and rightful intention. The remaining
four conditions have been added later, especially since World Wars I and II.

45
and moral sentiments of the people and their elected representatives (Duffey 1991). We must have the
courage to raise public voice in controversial concepts such as just cause, proportionality and civilian
immunity. 10

Stated thus, these conditions seem to provide an ethic for the sovereign rulers or democratic
governments to interpret and decide, and not for the common people. The just war theory requires
interpretation by responsible persons when applied to contemporary situations; the teaching is not
"self-explanatory" or evidently simple in its application. Thus far, governments were primarily responsible
for decisions regarding the use of military force. If war was waged, the common people had to obey. All
citizens of the warring nations were expected to comply with the commands of the state, and citizen-soldiers
bore responsibility for their personal conduct in war (jus in bello). The government could legitimately
conscript able men and women in war operations, and ordinarily citizens could not refuse conscription into
the army, especially if the war was waged as "a legitimate national defense". Until recently a citizen drafted
for war could not normally appeal to his conscience as ground for refusing to give his or her services.

The Theory of Just War and Selective Conscientious Objection

In the mid 1960s, with spreading war and draft protests, President Lyndon Johnson appointed a
commission, chaired by Assistant Attorney General Burke Marshall, to consider the question of "selective
conscientious objection" (SCO) given the theory of the just war. The majority of the commission
recommended that Congress not grant legal exemption to those claiming SCO on the following grounds:

• The just war theory is religious in origin, and the commission could not pass a judgment on it;
• Support or non-support for war was a political issue, and hence, opposition to it should be expressed
through recognized democratic processes;
• The legal recognition of SCO might lead to a generalized disrespect for law and to other sorts of
refusals to shoulder the burdens of citizenship; and
• The SCO exemption would burden those actually engaged in war with judgments of just and unjust
wars and deprive the government its obligation of judging it for them.

The SCO is yet to be legally recognized in the U.S. Apparently, the manpower and morale
considerations make the legal recognition of SCO still politically inexpedient. The commission while
casting aside the just war theory as a "classic Christian doctrine" affirmed three things: it disavowed the
relevancy of the just war tradition in public discourse about war; the report disclaimed any tension between
civic obligation and moral conscience; and it denied the continuing moral responsibility of those in military
service to judge the morality of the means of war in which they are engaged.

The just war theory and tradition, however, sets the right terms for public debate on war and can inform
individual conscience. The individual should not resign his conscience into the keeping of the State, even
though he must recognize that the State has its own conscience that informs its laws and decisions. Even

10 The conditions for a “just war” could be easily abused, or distorted beyond recognition, and used to justify the interests of
power brokers, especially in modern times of mass communication, when the possibility exists to manipulate the media. Thus, the
conditions of the just war were mysteriously applied, if ever, to justify the “war” in Iraq, the Persian Gulf, and in the so-called
war against terrorism. Governments seemed to have used the arguments for justifying “humanitarian intervention” in the wars
against Serbia/Kosovo, and currently, against Afghanistan, guided by the belief that they house the Taliban and Al Qaeda. Often
the reason may not be “humanitarian” to begin with. It is interesting to note that we had humanitarian military interventions for
example in Iraq, Kosovo, and Afghanistan, but not on Burundi, Rwanda, and Darfur, while the latter were decimated by
genocide, and nor in Chechnya and Tibet! The document on European Union security strategy (A Secure Europe in a Better
World, December 2003) asserts that “with new threats the first line of defense will often be abroad.” Of particular importance is
Europe’s energy dependence, paving the way for military intervention anywhere in the world to secure the oil and gas supplies
that a country needs. That is, the just war conditions seem to be generously applied for geo-political and economic interests (see
Kersteins 2006).

46
when one's personal conscience clashes with the conscience of the laws, one may still stand within the
community and may be subject to the judgments of the State (Murray 1960). Hence moral politics needs
vigorous discussion in which moral principles governing the use of force are internalized through concrete
application.

Today, given the aftermath of the Vietnam War and current exposure and experience of the Gulf War,
Iraq War and the war against terrorism in Afghanistan, we may feel more comfortable affirming our right to
abide by their consciences in matters of the use of military force. The draft protesters, among other things,
urged the U.S. government to make humane provision for the cause of those who, for reasons of conscience,
refuse to bear arms. This defense of the individual's right to one's conscience is an implicit acknowledgment
of the legitimacy of a "pacifist" stance among citizens. Just war pacifism affirms that individuals can object
engagement in particular wars that fail or ease to meet the just war criteria. Just war pacifism also implies
that no one is free to evade one's personal responsibility by leaving it entirely to others to make moral
judgments about war. That legitimate criticism forces political leaders to search for other alternatives to
bring about peaceful resolution of political crises, and that the war raised issues that must be kept under
constant moral scrutiny of citizens. The war in Vietnam typifies the issues which present and future
generations will be less willing to leave entirely to the normal political and bureaucratic processes of
national decision-making. Dissent from war is legitimate as long as such a dissent is a conclusion validly
derived from just war reasoning and not merely from "subjective considerations."

A conscientious objection should be first and foremost conscientious: that stems from a genuine sense
of justice, from a sincere faith that war is not a solution to evil, and not from fear, from apathy, from
cowardice of draft dodging, as an easy escape and desertion from duty. One who thoughtfully dissents from
something is really assenting to something one believes to be a greater truth. A real conscientious objection
(CO) can come only from a formed conscience. A right to SCO should be based on the classical teaching of
the just war principles, and not on any arbitrary self-protective strategies. The pacifist does not question the
right in principle of a legitimate government to require military service of its citizens for legitimate national
"self-defense" which is deemed as "common good" and as an exercise of the virtue of patriotism. All
citizens are as morally responsible for applying the jus ad bellum conditions before a conflict breaks out as
soldiers are responsible for applying the jus in bello conditions once the war is on.

Preventive versus Pre-emptive War

President Bush has made pre-emption and prevention the cornerstone of his military policy in the war
on terror. Bush’s National Security Strategy (NSS) asserts that it is the prerogative of the United States
“to exercise its right of self-defense by acting pre-emptively.” In especially threatening circumstances, it
will attack first “to forestall or prevent hostile acts.”

• Pre-emption: a military strike made in order to gain the advantage when an enemy attack is believed to be
imminent. Pre-emption theory has been accepted, though morally worrisome, as a military tactic for years,
but on the condition that the attack were both imminent and grave (Walzer 1977).

• Prevention: As proposed by Bush, preventive war aims to block the acquisition or transfer of weapons of
mass destruction when attack is neither imminent nor grave in the sense of threatening either the nation’s
survival; or a crippling blow to its defensive capacity.

The UN charter makes no provision for preventive war. The theory of just war does not cover
preventive war. Archbishop Renato Martino, the new President for the Pontifical Council for Justice and
Peace (i.e., foreign minister of the Vatican) draws a comparison between the just war and the death
penalty. He maintains that even as death penalty cannot be any more accepted or justified on the basis of
retributive justice, since today our society is capable of protecting itself without capital punishment, so

47
also “modern society has to have, and it has, the means to avoid war.” This means that the theory of just
war which was relevant during Roman times, those of St Augustine (354-440) and St. Thomas Aquinas
(1225-74), cannot be justified any more. That is, we have the capability of bringing about justice without
war (Christiansen 2003).

The Doctrine of Non-Violence

The world is beginning to grasp the meaning and implications of non-violence. The word
"non-violence" dates since the 1920s, even though there have been non-violent protests through human
history. Mohandas Karamchand Gandhi (1869-1948), a Hindu nationalist leader, advocated non-violent
freedom of India as early as the 1930s.

Nelson Mandela (1918-2013) struggled against apartheid for more than half a century. He was a
cofounder and leader of the African National Congress (ANC) in 1948. By and large Mandela
transformed ANC along lines of non-violence from the inspiration of non-violence he drew from
Mahatma Gandhi’s peaceful resistance in India. Released from prison in 1990, Mandela negotiated a
peaceful end to the old regime with leaders of South Africa’s White minority government. Three years
later in 1993, he was awarded the Nobel Peace Prize. He served as President of South Africa from 1994
to 1999, declined a second term, before stepping down voluntarily, unlike so many of the successful
revolutionaries he regarded as kindred spirits, and cheerfully handed over power to an elected successor,
Thabo Mbeki. Nelson was and became an international emblem of human dignity and non-violence.

Since 1960, South African Blacks have been more committed to non-violence than violence; the
dramatic demonstrations of 1989 have displayed an unprecedented degree of highly disciplined and
conscious non-violent resistance. Perhaps, more than even before, the vast majority of South African
Blacks is convinced that the only way to deal with apartheid is through non-violent unarmed struggle. It has
come in various forms: rent strikes, prison hunger strikes, labor strikes, sit-downs, slow-downs, stoppages,
stay-a-ways, school boycotts, bus boycotts, consumer boycotts, funeral demonstrations, defiance of
segregation orders in public places, and the “illegal” singing of liberation songs.

In this century have non-violent protests begun to proliferate, and in the last decade they have been
multiplying in an exponential rate. Armed revolution has become increasingly impracticable. All over the
world, non-violence is being used, not because of strong or spiritual commitments, but simply because all
other avenues of resistance are closed or have failed. Non-violence is not necessarily pacifism. Pacifism
often connotes passivity, and is too narrowly focused on peace. Peace is not the goal of our non-violence,
but justice. Peace is a by-product of justice. Non- violence can be an active opposition to evil, a non-violent
resistance to evil. Non-violence empowers the oppressed a new way of responding to their oppressors. All
religions should not only guard against justifying violence, but also to awaken and develop their impulses
for peace (Kerstiens 2006: 123).

Solidarity challenged the combined might of the Communist government of Poland and the Soviet
empire, and finally succeeded after 9 years of non-violent struggle: its casualties were some two or three
hundred that got killed by Russian troops; but solidarity killed nobody. The Philippine revolution that
overthrew Ferdinando Marcos was accomplished by the training of half a million poll watchers, some of
whom died trying to protect the ballot boxes. That revolution is sadly floundering today, as the landed class
and the army attempt to prevent needed changes. Mahatma Gandhi's non-violent struggle for independence
in India took 27 years (and 8000 lives out of a population of 400 million). British troops mowed down an
unarmed group of Indian men, women and children, killing 379, wounding 1,137, but this only deepened
their commitment to non-violence. On the contrary, the Algerian war was violent: almost a million of a
population of 10 million died to gain freedom violently from the French - a casualty rate 5,000 times higher

48
than in India!

The year 1989 will be recorded in European history as a revolutionary change at least as important as
1917, 1848 or even 1789, when the Bastille was stormed by an enraged populace. The storming of the
Berlin Wall in November 1989 by a jubilant populace symbolically recalls Paris 200 years before, but it also
demonstrates the difference between the two events: the revolution of 1989 was, by and large, peaceful to a
degree no one could have thought possible in our violent age. The old order collapsed without a struggle in
the streets of Berlin, Budapest and Prague. The new Soviet policy of Gorbachev replaced the Brezhnev
Doctrine: glasnost and perestroika were movements of the Spirit and Grace in subtle forms (Lucal 1991).

Martin Luther King Jr. (1929-1968), a U. S. clergyman and a leader in the civil rights movement, even
though assassinated in 1968, his non-violent civil rights struggle still goes on. Latvia, Lithuania and Estonia
are still struggling every day for their ongoing freedom. The stunning student/worker protests in China will
one day be victorious. May be oppressive powers prefer violence; rather they prefer to counter violence, as
they have a monopoly of fire-power and are trained to use it. But non-violence makes them nervous: if they
attack demonstrations against law the attack itself gives the movement credibility; but if they allow
demonstrations, which may grant the demonstrators victory! The South African government, in 1986, in
exasperation, even outlawed non-violence by punishing non-violent acts by $10,000 fines and/or ten years
imprisonment. They could not have paid non-violence a higher compliment! Non-violent demonstrations
continued unabated. Finally, in September 1989, for the first time, the South African Government granted
right to march peacefully without police opposition.

There has never been a stronger ethical case for violence. People have used it because it seemed to
work, and all other avenues seemed closed. But increasingly non-violence is becoming the method of
choice in national and regional struggles for justice. Violence is increasingly being seen as
counter-productive. Violent warfare limits the involvement of partisans to mostly young, able-bodied men.
Non-violence, on the other hand, is egalitarian; everyone can participate, from babies to the elderly. The
struggle becomes an education in democratic organization that galvanizes and conscientizes the masses and
prepares them for self-government. Those who advocate violence, mostly intellectuals and politicians,
seldom engage in it themselves, leaving it to others to hazard what they so glibly advocate. Those who
advocate non-violence invariably engage themselves in non-violent actions, risking themselves to arrests,
beatings and even death.

In the early stages of a revolution, often even right up to the point of "victory", neither violence nor
non-violence really "works"; perhaps both fail, as history of both violence and non-violence attests. But
non- violence more than violence helps to "build a movement," and the movement keeps developing.

Griffith (2003: 220-225) fears that the greatest and the most frequent concession to terrorism is mimesis
(i.e., the tendency to imitate the tactics of your enemy in retaliation; e.g., matching Osama Bin Laden’s call
for a global conflict with an opposing war on global terrorism), and those who take up a war on terror are
most likely to imitate their terrorist opponents. There is a similar mimetic rush to war on crime, drugs, and
corporate fraud (Griffith 2003).11 In general, any mimetic rush on terror may be the precise reaction sought

11 The torture and abuse of prisoners at Abu Ghraib, Guantánamo Bay, and elsewhere was the most disheartening example of
mimetic overreaction, lawless disregard for human rights, and counterproductive violence in the U. S. war on terror. Frustrated
with a growing insurgency and rising casualties from improvised explosive devices, the U. S. forces in Iraq indiscriminately
rounded up over 8,000 Iraqi citizens in cordon and capture raids. Even though 70-90% of the captured were known to have been
arrested by mistake and had no actionable intelligence, they were detained for months on end without any semblance of due
process. They were even subjected to an array of immoral and illegal practices (e.g., hooding, beating, sodomizing, threatening
with rape, and water boarding) – all these events inflicted irremediable harm on both the victims and the war on terror, while
producing little or no intelligence (Danner 2004: 3-9, 33-37; see Jane Mayer 2005). Subsequent investigative studies on the
torture and abuse of prisoners at Abu Ghraib and elsewhere revealed that not only was torture unnecessary, ineffective, and

49
by terrorists, and the course most likely to generate intractable violence and escalation of war (McCormick
2006: 153). Rushing to war on terror disables the U. S and allied governments from asking fundamental
questions about the underlying causes of 9/11 in particular, and terrorism in general. The causes might have
included a range of political and economic injustices in which the war-on-terror nations were deeply
implicated (Long 2004: 41-42). Mueller (2005: 220-23) suggests that efforts against terrorism should be
considered more like a campaign against crime than like a war.

Another more recent phenomenon is military intervention to stop the “threat” of the proliferation of the
weapons of mass destruction (WMDs). For instance, was the U. S. war on Iraq an intervention to prevent
the proliferation of the weapons of mass destruction? Several issues need to be addressed here (Himes
2004):

• What is a “threat”? Threat to whom? For instance, is simple capability, the possession of weapons of
mass destruction (WMD), or the infrastructure to produce WMD, a satisfactory threat and reason to go
to war?
• Can suspicion or fear about another country’s intention to develop WMDs be a sufficient justification
for preventive war? If so, the possibilities for attack can become limitless and endless.
• Military strategists can imagine and devise countless such scenarios that evoke fear of the enemy! But
such imaginary exercises cannot legitimate a call to arms.
• The uncertainty of assessing WMD threats is another problem, especially given the aftermath of the
Iraqi war. Did the U. S. overestimate the immediate WMD threat that Iraq posed?
• One could ignore serious doubts or contrary evidence in this regard, especially if it did not suit desired
conclusions or objectives. The temptation to “politicize” intelligence is difficult to resist (Gellman and
Pincus 2003: A1).
• Are there better (less violent) alternatives for countering proliferations of WMDs other than direct
military intervention?
• Do you need to counterattack proliferation of WMDs by WMDs, as was almost the case with the war on
Iraq? This is mimesis with vengeance Griffith (2003).

Currently, we fear if the global terrorists would have access to and freely use WMDs on the enemy.
The fear or suspicion may be legitimate, but not serious enough to justify preemptive wars. One must still
consider various methods of diplomacy and deterrence to avoid war, and even engage the enemy terrorist
and non-terrorist countries in serious dialogue for more collaborative roles of discouraging proliferation and
encouraging world peace and harmony.

Concluding Remarks
We need to revise the jus in bello, jus ad bellum and jus ex bello conditions given advances in war
technology, weapons of mass destruction, nuclear weaponry, and the like. Targeted war instruments
zoomed only on the combatants are no longer possible, as the range of these nuclear missiles and WMDs
defy any zonal attack. We need to evaluate war “with an entirely new attitude” that generates public
conversation, global dialogue, and world moral consensus.

Given the aftermath of Iraq war and the current war on terrorism in Afghanistan, most ethical scholars
seem to revise their views on the just war criteria and consider them either too permissive or too restrictive.
They are too permissive, since the criteria on proportionality and discrimination can allow massive,
avoidable, and unjustified damages and losses of innocent life, so long as they are unintentional and indirect

grotesquely unproductive, it violated the Geneva Conventions and the U. N. Conventions on Torture, and worse, it provided
terrorists and insurgents operating in the region invaluable propaganda and alienated countless previously sympathetic Iraqis
(Danner 2004: 32-33, 42-46; se Seymour Hersh 2004a: 42, Hersh 2004b: 38; and Elisa Massimino 2004: 74-76).

50
(Burke 2004). On the other hand, a just war theory informed by a predisposition against violence and an
orientation to reconciliation could restrict the discipline and the use of violence in war (Forrester 2003). In
general, all seem to agree that the just war thinking fails to attend sufficiently to the psychological and social
roots of violence, the moments of transition from violence (requiring a jus ex bello), or alternative modes of
conflict resolution.

Recently, economic sanctions as an alternative to war are becoming popular. However, the
disproportionate and indiscriminate harm produced by a decade of U. N. sanctions against Iraq and its
innocent populations (especially women and children) suggest that sanctions turn out to be a “continuation
of war” or even a “war crime” rather than an alternative to war. Moreover, most of the sanctions have not
really produced the intended effects. Some, therefore, suggest ethical sanctions.

There is much debate still whether the theory of just war begins with a presumption against war, or
against violence, or against injustice. The Second Vatican Council approved “conscientious objection” and
most of us condemn “uncritical conformism” and “exaggerated nationalism” implied in wars. Many
scholars also agree that the American culture, for several reasons, has a deeply embedded presumption in
favor of violence. Some even agree that war is its own justification. Some Americans believe that war is a
political subject, and that as a “default position” we should give a carte blanc to our legitimately elected
leaders when it comes to war. Other feel that, given that a state has vested interests in promoting war, and
since wars unleash horrible violence and torture, we should not surrender to the president or the state our
responsibility to make moral judgments about when a war is just or not.

The Golden rule applies here: we should treat others as we would like to be treated by them. Hence, in
general, our presumption should be against the call of arms in favor of peace, and we should be seriously
engaged with the moral problems associated with justifying any war. An ethical and moral response to war
or violence must do more than decide whether a particular use of military force is just; it must also include
education, prevention, and a wide use of alternative means, all guided by prudence and a fundamental
commitment to reconciliation and peace (McCormick 2006: 158-162).

Wars have never solved problems in the past, nor will they in the future. Mass killing of combatants,
who otherwise are undertaking the sacred duty of defending their country, cannot be justified under any
circumstance, not even by the theory of a just war. In a socialized, civilized, digitized and globalized world
we must proactively seek new and nonviolent methods of realizing human solidarity across borders and
living in global harmony. That alone can assure peace and prosperity for all humankind; that alone can
assure the just exercise of our human rights and duties, privileges and powers, immunities and liabilities for
the human planet and the universe.

51
 Table 14.1: A Taxonomy of Human Rights
[See also Hollenbach, David (1979)]

Human Types of Rights

Concerns Personal Social Instrumental
(Instrument to uphold these
rights)
Bodily* Food rights Community food rights Food or food-stamp rights
Shelter rights Community shelter rights Social welfare programs
Safety rights Community safety rights Safety laws
Security rights Community security rights Homeland Security laws
Personal healthcare rights Community healthcare rights Medicare, Medicaid, Public Health
Clean ecology rights Community ecology rights CAFÉ, EPA laws

Family* Dating rights Inter-ethnic group dating rights Dating laws and mores
Marriage rights Social marriage cultures Inter-marriage laws
Inter-ethnic marriage rights Inter-ethnic marriage rights Inter-marriage laws
Inter-religious marriage rights Inter-religious marriage rights Inter-marriage laws
Procreation rights No gender-bias birthing rights No forced sterilization
Family rights Community family rights No family limit laws

Religious* Personal religious rights
Religious practice rights
Personal expression rights
Evangelization rights
Religion conversion rights
Religious social rights
Community religious rights
Religious social expression rights
Community evangelization rights
Societal conversion rights
Freedom of personal religion
Freedom of community religion
Freedom of expression
Freedom of religion adoption rights
Freedom of religion conversion

Political Voting rights Community voting rights Franchise law rights

Political affiliation rights Socio-political affiliation rights Democracy rights
Voicing rights Community voicing rights Right–to-be-heard law
Legal rights Community legal rights Township/City/County law
Law & order rights Community law & order rights Government law & order
Common law rights Social common law rights Tort Law rights
Common good rights Social common goods rights Eminent domain rights
Due process rights Social due process rights Due process procedures
Non-slavery rights Non social slavery rights No slave trade laws (civil rights)

Movement Public transportation rights Community transportation rights Non-segregation rights

Geographic mobility rights Geographic social mobility rights Non-redline rights
Upward mobility rights Community upward mobility rights Non wealth-barrier rights
Horizontal mobility rights Social horizontal mobility rights No social enclaves

Association Affiliation rights Social affiliation rights Freedom to form associations

Gathering rights Social gathering rights Freedom to gather in public
Rallying or protesting rights Mass rallying rights Freedom to protest
Advocacy rights Social advocacy rights Freedom to advocate cause
Philanthropic rights Social philanthropic rights Tax exemption status

Economic Gainful employment rights
Living wage rights
Skills acquisition rights
Gainful productivity rights
Equal opportunity lending rights
Entrepreneurial rights
Gainful social employment rights Unemployment compensation
Family living wage rights Minimum wage laws
Social skills acquisition rights ?
Gainful social productivity rights ?
Community lending rights Equal Lending Act
Community entrepreneurial rights Freedom of market entry/exit

Communication Visibility rights Social visibility rights Freedom of self-expression

Linguistic rights
K-12 education rights
Telecommunication rights
Freedom of speech rights
Freedom of writing
Community lingual rights
Social education rights
Social telecommunication rights
Social freedom of speech rights
Social freedom of writing
Freedom of language rights
Freedom of education; no segregation;
Freedom of communication medium
Freedom of speech rights
Freedom of speech rights

* These may be construed as natural, inalienable, absolute, fundamental and primary human rights, while the remaining may be reckoned as
secondary, positive, and essentially derived rights from the primary human rights.

52
 Table 14.2: Conflicting/Supporting Rights and Duties of
Employers versus Employees

Context of Employers’ Employees’

Rights and Rights Duties Rights Duties
Duties
Hiring To decide whom to hire, To be fair in hiring Privilege for gainful Duty to self-train to fit job
how many, when and practices with no discrimi- employment when market conditions
under what conditions nation based on color, race, qualified
creed, nationality, age and
gender.
Firing To decide whom to fire, To be fair in firing Right to be fired when Duty to constantly update
how many, when and practices with no discrimi- costs of maintaining one’s skills, talents and
under what conditions nation based on color, race, employees far exceed the usefulness to the employing
creed, nationality, age and benefits and skills they company.
gender. bring.
Attracting, To decide whom to Duty to attract, retain, Right to job enrichment, Duty to seek and pursue to
retain, recognize, challenge, develop and enlargement, rotation, job enrichment, enlargement,
Retaining & promote, or develop via recognize skills, talent, and retraining, skills-updating, rotation, retraining, skills-
Development retraining and accomplishments. and general self- updating, and general self-
reeducating development. development.
opportunities,
Wages/Salary Right to pay as per Duty to protect minimum Right to demand wage as Duty to protect one’s wage as
market value of the wage and market and social per one’s fair market per market value and social
employee value of the employee. value need by providing required
service.

Voluntary/ Right to protect patents, Duty to respect the rights of Right to exit the company Duty to notify quitting as per
trade secrets, and other employees to quit, hut also and join the competing protocol, and not to violate
Exiting intellectual property tied to protect patents, trade company. patents, trade secrets and
in with those who quit. secrets, and other other intellectual rights of the
intellectual property tied in previous employers.
with those who quit.
Promoting Right to decide whom to Duty to be fair and Right to be developed, Duty to train and update
promote, how, when and equitable to distributing promoted and recognized oneself, and to contribute
with what rewards. recognitions, promotions for valuable contributions one’s best to the company,
and rewards across all to the company. and this seek promotions.
employees with no
discrimination.
Appraising Right to appraise Duty to appraise employees Right to be assessed and Duty to be open and
employees periodically periodically through fair appraised periodically cooperative when assessed
through fair and and objective performance through fair, transparent and appraised periodically
objective performance appraisal systems. and objective performance through fair, transparent and
appraisal systems. appraisal systems. objective performance
appraisal systems.

Due Process Right to establish due Duty to establish due Right to complain and Duty to complain and grieve
process systems for process systems for grieve when mutually when mutually agreed on
receiving, handling and receiving, handling and agreed on terms of work, terms of work, wages and
settling employee justly settling employee wages and working working conditions are
complaints and complaints and grievances. conditions are violated. violated.
grievances.
Safety Right to protect worker Duty to protect worker Right not to be harmed, to Duty and responsibility to
safety and prevent harm safety and prevent harm in worker safety, to harm prevent and protect oneself
in and around work and around work prevention in and around from harm, and risk of harm,
environment. environment. work environment. in relation to body, mind,
heart and spirit in and
around work environment.

Privacy Right to protect worker Duty to protect worker Right to worker privacy in Duty to enable one’s worker
privacy in relation to privacy in relation to relation to personal and privacy in relation to
personal and family personal and family assets family assets and liabilities personal and family assets
assets and liabilities and liabilities brought to brought to work and work and liabilities brought to
brought to work and work and work environment. work and work environment.
work environment. environment.

53
Table 14.3: A Hohfeldian Analysis of Corporate Executive Rights and Duties
Hohfeldian Jural Corporate Executive
Concept of Correlates/ Duties & Responsibilities
Right as: Opposites under bankruptcy situations
Corporate executives have a duty to
respect the rights of all stakeholders by
Duty providing them all material financial
information on corporate performance,
Claim if they so demand it.
Corporate executives have no-right to
deceive stakeholders by exaggerated
No-right financial statements of corporate
performance.
Corporate executives have no-right for
legal approval or social legitimacy if
No-right distressed corporations arbitrarily
close plants and force massive layoffs.
Privilege Corporate executives have a privileged
duty to safeguard the corporation and
Duty not to abuse Chapter 7 or 11
bankruptcy provisions but honestly
strive to Corporate the company for
good.
Power to operate, downsize or close
plants or parts of the corporations or
sell them to others under stipulated
Liability conditions, but as long as these are the
last and only alternatives.
Power Despite power to manage and operate
corporate situations, executives are
Disability disabled from harassing their
stakeholders by deceptive financial
reports and other fraudulent business
practices.
Once legally approved for bankruptcy
or business corporate, executives are
immune from external interference,
Disability unless they seriously violate
stakeholder rights.
Immunity Despite legal approval, corporate
executives may be held liable for
Liability generating disproportionate losses or
injustices in the fulfillment of their
Corporate duties.
54
Stakeholders’ Duties &
Responsibilities under
bankruptcy situations
Duty for seeking and studying clear and
adequate information on corporate
financial performance and related
business activities before acting upon it.
No-right to claim ignorance on
unintended consequences that are
reasonably foreseeable in companies
under a bankruptcy or turnaround
situation.
No-right but privilege to invest or
disinvest in distressed companies either
as employees, customers, suppliers or
creditors.
Privileged duty to protect themselves
and other stakeholders when they
suspect decline, distress or insolvency of
corporations they have a stake in.
All legitimate stakeholders are
empowered for equitable
compensations, as also be prepared for
incurring substantial losses.
Stakeholders are normally disabled
from harassing turnaround executives
by severe public and social scrutiny or
interference, especially, when the latter
are honestly trying to save the
corporation.
Disable stakeholders of losing
corporations from further losses by
being timely warning and counsel on
imminent bankruptcy consequences.
Despite legal protection, stakeholders
could be liable for harassing turnaround
or bankruptcy executives in the
fulfillment of their reorganization or
liquidation duties.
 Table 14.4: Bill of Rights and Duties of Corporate Executives and Stakeholders
Hohfeldian Corporate
Privileges Executive
Privileges
To Safety Privilege to safe entry in
the legally approved
competitive corporate
market; privilege of safety
from public harassment.
To Know Privilege that corporate
executives receive objective
(i. e., to be
feedback on the firm’s
informed) products and operations.
To Choice Privilege to offer a wide
variety of competitively
good and socially safe
corporate products and
services.
To be Heard Privilege to be heard by
proper authorities when
unduly harassed by
corporate stakeholder and
non-stakeholder public.
To Redress Privilege to adequate
compensation when unduly
maligned or vandalized by
corporate stakeholder and
non-stakeholder public.
To Full Privilege to advertise and
deliver full value of
Value
corporate product-bundles
that includes no harm.
To Privilege to educate
corporate stakeholder and
Education
non-stakeholders about the
costs and benefits of
corporate.
Represen- Privilege to an objective
representation and
tation and
unbiased participation of
Partici- corporate stakeholders
pation when serious corporate
product/service issues
arise.
Corporate Corporate Executive
Stakeholder “No-Rights”
Privileges
Privilege to corporate “No-right” not to protect
strategies, products and corporate customers and
services that are non-customers from all
personally and socially personal and social harm of
safe and just. unsafe and addictive
products.
Privilege to truth in “No-right” not to truthfully
corporate advertising and inform and instruct
promotions without corporate stakeholders
information overload or through objectively clear and
under-disclosure. meaningful promotions and
products. Hence, no over-
marketing and deceptive
corporate offerings!
Privilege to choose from a ‘No right’ not to offer a wide
variety of socially safe variety of corporate product
corporate products and bundles that are socially and
service packages. competitively safe. Hence,
build justice before variety.
Privilege to complain to ‘No-right’ to immunity when
proper authorities about legitimately opposed by
corporate abuses and be corporate stakeholder and
heard. non-stakeholder publics.
Hence, avoid corporate
abuses and seductions.
Privilege to recourse and ‘No-right’ to demand undue
adequate compensation compensation when unjustly
when unjustly tricked into maligned or vandalized by
attractively deceptive corporate stakeholder and
corporate packages. non-stakeholder public.
Privilege to receive on ‘No-right’ to assume that
purchase full value of corporate stakeholder and
corporate product-bundles non-stakeholders will not
that include no harm. expect full value that includes
no harm. Hence, sellers
beware!
Privilege to educate ‘No-right’ to demand that
yourself on corporate current and prospective
products and services. stakeholders will seriously
Hence, learn when to say educate themselves about the
“no.” costs and benefits of
corporate. Hence, counsel
them.
Privilege to represent ‘No-right’ to an objective
objectively serious representation and unbiased
corporate stakeholder participation of corporate
issues as and when they stakeholder and non-
occur to proper corporate stakeholders when serious
or government product/service issues arise.
authorities. Hence, preempt problems.
55
Corporate Stakeholder
“No-Rights”
Society and public have “no-right”
not to provide safe market entry to
responsible corporate executives
even though they may not ensure
socially safe corporate products
and services.
.
“No-right” not to search, shop and
compare corporate products and
services from representative
competitive corporate offerings
and thus learn about their justice
and equity.
‘No-right’ to demand or expect
access and choice to a variety of
competitively and socially safe
corporate products and price
packages. Hence, choose
cautiously.
‘No-right’ to be heard and acted
upon by proper authorities when
complaining about corporate
abuses. Hence, negotiate redress
prior to corporate contracts.
‘No-right’ to undue compensation
when justly or unjustly tricked into
attractively deceptive but losing
corporate packages.
‘No-right’ to assume that corporate
products will always deliver full
value that includes no harm.
Hence, buyers beware!
‘No-right’ to educational and
counseling programs that enable
better education on corporate
products and services. Hence, also
work on your own.
‘No-right’ to demand to be heard
and redressed when corporate
executives rightly represent to the
right stakeholders with just
procedures. Hence, act much
before problems arise.
 Chapter 15
The Ethics of Corporate Moral Reasoning and Moral
Judgment or Decision-Making

“The unexamined life is not worth living” (Socrates). That is, without critically inquiring into the knowledge of
life which is well-being and valuable, life is not worth living. Critical thinking questions existing theories and
their unexamined and obsessive assumptions and generalizations, constraints and “best” practices of the
prevailing system of management, and tries to replace them with more valid assumptions and generalizations
that uphold the dignity, uniqueness and inalienable rights of the individual person and the community. Better
outcomes result from asking the right questions than from having the right answers. In the diverse, pluralist
cultural environment of today, the promise of a truly generative dialogue among Occidental (Western) and
Oriental (Eastern) cultures and civilizations holds great hope for the future. Karma Capitalism is a term used in
leading business schools of the West such as Harvard, Wharton and Dartmouth where students are reading the
Bhagavad Gita, the ancient Hindu text about a warrior prince facing a moral dilemma. The Dharma of
Capitalism of the East is teaching the executives of the West to take a more holistic approach that puts purpose
before goals and stakeholders before stockholders. C. K. Prahalad coined a new expression “Inclusive
Capitalism” to advocate that corporations can simultaneously create value and social justice. Critical thinking is
an “inclusive” thinking system that can facilitate this dialogue such that all of us have a meaningful space and
place in this universe. After defining critical thinking and arguing its importance for executives, this Chapter
introduces critical thinking in three parts: Part One: Various Approaches to Critical Thinking; Part Two: Major
Theories of Critical Virtuous Thinking, and Part Three: Critical Thinking as applied to corporate Problem
Solving. Several contemporary business cases will be invoked to illustrate the need, nature and scope of
corporate critical thinking.

Case 15.1: Dassault Aviation and the Defense Ministry, India

On February 2012, the Indian Ministry of Defense selected Dassault Rafale for the Indian Air Force's
MMRCA (medium multi-role combat aircraft) program. The MMRCA competitive bid, also known as the
MMRCA tender, was an open bid to supply 126 multi-role combat aircraft to the Indian Air Force (IAF).
This competition started off as a requirement for a light cheap fighter to replace the ageing MiG 21. The
Ministry of India had allocated 82,000 crore (US$14 billion) for the purchase of these aircraft, making it
India's single largest defense deal. It would have been the biggest military aviation contract in the world.
The MMRCA tender was floated with the idea of filling the gap between its future Light Combat Aircraft
and its in-service Suk hoi Su-30MKI air superiority fighter.

The MMRCA tender contest attracted six fighter aircraft: Boeing F/A-18E/F Super Hornet, Dassault
Rafale, Eurofighter Typhoon, Lockheed Martin F-16 Fighting Falcon, Mikoyan MiG-35, and Saab JAS
39 Gripen. On April 27, 2011, after an intensive and detailed technical evaluation by the IAF, it reduced
the bidders to two fighters — Eurofighter Typhoon and Dassault Rafale. On 31 January 2012, the
Ministry of Defense (MOD), India announced that Dassault Rafale won the bid due to its lower life-cycle
cost. Rafale’s closest contender in cost was Eurofighter's Typhoon. Contract negotiations ensued. As
agreed under the contract, Dassault will supply 126 Rafale fighters. The first 18 fighters will be supplied
by 2015 and the rest will be manufactured in India under a technology transfer to Hindustan Aeronautics
(HAL). This contract will be the first international supply for Rafale.

The decision was received in France with the French President Nicolas Sarkozy, Minister of State for
Foreign Trade, Pierre Lellouche, and Dassault Aviation- all issuing statements in support of the decision.
Dassault Aviation shares soared more than 21% on the Paris Stock Exchange immediately after the
breaking news. Nicolas Sarkozy said that the selection of Dassault's Rafale multi-role fighter "goes far

1
beyond the company that makes them, far beyond aerospace — it is a vote of confidence in the entire
French economy."

Eurofighter issued a statement saying that although they are disappointed, they respect the decision of
the MOD: "India took the decision to select our competitor as the preferred bidder in the Medium Multi-
Role Combat Aircraft (MMRCA) tender. Although this is not yet a signed and sealed contract,
Eurofighter surmised contract negotiations were still ahead. With the Eurofighter Typhoon, “we offered
the Indian Air Force the most modern combat aircraft available,” they said. Officials at the British High
Commission in Delhi also said they were disappointed with the decision but added that it was expressly
said this was about the cost of the contract, not a reflection on the health of bilateral relations between
India and the countries.

The Dassault Rafale Contract is Revisited

Currently, however, India’s $12 billion Medium Multi-role Combat Aircraft (MMRCA) program has
run into turbulence due to a disagreement over delivery commitments, according to an Indian Defense
Ministry source. The Defense Ministry, India, in concurrence with the Defense Minster A. K. Antony,
had short-listed Dassault Aviation, a French Company, and Rafale combat aircraft was selected as the
lowest and preferred bidder two years ago (2012) for supplying 126 fighter aircraft planes at a cost of $12
billion. But the deal was stalled for more than two years, and was reported to cost US$28-30 billion in
2014.

For the last two years the Defense Ministry has still been negotiating the price and terms and
conditions of the contract with Dassault Aviation. The Indian Air Force has told the new Mod
government that Dassault Aviation, maker of the Rafale jet, and Hindustan Aeronautics Ltd. (HAL),
which will produce the aircraft in India, must put their delivery guarantees in writing before the Ministry
of Defense (MOD) signs the contract. But HAL is unwilling to give any written guarantee on the delivery
schedule for the Indian-made Rafales, and instead wants Dassault to guarantee deliveries of the Indian-
made aircraft, a condition the French have already rejected, the MOD source said. The Dassault deal
proposal stipulates that the first 18 aircraft will be supplied by the vendor — Dassault — in fly-away
condition and the remaining 108 aircraft will be manufactured — in this case, by HAL — through
technology transfer from Dassault. The delivery of the aircraft should begin three years after the contract
is signed.

On behalf of Dassault, the French government has been urging India to expedite the multi-billion
dollar deal, fearing the new government that comes to power after the Lokh Sabha elections of May 16,
2014 may stall the negotiations further. France wants India to sign a pact to provide government
guarantee for completion of the Dassault-Defense ministry negotiations, but the Defense Minister A K
Anthony has refused to do so. Anthony argued that government guarantee cannot be provided when
negotiations are still under way.

Many subsequent issues have forced reconsidering the original deal. For instance, the French
seemingly found an easy market in India, a country willing to pay excessively for the aircraft, because
New Delhi has been inclined to make India a “great military power” on the basis of imported armaments.
But the question raised in India was why should India buy the Rafale combat aircraft that was rejected by
every other interested country—Brazil, Canada, the Netherlands, Norway, South Korea, Singapore, and
even the cash-rich but not particularly discriminating Saudi Arabia and Morocco? The first whiff of
corruption in the deal led the previous defense minister, A K Antony, to strand the deal at the price
negotiation committee stage.

Other issues include:

2
Life Cycle Cost: This appears to be the biggest problem. This is something Government of India has
never dealt with before. The deal is complex and it is challenging to assess Rafale’s life cycle cost based
on future events like inflation, exchange rate fluctuations, and global economic conditions. There are
complaints about the procedure of calculating the life cycle costs, and this issue is far from being settled.
Before bringing the deal to the Cabinet Committee on Security for final approval, the defense ministry
wants clarification on LCC, defense Minister Anthony said. Moreover, LCC has to be taken into the
equation in determining the lowest bidder. Meanwhile senior BJP leader and former finance minister
Yashwant Sinha has written to Anthony raising several questions over the “conceptual shift” in the
defense procurement policy, and has expressed fears that the LCC concept may lead to corruption. [See
Deccan Herald, Monday, March 31, 2014, p.1].

Cost Escalation: As of January 2014, the cost of the aircraft had reportedly escalated by 100% to US$28-30 billion.
The cost of the program was projected at US$12 billion (Rs. 42,000 crore) in 2007. The cost increased to US$18
billion (Rs. 90,000 crore) in January 2012 when the lowest bidder was declared. In February 2014, it was reported
that contract had not been signed owing to the fact that the department's budget had been spent for the year, but that
it was expected to be signed in the next fiscal year, not before six months after the new government takes charge
after the elections. Because of the delay in concluding the deal, the cost for procurement has risen exponentially – it
is now almost 100% higher than the initial estimate. This creates another problem for meeting the requirement of
down payment which is about 15% of the cost. Based on media report, the option to cut down the order is also being
considered.

Conflict Dilemma: According to the contract, Dassault has to give delivery guarantee for the fighters that are going
to be manufactured in collaboration with Hindustan Aeronautics Ltd (HAL) of Bangalore, India. Even though these
clauses were part of the initial requirement, Dassault is not comfortable and shying away. Both parties have some
valid concerns. HAL will be working on design or technology provided by Dassault and will have necessary “know-
how.” In absence of “know-how” HAL is not sure of meeting the dead line. Based on experience and failures in the
past where HAL had undertaken to manufacture fighters based on only technology transfers, HAL and the
government of India (GOI) do not want to take chances. France has said it will help Hindustan Aeronautics Ltd
stick to delivery schedules, but that it cannot give guarantees for production of the aircraft undertaken at a facility
over which it has no administrative or operational control. Hence, it appears that Dassault has suggested delinking
108 aircraft to be manufactured by HAL. Dassault wants a separate contract with HAL for delivery guarantee. This
will result in violation of the terms of the initial request and of the tender that it entered into of its own free will.

The prohibitive cost of the French aircraft supposedly made the new finance-cum-defense minister
Arun Jaitley apprehensive. He decided, as is rumored, of revising the order downwards from 126 aircraft
to 80 or so Rafales. The IAF headquarters pre-emptively acquiesced in the decision to save the deal. But
considering the various negatives of the proposed deal and the long-term national interest of India, Arun
Jaitley was well inclined to cancel the costly Rafale transaction altogether. Recently, as on 10 January
2015, India hinted of not signing the deal with Dassault in favor of procuring Su-30MKI or Su-35, and
with this it appears that everything was not as transparent and fair as was described. On January 14, 2015
it was said that a French delegation will visit New Delhi to salvage the Dassault Rafale deal.

Based on the Indian Government’s current stand on the Rafale deal, runner-up Eurofighter decided to
lower the price of the Typhoon jets to stay in the race. This decision came after extensive discussion
amongst the member nations. However, the Indian Ministry of Defense (MOD) officials ruled out any
possibility of a comeback by the Eurofighter Typhoon in the competition. According to them, Dassault
Rafale beat the Typhoon by a huge margin in terms of life cycle costs as well as direct acquisition costs.

Terminating the Dassault Rafale deal may be disruptive, but Arun Jaitley maintained that the
Narendra Modi government wishes to send a strong message to the military, the defense procurement
systems, the defense ministry bureaucracy, and foreign companies craving for exorbitantly priced, one-

3
sided contracts, that the newly elected government is determined to make a new start and conduct defense
business differently and much more defensively.

References (chronologically sequenced):

Pandey, Vinay (2008). "F-16 maker Lockheed mounts an India campaign". The Times of India, January 17, 2008.
Pandit, Rajat (2009). "India ready for war? Forces grapple with delays, red tape". The Times of India. January 20, 2009.
"India says to have fifth generation jets in 2018". The Times of India. 23 April 2010.
Watt, Nicholas (2013). "David Cameron to press India over Eurofighter jet sales". The Guardian (London), February 15, 2013.
"Dassault CEO talks of ‘hope and uncertainty’". The Hindu. 26 July 2013.
"Reliance, Dassault planning facility to produce warplane wings: report". NDTV. 10 December 2013.
"RIL, Dassault plan to set up Rs 1,000-cr warplane facility". Financial Express. 10 December 2013.
Pandit, Rajat (2014). "Mega 126-fighter jet deal will be inked next fiscal, defense minister AK Antony says". indiatimes.com.
TNN, February 7, 2014.
See also Deccan Herald, Monday, March 31, 2014, p.1.
Vivek Raghuvanshi (2014), “India's Fighter Jet Negotiations Stall over Delivery Commitments,” filed under World News, Asia
&Pacific Rim, June 16, 2014, 3:45 am.
“Indian MRCA competition, “Wikipedia, the free encyclopedia, retrieved July 6, 2014.
Karnad, Bharat (2014), “Why Rafale is a Big Mistake,” The New Indian Express, July 25, 2014.
“Rafale Multirole Combat Fighter, France,” www.airforce-technology.com, a product of Kable
http://www.defense-aerospace.com/article-view/feature/132379/why-rafale-won-in-india.html
http://www.defenseindustrydaily.com/mirage-2000s-withdrawn-as-indias-mrca-fighter-competition-changes-01989/

Ethical Issues:

1. Was the process by which the IAF and the MOD selected Dassault Rafale as the finalist in the MMRCA tender
closed bid legal, ethical, and moral, and why?
2. Is the Indian Defense ministry morally justified in prolonging the Dassault-Rafale deal negotiation for over two
years, and then discarding it, almost doubling the cost of the project originally agreed upon? Explain.
3. Is this prolongation an example of good ethical and moral reasoning and good moral judgment on both sides of
the equation? Explain.
4. Given that India’s air defense based on aging and obsolete MIGs was progressively weakened, to what extent
was the long delay in the Dassault-Rafale deal justified teleologically, deontologically, and from a distributive
and corrective justice point of view?
5. Was it a prudent and brave proactive defense strategy? In short, was this delay a violation of the four cardinal
virtues? Discuss.
6. Is the French government justified in putting pressure on India for expediting the Dassault-Rafale deal?
Discuss.
7. Is the LCC “conceptual shift” valid and necessary? Explain. Will it spur corruption? Why?
8. How would you apply legal, ethical and moral reasoning skills and processes to handle this Rafale deal justly
and equitably to all parties concerned?

Case 15.2: Arun Jaitley, Modi’s Chanakya

Jaitley is a Brahmin, and a BJP spokesperson described him as Modi’s Chanakya, recalling
Chandragupta Mauriya’s advisor around 400 BC. A more apt description for Jaitley would be as the
prime minister’s input provider, sounding board and troubleshooter.

Arun Jaitley, 61, is at the center of politics in New Delhi. The most powerful leader after Prime
Minister Narendra Modi, Jaitley heads two critical weighty ministries, Finance and Defense, two of the
top four ministries in India, the other two being Home (Rajnath Singh) and External Affairs (Sushma
Swaraj). He also handles Corporate Affairs. All these three big portfolios “for a man who had just lost
the first parliamentary election he had contested from Amritsar (his birthplace), and had expressed his
reluctance to accept a ministerial assignment on moral grounds” (Business India: Cover Feature, June 9-
22, 2014, p. 35)! Jaitley’s long-standing relationship with Modi is one of the reasons the latter has

4
entrusted him with so many big portfolios. All party spokespersons run to him for advice. Ministerial
colleagues like Nirmala Sitharaman (Commerce & Industry Minister) and Piyush Goyal (Power) rush to
seek his guidance. He is Modi’s ace troubleshooter on almost all issues. Modi depends upon on Jaitley’s
sharp legal mind for taking critical decisions. Besides his legal background, Jaitley’s large circle of
friends in the media, judiciary, big business, bureaucracy and even sports, makes him a critical asset in
the Mod government.

Jaitley’s friends cut across party lines. He shares a good relationship with Congress leaders
Jyotiraditya Scindia, Ahmed Patel and P. Chidambaram. It is said that for the forthcoming Budget he even
consulted Chidambaram and ex-Prime Minister ManMohan Singh. Soon after taking office, Jaitley had
an hour-long meeting with RBI Governor Raghuram Rajan. Among other things, the two discussed ways
to contain inflation and revive economic growth. Marketing consultant Suhel Seth calls Jaitley the “Amol
Palekar of Indian Politics.” Suhel Seth, who has known Jaitley for well over two decades, asserts “there
isn’t an iota of change in the man, whether he’s in or out of power. He’s truly a friend.” Though a
disciplined man who loves his early morning walk in Lodi Garden, Jaitley is known to party regularly.
Besides Suhel Seth and Rajang Karanjawala, his close friends include Attorney General Mukul Rohatgi,
Hindustan Times Group Chairperson Shobana Bhartia, and bureaucrat turned politician N. K. Singh.

He was also associated with sports and was appointed Vice President of BCCI because of his love for
the game of cricket and his close associations but he resigned when the IPL match-fixing scandal
unfolded. Similarly, he resigned from the post of President of the Delhi District Cricket Association after
a service of 13 years to concentrate on the first love of his life: politics. He has made great contribution in
improving the standards of the stadium in Delhi, which was rated as one of the best by the BCCI.

The Makings of Arun Jaitley

Jaitley’s parents are from Punjab. His father, Maharaj Kishen Jaitley, a lawyer, came from Lahore,
while his mother, Ratna Prabha, belonged to Amritsar. The couple was in Amritsar expecting their first
child, Arun’s older sister, when the Partition riots broke out. The family decided to stay on in India. Later
they moved to NarainaVihar in Delhi into a house vacated by a Muslim family that had left for Pakistan.
MK Jaitley resumed his legal practice, while the growing boy Arun Jaitley was schooled at St. Xavier’s
Delhi, a missionary school, and later was admitted by the prestigious Sri Ram College of Commerce
(SRCC), where he soon became the college union president. Arun was smart, articulate, and a good
debater, recalls his classmate at SRCC, Raian Karanjawala, senior advocate and founder of Karanjawala
& Co.

Jaitley started his political journey as an Akhil Bharatiya Vidyarthi Parishad (ABVP) student leader
in the Delhi University Campus in the seventies. He was a prominent leader of a movement against
corruption launched in the year 1973 by Raj Narain and Jayaprakash Narayan. He was the convener of the
National Committee for Students and Youth organization appointed by Jai Prakash Narayan. In 1977,
being the convener of the Loktantric Yuva Morcha at a time when the Congress suffered a humiliating
defeat, Jaitley was appointed the president of the Delhi ABVP and All India Secretary of the ABVP. He
was then made the president of the youth wing of the BJP and the secretary of the Delhi Unit in 1980, a
short time after joining the party.

From Sri Ram College of Commerce (SRCC), Arun proceeded to study law in Delhi where he
became the president of the Delhi Students Union when Indira Gandhi declared emergency. “The day
Emergency was declared I slipped out of my residence. The police took my father into detention but
being a lawyer he was released immediately,” Arun Jaitley told Business Standard recently. The next day
of Emergency, Arun Jaitley organized a massive protest at the Delhi University campus and was promptly
arrested under the Maintenance of Internal Security Act. He spent the next 19 months in prison, opting

5
not to seek early release through an apology or an assurance that he would not participate in any political
activity. “He handled his time in prison in a stoic manner. The only time I thought he was a little low
when, on one occasion, he was not allowed to sit for his exams and he missed a year” recalls
Karanjawala. Jaitley was also convener of Jayaprakash Narayan’s student and youth wing, which brought
him in touch with other student leaders from the Lok Sangharsh Samiti such as Nitish Kumar and Lalu
Prasad.

Arun Jaitley’s legal career was quite exemplary. He practiced law before the Supreme Court of
India and several High Courts in the country since 1977. When VP Singh became Prime Minister in 1989,
Arun Jaitley was appointed Additional Solicitor General, one of the youngest to hold the post. In January
1990, Delhi High Court designated him as a Senior Advocate. He did the paperwork for the
investigations into the Bofors scandal. He has authored several publications on legal and current affairs.
He has presented a paper on law relating to corruption and crime in India before the Indo-British Legal
Forum. He was a delegate on behalf of the Government of India to the United Nations General Assembly
Session in June 1998 where the Declaration on Laws Relating to Drugs and Money Laundering was
approved. He stopped practicing law from June 2009.

In 1980, when Indira Gandhi returned to power, Jagmohan, the Lieutenant Governor of Delhi, tried to
demolish The Indian Express building. Arun Jaitley challenged it in the Courts (on the other side was
Abhishek Manu Shingvi, later Congress leader). That incident brought Arun Jaitley into close contact
with Ramnath Goenka, Arun Shourie, Fali Nariman, and Swaminathan Gurumurthy, Goenka’s chartered
accountant and legal advisor. It was this association that brought Arun Jaitley to the notice of Vishwanath
Pratap Singh in 1986-87.

Arun Jaitley became a minister in 1999 when the National Democratic Alliance (NDA) came to
power. Arun handled the Law, Information & Broadcasting, Disinvestment, Shipping, and Commerce &
Industry portfolios. While he found the Law Ministry intellectually challenging, Arun enjoyed and
governed better as a minister of commerce. He took on the US and the European Union over trade
liberalization in Doha, drew the blueprint for the Special Economic Zone Act, pushed for opening Indian
retail to foreigners, and convinced the government and the RBI to allow Indian companies to buy lands
overseas. “Now as Finance Minister, it’s good to see someone with an exploring mind,” says Ajay
Shriram, Chairman, Shriram Group.

Arun Jaitley took care of his staff as a lawyer beyond the call of duty. Traditionally, lawyers are
entitled to charge 10% of their fees as clerks (charge for clerical work) from clients, but not many lawyers
share this money with their staff. Arun Jaitley always did, says Om Prakash Sharma, his one-time
political secretary and now a Delhi MLA from Vishwas Nagar. Jaitley founded a clerkage corpus fund
whereby he ensured that the children of all his staff go to good schools. Some of them have grown up to
become dentists and engineers. “He also used this money to help his employees own a house,” adds Om
Prakash Sharma who has known Jaitley since 1972.

Arun Jaitley is married to Sangeeta (“Dolly Aunty” of many BJP juniors), and has a daughter Sonali,
now a lawyer with her own practice and who also campaigned for her father in the recent Amritsar MP
Seat campaign. Not less than forty of Jaitley’s relatives had turned their homes into campaign offices.
Being so astute and so much supported by his campaign crew, how and why did Arun Jaitley lose the
Amritsar seat to Congress opponent Amarinder Singh? That will remain a mystery for some time.
Recently, however, Sangeeta and Sonali went back to Amritsar to feed orphans on Sonali’s birthday.
Arun and Sangeeta have a son, Rohan, who just completed masters in law at Cornell University, USA.

Arun Jaitley is a man of simple tastes. His family often travels by trams and buses on vacations
abroad. Recalls a friend, while on a holiday in Vancouver, he chose Sarvana Bhavan over fancy

6
restaurants. Though a workaholic, he does not let work stress him, say his colleagues. “You will never
hear him shout, even if he is annoyed,” says a BJP junior leader. “Critics sometimes suggest that he rules
too much by the head and too little by the heart, but I have not found him to be a heartless person” said
Abhishek Manu Singhvi.

Those who campaigned for him in Amritsar say that he ensured that even the street-play actors called
from Delhi were looked after. Known to enjoy a hearty meal, Jaitley, however, is frugal and temperate
and keeps his indulgence in check. His other passions are cricket and old Bollywood films and songs.
While Jaitley lived at his house in Kailash Colony, his official residence, 9 Ashoka Road, was open for
use for others. It is here that cricketer Virender Shewag got married, as did BJP National Secretary Vani
Tripathi.

Arun Jaitley and NarendraModi

The partnership between Modi and Jaitley goes back a long way. When Modi, an RSS pracharak, was
appointed a BJP general secretary in the late nineties in Delhi, he stayed in the outhouse of Jaitley’s
official bungalow on 9 Ashoka Road, New Delhi. Jaitley helped familiarize Modi with Delhi and was
part of the move to oust then Gujarat chief minister Keshubhai Patel. After chief minister Modi’s new
government failed to contain the riots of 2002, many regarded him as a liability to the party, but Jaitley
remained steadfastly loyal. For years, behind-the-scenes Jaitley offered legal advice to the Gujarat
government in combating a slew of cases in connection with the riots and encounter deaths. When in the
last few years Modi became the obvious choice as the BJP’s prime ministerial nominee, Jaitley threw his
weight behind Modi, while L K Advani and Sushma Swaraj sulked and fought to stave off a Modi
takeover of the party, and others in the central leadership watched from the sidelines.

Arun Jaitley, along with Narendra Modi, Sushma Swaraj, and Pramod Mahajan, were among the most
popular leaders groomed by L. K. Advani in the 1990s. After Mahajan passed away and Modi shifted to
Gujarat, Jaitley acquired the mantle of being BJP’s chief strategist, managing several assembly polls and
the 2009 general elections. Jaitley stoutly defended Modi when the latter came under post-Godhra fire
from the media and the politicians. The most critical point in the Modi-Jaitley relationship came when
Vajpayee wanted to fire the then chief minister of Gujarat after the 2002 riots. In a tension-filled meeting
in April 2002, along with Advani, Arun Jaitley preempted Vajpayee’s move to dethrone Modi. Jaitley
flew to Gujarat and travelled with Modi to the national executive meeting in Goa where, before Vajpayee
could proceed, Modi offered to quit only to be rejected unanimously by the gathering. It was a master
strategy that worked, and the bond between Modi and Jaitley has grown stronger since.

In 2006 he became leader of the opposition in the Rajya Sabha and earned the respect of many
Congressmen because of his clarity, quick thinking and phenomenal memory. Pranab Mukherjee singled
him out as the man to watch. Since the party regularly assigned organizational work to him, putting him
in charge of various assembly polls as well, Jaitley is sometimes dismissed by his detractors as a
backroom boy. When Jaitley was defeated by Punjab veteran Captain Amarinder Singh in 2014 elections.
Jaitley mulled over returning to law practice, but Modi insisted he join his cabinet.

Currently all eyes are on Arun Jaitley as Finance Minister as he prepares to present his first National
Budget before July 31, 2014. He has taken charge at a time when Indian GDP growth has got stuck below
5% for the second year in succession, and there is fear that the fiscal deficit may exceed 5% of GDP in
2014-2015. In his initial comments after taking over the Finance Ministry, Jaitley acknowledged the
challenging times the Indian economy is facing. “We have to restore the pace of growth, contain
inflation, and obviously concentrate on fiscal consolidation itself” said Jaitley. Despite the mess that

7
government finances are in, expectations are high. The country hopes his Budget will reflect the quality
and challenge the country deserves.

References:
Nivedita Mookerji and Veenu Sandhu (2014) “Modi’s Chanakya,” Business Standard, Weekend, July 5, 2014, p.1.
Rakesh Joshi (2014), “Five Big Ideas for Jaitley’s Budget,” Business India, Cover Feature, June 9-22, 2014, pp. 34-40.
Kapoor, Coomi (2013), http://indianexpress.com/article/india/politics/pms-input-provider-troubleshooter-and-budget-author/
3/#sthash.pPyxQ2lT.dpuf, New Delhi.

Ethical Issues:

1. What are the ethical, moral, economic and political challenges to Arun Jaitley as the Union Defense
Minister of India, and what are the modes of ethical and moral reasoning and judgment does this
Office need for fulfilling the sacred duty of defending and protecting India and enhancing peace
along all its borders?
2. What are the ethical, moral, economic and political challenges to Arun Jaitley as the Union Finance
Minister of India, and what are the modes of ethical and moral reasoning and judgment does this
Office need for fulfilling the paramount duty of fighting inflation, sustaining growth and global trade
surplus, and eradicating poverty and disease in India?
3. What are the ethical, moral, economic and market challenges to Arun Jaitley as the Union Corporate
Affairs Minister of India, and what are the modes of ethical and moral reasoning and judgment does
his Office need for fulfilling his critical duty of bringing about economic recovery and social progress
and growth, full employment with meaningful work, just wages and salaries, financial market buyer-
seller transparency, fiscal honesty and corporate citizenship?
4. If you were a corporate Chanakya to Arun Jaitley for bringing about social harmony and solidarity,
and eradication of gender and caste discrimination in the country what advice would you give to
bring about distributive and corrective justice in areas marked with structured injustices?
5. If you were a corporate Chanakya to Arun Jaitley for bringing about educational, social, economic
and political reform in the country, what advice would you give to him based upon the ethics of
virtue and the ethics of mutual interpersonal trust?
6. If you were a corporate Chanakya to Arun Jaitley for bringing about strong and sustained economic
growth in the country via creativity, imagination, innovation, entrepreneurship and adventure in the
educational systems, what bureaucratic and regulatory structures would you dismantle based on the
principles of teleology, deontology, distributive justice, and corrective justice, and why?

Case 15.3: Mukesh Ambani: The New Media Moghul in India!

Towards the end of May 2014, the board of directors (BOD) of Reliance Industries Ltd (RIL) decided
to acquire control in Raghav Bahal’s Network 18 Media and Investments Ltd (market cap: Rs 5,665 crore)
and its subsidiary, TV 18 Broadcast Ltd (market cap: Rs 5,700 crore) [See Exhibit 15.3.1 for product
offerings]. This was done by the BOD empowering RIL to invest Rs 4,000 crore in Independent Media
Trust (IMT), an entity whose sole beneficiary is RIL. This meant that with money power, RIL, India’s
second largest company by market capitalization, was taking control of the Indian media. Obviously,
such corporatization of media would seriously weaken all independent media houses in India. If media
should be objective and reliable, then it should be independent from big businesses.

Exhibit 15.3.1: Network 18 + TV 18: Assortment of Offerings

8
 [Source: Daksesh Parikh (2014: 43)]

News Entertainment Film Production Portal Business Distribution & Investments

Aggregation
Business News Colors Famous Titles In.com Distribution of Channels:
CNBC – TV 18 Rishtey BhagMilkhaBhag Moneycontrol.com ETV ETV Telugu
CNBC – Awaaz MTV Queen IBNLive.com TV 18 ETV Andhra
IBN 7 MTV Indies Madras Café Firstpost.com Viacom 18 ETV Telangana
General News VH1 Bombay Talkies Burp
Regional News Nick Sons of Sardar News 18 Publishing and Financial Invest-
CNN-IBN Sonic Kahani E-Commerce distribution of: ments in start-ups:
Regional News Comedy Central Singh is King selling products Magazines Bookmyshow.com
ETV – MP ETV – Marathi OMG through portals, Including: Yatra.com
ETV - UP ETV –Gujarati Gangs of Wassepur and TV Channels Forbes Ubona-VAS
Rajasthan ETV - Oriya through Chip Stargaze (multi-
Bihar ETV Bengali HOMESHOP 18 Overdrive theatre screen)
Urdu ETV Kannada Modern Pharma Coliseum
Kannada Infotainment Entrepreneur Production House
Haryana History 18 Auto Monitor Topper Channel for
IBN Lokmat kids

However, Professor Kanu Doshi, dean finance, Weingkar Institute, argues that media, be it print or
electronic, is highly capital-intensive and can easily face cash flow problems. Earlier reports said that
Raghav Bahal and some of his key members decided to step down in order to make way for Mukesh
Ambani and his team to take effective control. Raghav Bahal, a first generation entrepreneur, who
founded the media and entertainment house, initially divested part of his equity some time ago, and still
found it difficult to survive the competitive onslaught coming from Times Now and ET Now, supported
and sponsored by India’s largest media house, Bennet, Coleman & Co Ltd, now controlled by the Jains.
Finding it increasingly difficult, Raghav Bahal has now decided to sell his enterprise to the Mukesh
Ambani team and use the realized sales revenue in another business venture. Professor Kanu Doshi sees
nothing wrong about this divestment; it is just a part of a global trend, he argues. For instance, Warren
Buffet bailed out owners of The Washington Post. Consultants Frost & Sullivan also rationalize this deal
by saying that “this is the new reality in business.”

In fact, the Indian TV industry as well as the cable/DTH service segments, have been struggling over
the past few years. Advertising is taking a beating. Conflict within the advertising industry over content
carriage rights and fees, poor regulatory support, heavy taxation, resource churn and the demand for
digital content has seriously impacted the advertising business in the negative. Increasing viewership,
moreover, has not translated into profitable bottom lines, and it is has been hard to sustain growth. Under
such dire circumstances, consolidation seems to be the only way to streamline operations, cut costs, and
survive. Throughout multi-media and international distribution, companies are working towards
consolidation. The oft-repeated term ‘convergence’ has been occurring in the telecom, media and
entertainment industries over the last few years (Gupta 2014: 42-43). For instance, Comcast, the US’s
biggest cable multi-service operator, has recently proposed to buy Times Warner Cable for $45 billion –
another example of convergence or consolidation of two big companies, whose combined presence may
reach every third household in America. Earlier, Comcast had bought NBC Universal, a media and
entertainment company, in two stages, from GE – the first lot in 2009 and the balance 49% stake in 2012.

Whether has become a Media Moghul in India by 2014 is still debated, and possibly irrelevant. The
fact is that one of India’s largest business houses has taken stake in the media sector through investments
from a listed company. K. K. Birla, another media baron, had invested in The Hindustan Times, but it was
through his private funds. How is going to ensure editorial independence and build a framework for
keeping commercial dealings at an arm’s length will be carefully watched and even emulated by others,
who may even contemplate similar media ventures, said Vimal Bhandari, CEO, Indostar Finance, a
Mumbai-based NBFC.

9
 Moreover, Mukesh Ambani’s foray into media is part of an overarching strategy towards achieving
leadership in the telecom space, and not guided by any ambition of being a media Moghul. Planning to
acquire a majority stake in Network 18 and TV 18 is a well-thought-out strategy that fits in with RIL’s
overall telecom roll-out plans. “It is synergistic with Reliance’s 4G plans,” says Ashish Chugani, head,
investment banking, Centrum Finance. In a strategic deal, valuation is not relevant, argues Chugani. The
deal cannot be examined as a stand-alone action in isolation; it is part of the group’s foray into telecom.
By taking over Network 18 and TV 18, has ensured that he gets a head-start in the media and
entertainment segment, one of the important building blocks that ensure a leadership position in the
telecom space. This acquisition will give Ambani a lot of content in education, e-commerce and
entertainment. It will get RIL a presence across several verticals (see Exhibit 7.3.1) of news and
entertainment channels. It is, therefore, a “smart strategy” says Deven Choksey, CEO of KR Choksey
Shares and Securities, a Mumbai-based broking house.

The takeover will allow RIL not just news and entertainment content, but also facilitate e-commerce
and offer interactive platforms to his telecom subscribers. RIL will control not just content in news,
entertainment and film production but also in the distribution mechanisms. Consumers are trying new
platforms to seek faster and accessible platforms to view content. Content is the prime driver in the
digital media. “The world is going digital and new platforms are emerging. The leader will have to
demonstrate not only the quality of content but also leadership in packaging and delivering the contents
on the platforms of consumers’ choice,” argues Smita Jha, leader, media and entertainment, PwC India.

Having full ownership of media content, platforms and distribution might give RIL a better
bargaining power with other content providers, especially when the telecom majors start charging for the
content. In which case, content companies will always remain cost centers for telecom companies, given
the mushrooming of content (print, television or internet) providers. Consolidation is the only way
forward in this industry, says M. M. Gupta, CMD, Jagran Prakashan, one of the few listed media houses
in India that is making profits. Ambani’s deal is sure to spark off more such deals in the media space,”
adds Rasesh Shah, founder chairman, Edelweiss Group. Shah had earlier facilitated capital flows to the
TV 18 Group.

But, while everyone may agree that RIL’s forays into media is a long-term 4G strategic move, will
deliver quality products and platforms and enable the media to grow to desired global levels of
excellence? Most business houses, foreign and domestic, that have taken to media have made it yet
another commodity. Content, platforms, films production, distribution, technology - each component of
the media value chain needs a specific mind set and creative skills, says Pritish Nandy, chairman, Pritish
Nandy Communications, a listed company focused on the production of films and having a string content
library. The Ambanis may have an edge over others in content, delivery, and technology, says Pritish, but
this may not ensure quality and excellence along the entire media value chain. It is best left to small
entrepreneurs or start-ups to develop new technologies, and content is best left to creative hub-shops.
Pritish Nandy opines that conglomerates should focus on delivery and distribution, and not on content
that must be left to young artists spread all over the globe.

Meanwhile, other investors with deep pockets like the Ambanis are indeed making inroads into the
media space. Kumar Managalam Birla’s Aditya Birla group is another industrial house venturing into
media. It has picked up a minority stake in the India Today group which, like Network 18 and TV 18, has
also a presence across verticals, including production of original content for television, India’s largest
printing press and magazines of repute like India Today, across several languages and Business Today.

References:

10
Parikh, Daksesh (2014), “The New Media Moghul,” Business India: The Magazine of the Corporate World, Special Report, June
9-22, 2014, pp. 42-46].
Alluri, SahadevaRao (2012), http://stockinventor.blogspot.in/2012/01/mukesh-ambani-media-mogulthe-dhirubhai.html.
http://indiatoday.intoday.in/story/bailout-for-raghav-bahl-network-18-signals-mukesh-ambani-willing-to-bet-big-money-on-
media /1/168680.html

Ethical Questions:
1. The ability to exploit media content over various distribution mechanisms may give Ambanis the edge, but is this
ethically and morally good for India in terms of honest reporting, universal coverage, objective news content, and
quality entertainment content?
2. Historically industrial concentration has stalled creativity and technological innovation. Hence would RIL focus on
radical technological and social breakthroughs in 4G platforms, and marketing breakthroughs in films production?
3. Do you fear that control of the entire media value chain that the Ambanis are aspiring as a good 4G strategy may
eventually “commoditize” media, and ethically and morally compromise the ultimate symbol of free India and the
bastion of Indian democracy? Explain.
4. Is convergence or consolidation in the culture-intensive media industry a morally and ethically healthy development
given the rich social, religious, cultural and linguistic diversity of India?
5. Media dominance will compromise and even threaten economic freedom, political choice, moral national conscience,
and value-education among the youth, as it happened in India during the 2014 elections and in other parts of the
world. Will this be another threat to free enterprise capitalism? Explain.
6. What ethical and moral reasoning and moral judgment skills would you deploy for questioning and stopping the
current industry concentration, market dominance and consolidation moves in the Indian media industry that may
seriously jeopardize honest reporting, universal coverage of national interests, objective news, and quality
entertainment content, and to what effect?

The Ethics of
Executive Moral Reasoning and Moral Judgment
Besides providing materials for addressing ethical questions raised under Cases 15.1, 15.2, and 15.3,
this Chapter addresses a crucial moral question: What ethical theories enable me to arrive at the moral
justification of my corporate business strategies, decisions and actions? Business managers, in general,
and corporate executives, in particular, could use various ethical theories or ideologies in arriving at
ethical judgments and moral justifications. There is a wide distribution of ethical ideologies and moral
philosophies among corporate decision makers (Fraedrich and Ferrell 1992a), and executives may often
switch moral philosophies between home and work environments (Fraedrich and Ferrell 1992b).

While individual personality factors, ethical ideologies, and moral philosophies influence corporate
decision making processes, ethical scholars have researched a number of other factors that are also found
to influence ethical decision-making among executives, such as corporate culture, organizational culture,
one's significant others, opportunity to be unethical, and the individual's role and function within a
decision-making team. It has also been found that these latter factors provide more insight into how
ethical decisions are made on a daily basis (see also Fraedrich and Ferrell 1992a, b; Fritzsche and Becker
1984; Laczniak and Inderrieden 1987; Mayo and Marks 1990).

Hence, recently there has been an increasing tendency among corporations to ground their company
ethics-training programs more on relativistic sociological sources such as corporate and organizational
culture, behavioral and cultural universals, than on universally normative ethical ideologies, theories,
moral principles and philosophies. This is an unfortunate shift, and possibly, moral philosophers must
take the blame for it. This shift primarily results from philosophies and principles that are rather
absolutistic, dogmatic, abstract, and non-practical - features typically detested by the business world.

11
 We revisit major ethical theories of teleology, deontology, distributive justice and corrective justice
that we briefly stated in Chapter 01. But now we study them from the viewpoint of intrinsic versus
instrumental good, moral worth and moral obligation, moral conscience and moral justification. Such
advance reviews and synthesis of major ethical theories can provide additional insights as practical and
readily applicable principles for ethical reasoning and moral assessment. The focus throughout this
chapter is how to apply ethical theories of moral reasoning and moral judgment to executive decisions and
moral obligations. Some practical "business executive exercises" for ethical-moral reasoning and
assessment are added. This Chapter has two parts:

• Part I: General Application of Moral and Ethical Theories to Executive Decisions and Moral Dilemmas,
• Part II: Applying Specific Moral and Ethical Theories to Executive Decisions and Moral Obligations

Part I: General Application of Moral and Ethical

Theories to Executive Decisions
Ethics is all about making good and moral decisions. As a corporate executive our moral and ethical
concerns, decisions and dilemmas should be:
1. What should I do? What should I not do?
2. What ought I to do? What I ought not to do?
3. What am I obliged to do? What am I not obliged to do?
4. What should I become? What should I not become?
5. What should I be? And what should I not be?

All five sets of questions deal with executive commissions (first question under each set) and
omissions (the second question in each set) from the viewpoint of executive duty (first two sets),
obligation (sets three and four), and responsibility (set five). The first three sets of questions refer to
executive inputs of action; the next two relate to processes of executive action, and the sixth one deals
with executive action outcomes. Various ethical theories of moral reasoning help us in answering these
questions.

Kohlberg’s Theory of Phases in Moral Reasoning

It is generally agreed among psychologists (e.g., Kohlberg 1969, 1984; Rest 1979) that ethical
reasoning attains full maturity through three main phases as one's decisions and actions get predominantly
based on:

• The immediate consequences of an action such as rewards and punishments (Pre-conventional

Phase);
• On social approval, compliance or conformity (Conventional Phase),
• On personal, moral or ethical, standards (Post-conventional Phase).

We assume that most business students and corporate executives have reached the second stage of
conventional or the third stage of post-conventional moral reasoning. During the third stage, maturity
increases through the internalization of moral judgments, and the standards of society are often a subject
of criticism. Executives may use, more implicitly than explicitly, some major ethical theories (e.g.,
teleology, deontology, distributive justice, corrective justice, virtue ethics, and ethics of trust) for ethically
analyzing and justifying corporate decisions and strategies. For instance:

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Pre-conventional Phase: We do things because of the immediate consequence of an action such as rewards and
punishments.

1. I obey at work lest I should be fired (reward/punishment)

2. I obey at work as it benefits both the company and me (cost/benefits).
3. I obey at work that I may learn and grow on my job. (instrumental)
4. I obey at work for my colleagues and superiors (interpersonal).

Conventional Phase: We do certain things for social approval, compliance or conformity.

5. I obey at work, as everybody does it (social compliance)

6. I obey at work, as I need to be recognized (social approval)
7. I obey at work, because of my contract to do so (contractual)
8. I obey at work, as this is my duty (obligation).

Post-conventional Phase: We do certain things based on personal, moral or ethical standards and convictions.

9. I obey at work, for work unites humankind regardless of race, color, age, gender or creed
(sociological).
10. I obey at work, because everybody should work for a living (deontological)
11. I obey at work, for work is human and humanizes me (philosophical)
12. I obey at work, for work is a divine mandate (theological).

As students of business corporate executives to be, we could check where we stand in relation to the
above sets of motivations. For instance:

a) Personally, where would we like to be on this ethics phase, and why?

b) Ideally or normatively, where should we be at this stage of our executive life?
c) How do we argue for higher forms of ethical and moral reasoning from the pre-conventional to the
conventional to the post-conventional phase, and why?
d) Does our executive moral reasoning become more objective, universalizable and reversible (in the
Kantian sense of categorical imperatives) as we ascend from the pre-conventional to the conventional
to the post-conventional phase, and why?

These are equivalent, if not identical, ethical questions that a course in business ethics should include.
These questions relate to commissions and omissions, rights and duties, moral obligations and
responsibilities. The word “I” in these questions can easily be substituted by institutions such as a
business, a venture, a corporation, a B-school, a university, a church, a government, and the like. The
main purpose of any ethical theory is to provide consistent and coherent answers to these practical
questions.

In general, an ethical theory is the reasoning process by which we justify our particular ethical
decisions. An ethical theory helps us to organize complex information regarding an ethical problem (or
dilemma) at hand, the competing values and alternatives available to resolve the problem, and thus, arrive
at a solution to the above ethical questions.

In the past, teleological considerations were mostly emphasized; presently deontological norms are
getting attention; distributive justice considerations are just emerging (see Mascarenhas 1990, 1991, 1993,
1995, 2008; Mascarenhas et al. 2006).Even more recently, corrective justice theory considerations and
empirical applications are entering business ethics literature (e.g., Mascarenhas, Kesavan, and Bernacchi
2008). We need all four ethical systems, including virtue ethics and ethics of trust, especially for
analyzing controversial cost-containment and revenue-generating business strategies such as market

13
dominance, consolidation, strategic alliances, joint ventures, plants closings, mass labor layoffs, offshore
outsourcing, and seeking strategic bankruptcy.

Major Normative Ethical Theories or Systems

A well-developed ethical-moral reasoning process or methodology should be guided by a framework
of theories, moral principles, moral rules or norms, whereby moral judgments regarding right or wrong,
good or bad, fair or unfair, and just or unjust may be derived and assessed. There are various theories in
ethics that attempt to do so. These theories try to answer the basic dichotomous questions of what is right
or wrong, truth or falsehood, ethical or unethical, moral or immoral, good or evil, and just or unjust, or,
the more general question: what should I do and what should I not do.

In general, ethical scholars distinguish at least three positions in judging the moral rectitude of human
actions (Beauchamp 1993; Frankena 1973; Schuller 1976):1

Teleological Moral Reasoning

▪ The moral correctness of all actions is determined EXCLUSIVELY by its consequences. To the
question: “What should I do?” this theory responds by the following guideline: Act in a such way
that your action brings about the greatest number of advantages over disadvantages, more benefits
over costs, or the greatest good for the greatest number of people. This theory justifies an ethical
action by the outcomes or consequences of the action in a given situation. Hence, this position is
often called utilitarian teleology or consequentialism or situation ethics.

This is an output-based version of teleology since it judges the moral correctness of the executive
action from its outcomes of benefits versus costs, advantages versus disadvantages to the greatest number.
But the problem is when and how does the executive know the nature and degree and seriousness of
benefits versus costs, or advantages over disadvantages? Often, it may take days, weeks or months to do
that moral and ethical assessment. In general, there is a distance of space and time between causes and
effects. Victims of asbestos white-lung disease discovered the harmful effects of asbestos particles they
inhaled while in working in asbestos-using environments only 25 to 35 years later. Similarly, coal-mine
workers inhaling crystalline coal dust suffered from black lung disease decades later during retirement.

Hence, this version of out-based teleology fails to be a useful rule of moral assessment of executive
judgment or action. Moreover, when are you sure that you have exhausted search and study all the costs
or benefits of an action, especially when there could be unforeseen and unintended consequences to many
executive actions. A later version (Broad 1946, see footnote 1 below) of teleology argues thus: Act in
such a way that your action is geared to produce at least more good consequences than evil ones, or more

1 The distinction between teleological and deontological ethical theories is usually attributed to C. D. Broad (1930: 206ff), Five
Types of Ethical Theory, (London: Routledge & Kegan Paul). In a subsequent Essay (1946) “Some of the Main Problems in
Ethics,” Philosophy, 21, Broad identified any teleological argumentation with a consequential one. According to Broad, one
characteristic that tends to make an action right is that it will produce at least as good consequences as an alternative open to the
agent in the circumstances. Broad also characterizes non-teleological actions such as an obligation to perform what one has
promised, regardless of consequences. The term “consequentialism” was coined by G. E. M. Anscombe (1953) and the term
“Utilitarianism” is traced to John Stuart Mill (1964). The distinction between the goodness and the rightness of an action was
introduced by W. D. Ross (1930), The Right and the Good (oxford: Clarendon Press). The terms “right-making” versus “wrong-
making” characteristics or “good-making” versus “bad-making” properties of an action were first discussed by Broad (1946) in
the article cited above. Consequentialists emphasize the fundamental difference between the moral rightness (or “right-making
properties”) and the moral goodness (i.e., “good-making properties”) of an action. The former concerns properties in the action-
situation that make it right or wrong, whereas the latter relates to the properties of the free will of the agent (e.g., benevolence,
love of justice, fairness) that makes an action good or bad.

14
advantages than disadvantages to the greatest number. This traces the morality of the act to the process
than to the outputs. But even this version begs or urges the same question: how and when do you know
that your action is geared to produce better consequences? To this the teleologists would counter by
saying: Act in such a way that your pre-disposition is to do good and make it right rather than the
opposite. This as an input-based version of teleology, and boils down to striving right and being good in
all our actions, a position that Ross (1930; see footnote 1) held all the while, and which Broad (1946)
adopted as the final teleological rule.

Deontological Moral Reasoning

A second theory of moral reasoning, deontology, argues thus:

▪ The moral correctness of all actions is ALWAYS ALSO, BUT NOT ALWAYS ONLY, determined
by its consequences. Certain conventions, principles, rules, rights and duties of involved subjects also
determine it. To the question, “What should I do?” this theory offers the following guideline: Act in
such a way that you violate no moral conventions or pacts, rules or principles, rights or duties, and, at
the same time, you uphold and fulfill most of your obligations, responsibilities and duties toward
others. This position is called deontology (deon = duty in Greek) or existentialism or situationalism.

This is a process-based version of deontology since it judges the moral correctness of an executive
action from its conformance or fulfillment of moral conventions or pacts, rules or principles, and rights or
duties that concern the greatest number. But the problem is when and how does the executive know the
nature, content, extent and seriousness of moral conventions or pacts, rules or principles, rights or duties
that matter, especially if they are non-existent or not fully evolved and accepted? Often, it may take years
and decades to arrive at such pacts and conventions. For instance, despite our rapid globalization,
digitization and ubiquitous networking we still do not have a corpus of international laws to rule and
adjudicate our international and intercontinental behavior other than a few pacts and conventions of the
IMF, UNO, World Bank, WTO, and the like. The existence and operation of international courts are far
from desirable and effective. International labor laws, patents, trademarks and copyrights are still not
taken seriously, while counterfeiting and trademark infringements are very common and often
overlooked. In the world of international finance, a few reforms such as Besel I, II and III Reforms are
emerging but whose full compliance is not up to the mark. International financial products and markets
are still opaque, confusing and deceptive leading to unnecessary financial crisis as those of the Great
Depression of October 1929 and the September-October 2008 collapse of mega investment banks.

Hence, this version of process-based deontology often fails to be a readily applicable rule for ethical
and moral assessment of executive judgment or action. Hence, Emmanuel Kant would argue thus: Act in
such a way that your action is a norm for all mankind whatever you do and wherever you are. This traces
the morality of the act to the universalizability principle of Kant that we internalize as an input to all our
actions. With utilitarianism, we may be concerned with maximizing the good in society, and most of us
would not consider this alone as right. No doubt, an efficient society is one that is most capable of
maximizing the good of its citizens, but such a society is not a moral one unless its goods are justly
distributed (Grassian 1999: 88). Hence, teleology and deontology need to be supplemented by
distributive justice, and distributive justice by corrective justice.

Distributive Justice Based Moral Reasoning

The third theory of ethical and moral reasoning is distributive justice:

▪ The moral correctness of AT LEAST SOME ACTIONS is in no way determined by their

15
 consequences. Thus, while teleologically an action may have positive net benefits, and while
deontologically the same action may not violate any known moral principles, rights or duties, yet in
the distribution of these net benefits, rights and privileges there may be gross injustice: the rich may
become richer while the poor become poorer. Hence, the need for a third ethical system: that of
distributive justice. To the question: what should I do? This theory answers: Act in such a way that,
while fulfilling most of your duties and moral obligations, the benefits of your action clearly exceed
the costs, and that the costs and benefits, rights and duties are equitably spread across all people
affected by the action.

This is once again an output-based version of teleology-deontology combined since it judges the
moral correctness of the executive action from its benefits versus costs, rights versus duties, conformance
to pacts and agreements that bring greater advantages than disadvantages to the greatest number. But the
problem is when and how does the executive know the nature and degree and equitable distribution of
benefits versus costs, of advantages over disadvantages, rights over duties, pacts and agreements over
non-existent ones? Often, it may take days, weeks or months to do that. Hence, this version of process or
output-based distributive justice also fails to be a useful rule of moral reasoning and assessment of
executive judgment or action.

The Rawlsian concept of justice mandates giving to others what rightfully belongs to them (Rawls
1971). Justice, therefore, has both deontological and teleological (utilitarian) aspects. The theory of
distributive justice is particularly relevant when different people put forth conflicting claims on society's
rights and duties, benefits and burdens and when all claims cannot be satisfied. In such cases, the
standards of distributive justice are generally taken more seriously than utilitarian considerations (Hare
1978; Rawls 1958). The moral right to be treated as free and equal persons is the basic egalitarian
foundation of distributive justice (Vlastos 1962).

Corrective Justice Based Moral Reasoning

The fourth theory of ethical and moral reasoning is corrective justice:

▪ Regardless of costs and benefits, rights and duties, and their existing distributions, that executive
action is moral if its sets up legitimate laws, and effective procedures and processes to rectify unjust
structures in society that inequitably distribute costs and benefits, rights and duties across the greatest
number of affected stakeholders. Thus, while teleologically an action may have positive net benefits,
and while deontologically the same action may not violate any known moral principles, rights or
duties, yet if in the distribution of these net benefits, rights and privileges there is gross injustice, then
executive actions should rectify such unjust structures such that the rich may become richer while the
poor become poorer. Hence, the need for a fourth ethical system that of corrective justice.

▪ To the question: what should I do? The corrective justice theory answers: Act in such a way that,
while fulfilling most of your duties and moral obligations, the benefits of your action clearly exceed
the costs, and that the costs and benefits, rights and duties are equitably spread across all people
affected by the action, and if not, set up processes and procedures to rectify unjust distributions of
costs and benefits, and rights and duties among the greatest number of affected stakeholders,
especially, the marginalized and the poor.

The Theory of Equality and Corrective Justice

The problem underlying all forms of justice (e.g., distributive, retributive and corrective) is the
content or domain of equality. The fundamental problem, however, is, as Amartya Sen (1979: 307)

16
expressed it, “equality of what?” That is, what is the appropriate equalizandum (the entity to be
equalized)? There is hardly a consensus among egalitarians justice theorists. For instance, some
egalitarians define the domain of equality as resources (Dworkin 1981), as primary goods (Rawls 2001:
62, 92), as opportunity for welfare or access to advantage (Cohen 1989: 99), or as buyer-seller
information asymmetry reduction (Mascarenhas, Kesavan and Bernacchi 2008).

The next question is, given an equalizandum such as opportunity for education, earning, healthcare,
and property, what limitations should be imposed on its distribution. For instance, what would justify a
deviation from equal opportunity to basic education or basic health among citizens of a given country?
Alternately, what is the role of justice, liberty or responsibility in the distribution of the equalizandum?
Most egalitarian theorists of distributive justice attempt to design a distributive policy that is endowment-
insensitive but ambition-sensitive. That is, any equalizing of opportunity should not be based on
individual endowments such as wealth, race, color, power, social status and other such considerations, but
on the needs, wants and use of that opportunity for all citizens (Cohen 1989; Dworkin 1981).

Corrective Justice (CJ) and Distributive Justice (DJ) as Complementary

CJ and DJ differ in the way they construe equality. DJ divides benefits/burdens in accordance with
some criterion that compares the relative merits of the participants (such as need, ability, efforts,
contribution, market value) in a political community. DJ thus embodies a proportionate equality, e.g., a
share according to one’s needs, efforts, contributions or merits in the political system (Rescher 1966;
Ryan 1942).

CJ, on the other hand, focuses on the maintenance and the restoration of equality of partners that
enter a given transaction. Injustice occurs, when, relative to this baseline, one party gains at the expense
of the other. The CJ law corrects this injustice by restoring the original or initial equality. In this sense,
CJ is restorative justice. Thus, CJ is a rectifying function while DJ is a distributive function (Benson
1992). CJ deals with the justice of particular transactions while DJ provides rules of distribution that
govern universal transactions. CJ and DJ, therefore, complement each other, and we invoke both justice
theories in analyzing and rectifying social injustices in the market place.

Correlativity as the Central Principle of CJ

The rectification function in CJ operates correlatively on both parties: the wrongful gain of the one
(defendant) must be returned to the other (plaintiff) who was deprived of it. This doctrine of correlativity
serves as an organizing idea implicit in the relationship between the buyer and the seller in any unjust
situation. That is, CJ is correlatively structured in the sense that it simultaneously works on both parties
in righting the wrong. Justice is thereby achieved for both parties through a single operation.

Applied to BSIA, CJ involves three critical correlativity factors (see Weinrib 2001):

a) Correlatively structured transaction - The sellers have taken from or deprived buyers of what belongs
to them (e.g., material information), or vice versa. Under this aspect, CJ is exchange justice.
b) Correlatively structured injustice - the buyer and the seller are connected with the same injustice.
What the seller does and what the buyer experiences are not independent events - they are the active
and passive poles of the same injustice. That is, what the seller does count as injustice if only if the
buyer suffers and because of what the buyer has suffered, and vice versa.
c) Correlatively structured rectification - what the seller took from the buyer (e.g., job opportunity,
income opportunity, and healthcare opportunity) is now returned to the buyer. Thus, the active-
passive roles are reversed. Under this aspect, CJ is restorative justice.

17
The idea that correlativity affects transaction, injustice and rectification is the central insight of the CJ
approach (Weinrib 2002). CJ ensures that critical factors apply equally to both parties. Because the
seller, if liable, has committed the same injustice that the buyer has suffered from, the reason the buyer
wins ought to be the same as the reason the seller loses. Thus, the factor that applies to only one of the
parties, e.g., the seller has deep pockets or that the buyer has significant buying power are aspects totally
irrelevant to the operation of CJ or inappropriate justifications for liability. Liability consists in a legal
relationship between two parties, each of which position is intelligible only in the light of that of the
other. The seller cannot be held liable without reference to the liability of the buyer. Similarly, the
buyer’s entitlement exists only in and through the seller’s correlative obligation

There are other ethical evaluation systems (e.g., Egalitarianism, Libertarianism, Egoism), all of
which can be construed as subsets under any of the above three major ethical theory-systems. In general,
business ethics literature has used ethical theories of teleology (primarily utilitarianism) and deontology
(rights-based norms) (e.g., Hunt and Vitell 1986; Laczniak 1983; Murphy and Laczniak 198; Robin and
Reidenbach 1987, 1988a). Recent studies report also the use of distributive and corrective justice
principles. Business is filled with relationships in which power is uneven and chance can operate to both
the benefit and detriment of different publics (Robin and Reidenbach 1993: 100). Such inequitable
relationships need to be specifically addressed by distributive justice principles and unjust structures need
to be rectified by corrective justice principles. "The application of distributive justice system that is part
of capitalism affords the opportunity for abuse of power and marketers must attempt to understand how
and why abuse can occur" (Robin and Reidenbach 1993: 103).

Table 15.1 summarizes and critiques Basic Moral Reasoning Paradigms

Table 15.2: Lists some Practical Distributive Justice Principles

Moral Judgments and Moral Justification

Judgments express a decision, verdict or conclusion about a particular action or about a person's
character based on our intuition or learning. Moral judgments express a decision, verdict or conclusion
about a particular action or about a person's character based on our understanding of moral theories and/or
their principles. The average executive in most circumstances has no difficulty making moral judgments
such as whether to tell the truth, whether a given decision is morally right or wrong, whether there is
conflict of interest, and so on. Our moral life is usually composed of a rich blend of directives,
experiences, parables, vignettes and virtues that suffice to guide us to moral judgments.

Moral reasoning is process of arriving at moral judgments. Moral judgments are followed by moral
justification of our moral judgments, decisions and their outcomes. A typical moral justification starts
with a moral judgment. It upholds the judgment by moral rules specific to the context and restricted in
scope. The moral rules are justified by certain moral principles, which are more general and fundamental
than moral rules. Finally, the moral principles are justified by moral theories, which integrate bodies of
principles, rules and action guides. The theories backing moral principles may themselves need to be
defended unless they are already well accepted among moral philosophers. If the proclaimed ethical
theories and moral principles are not commonly accepted, then one could further inquire if they need to be
replaced, rejected, revised or expanded. Most executives defend their moral judgments in terms of rules;
few in terms of principles; and very few relate them to ethical theories. 2

2 Moral reasoning and moral judgment is very illustrated in the theory of “madness” in the writings of Michel Foucault (1926-
84). The major project that he executed was the study of the history of some important institutions and social constructions like
madness, clinic, sexuality, knowledge etc. His philosophical positions are derived from these studies. One of his basic positions is
that the ways in which we think of madness, sickness, sexuality, knowledge etc., though appear to us as objectively given facts,

18
Moral justification goes further to deliberate about these moral judgments and justifies them or the
principles underlying them. Moral dilemmas occur at the level of moral justification and not so much at
the level of moral judgment. An ethical “dilemma” is not seen as an abstract problem with only one
ethically “correct” solution that can be agreed on by impartial observers applying universally accepted
principles (Giligan 1982). Instead, solutions can and should emerge from mutually caring relationships
and the contexts in which the problems are embedded. Particular human beings in particular settings
should generate “caring” solutions appropriate to unique situations (Jones, Felps and Bigley 2007: 139).

The Process of Justifying Executive Moral Judgments

In general, any moral justification of one's corporate judgment and decision involves five supporting
sets of beliefs and values held by a particular person in one or more of the following hierarchical series of
moral values:

A. A set of normative ethical theories;

B. A set of moral principles derived from set A;
C. A set of moral standards derived from sets A and B,
D. A set of moral rules derived from set C, and
E. A set of moral judgments resulting from applying sets A, B, C or D while assessing concrete
actions

are in fact, social constructions. Foucault’s account of the evolution of the social perception of madness illustrates a “social
construction.” He argues that the concept of madness is not an objective, non-historical given, but is merely a contingent social
construct which has a genealogy. Foucault identifies three distinct stages in the development of the concept of madness. The first
stage is seen in the Middle Ages. In this period madness was seen as an integrally human phenomenon. Madness was opposed to
reason, but it was recognized as an alternative mode of human existence. Consequently, though abhorred and disdained, it was
seen as a meaningful challenge to reason. It could engage in ironic dialogue with reason or claim to be a domain of human
experience and insight not available to reason. Classical Age (17th and 18th centuries) represents the second stage. In this period
the perception of madness changed. It was seen as the negation of the characteristic human attribute of reason. It was nothing but
unreason, a plunge into animality. It had no human significance. Accordingly there was a conceptual exclusion of the mad from
human society. Corresponding to this conceptual exclusion they were also physically excluded from human society by
confinement in institutions. Conceptual and physical exclusion also led to a moral condemnation. The moral fault was not of the
ordinary kind. While ordinary moral fault is the violation of one or more norms of human community, madness is a more radical
moral fault, where one makes a radical choice of rejecting humanity and the human community in toto in favor of a life of sheer
animality. In the Modern Age the perception of madness changes again. In this period once again the mad are regarded as being
within the human community, not as animals outside human community. They are within human community; however, they are
now seen as moral offenders, violators of specific social norms, who should feel guilt at their condition and who need reform of
their attitudes and behavior. Correspondingly, in the modern age there are ways of treating the mad, not merely isolating them but
by making them the objects of a moral therapy that subjects them to social norms. There is a move from the merely custodial
confinement of the Classical Age to the modern therapeutic asylum. Though this institution was widely regarded as an advance in
humanitarianism, Foucault sees it as merely a more subtle and thorough method of controlling the mad. It is a “gigantic moral
imprisonment”. It may seem natural to us that the doctors should rule the mad, because we see the latter as “mentally ill”. But
Foucault claims that in the asylum the rule is not really so much by medical as by moral authority. Doctors have authority not
because they have knowledge to cure, but because they represent the moral demands of society. This is evident today in the
psychiatric practices such as psychoanalysis. The practice is accompanied by the trappings of medical science, but the key to the
therapy remains the personal moral authority of the therapist, who serves as an instrument of social values. In The Order of
Things as well as in Archeology of Knowledge Foucault shows that each epoch has its own underlying ‘episteme’ (the langue)
which constrains and conditions the explicit discourses (the parole) of that age. Thus there is nothing absolute about the modern
episteme, and its peculiar conceptions of truth, science, man etc. [See Barry, Peter (1995), Beginning Theory: An Introduction to
Literary and Cultural Theory, Manchester University Press. Caws, Peter (1988), Structuralism: The Art of the Intelligible, New
York: Humanities Press International. Gutting, Gary (2001), French Philosophy in the Twentieth Century, Cambridge University
Press. Harland, Richard (1987), Super-structuralism: The Philosophy of Structuralism and Post-structuralism, London: Methuen
and Co.].

19
 Briefly, each set may be described as follows:

❖ Moral or ethical theory is the reasoning process that one uses to justify one's moral judgments and ethical
actions. Major moral or normative ethical theories are deontology, teleology, and distributive and corrective
justice. More recent theories include personhood ethics (see Handout 09), virtue ethics (Handout 10), ethics of
trust (Handout 11), ethics of moral reasoning (Handout 15), ethics of rights and duties (Handout 148), ethics of
leadership (Handout 12), and ethics of moral responsibility (Handout 16).

❖ Moral principles are more general moral axioms or guidelines derived from moral theories that pertain to
human or social welfare (teleological moral principles), to personal or social rights/duties (deontological moral
principles), to social justice (distributive justice moral principles), or to a sense of personal and spiritual fairness
or righteousness (e.g., virtue ethics, responsibility ethics). Example: The deontological principle of non-
malfeasance: Do not harm others; or the Golden axiom: Do unto others what you would like others to do unto you.

❖ Moral standards are less general or more specific moral norms of behavior that require, prohibit or allow certain
actions. Such norms are derived from moral theories and their moral principles. Moral standards are
teleological if they relate to social costs and benefits; they are deontological if they uphold rights and duties; they
are related to distributive justice if they deal with issues of fairness and justice, and fourthly, they are related to
virtue ethics if they promote a general sense of physical, functional and moral wellbeing. Examples of
deontological standards: Do not kill; do not steal; do not lie; do not be avaricious.

❖ Moral rules are concrete applications of moral principles and moral standards to a society, corporation,
government or any social institution, given the situational context of economy, politics, culture, science and
technology. Example: Do not produce or market harmful products since: every consumer has a right to product
safety (deontological), a harmful product harms consumers and society (teleological), harmful products bring
about serious injustices to the public (distributive justice), and any harm destroys the physical, functional and
moral well-being of people (virtue ethics).Table 7.1 provides some well-known distributive justice moral rules.

❖ Moral judgments: These are practical moral assessments of concrete executive decisions, strategies and actions
based on sets A, B, C and D. Some of these could be “considered moral judgments “applicable to several actions
over longer time-periods; then, these are tantamount to corporation standards of ethical conduct or the
corporate Code of Ethics. Statements of corporate codes could be typically moral standards or norms, which
are also derived from moral theories, but they are less general than moral principles or moral rules. Some
examples of moral judgments: Capital punishment is wrong. Child labor is evil. Sweatshops are dehumanizing.

Two criteria characterize moral principles:

❖ Supremacy: moral principles override other considerations such as contingencies, situations, self-interest, group
interest or politics. Examples: Do not harm. Speak the truth. Do not lie.
❖ Universal: moral principles apply to all people under comparable conditions with no exceptions based on any
socio-biological factors such as gender, age, race, color, religion, nationality or social status. Examples: Kant’s
Universalize able principle: Whatever you do should be a moral rule for all others. Kant’s reversible principle:
What all others do should be a moral principle that you should follow.

Besides moral theories, principles, standards and rules, there may be specific conditions and
circumstances that render a given moral judgment morally defensible. Moral justification is needed when
one has to defend one's moral convictions or judgments under a given situation.

Thus, particular judgments are justified by moral rules; moral rules are justified by moral standards;
moral standards are derived from moral principles, and moral principles are derived from appropriate
ethical theories. Table 15.3 captures this hierarchical process of moral reasoning. The derivation of
moral justification based on ethical theories is deductive. Moral justification based on the application of
moral principles is deductive-inductive, since this process may have some inductive elements of deriving
the moral principles through empirical inquiry. Moral justification via moral rules is inductive, as both
moral rules and their concrete applications to a given situation require search and empirical inquiry.
Moral justification through moral judgments is situational, as most moral judgments consider the
concrete business situation.

20
 Integrated Social Contracts Theory or ISCT is a very recent addition to the normative ethics
literature. Unlike other ethical theories that must be adapted to business settings, Ictus intended to apply
directly to them. Its most formal and complete articulation is found in Donaldson and Dunfee’s book
entitled Ties That Bind: A Social Contracts Approach to Business Ethics (1999). These authors use a
social contracts perspective to show how individual communities can be allowed to develop their
own(local) standards, within a “moral free space,” as long as they (1) meet certain standards involving
acceptance by community members and (2)do not violate broad, universal standards, called
“hypernorms.” As such, the theory attempts to simultaneously allow for a substantial diversity of
adaptation to local conditions without allowing these developed norms to violate higher ethical standards.
In fact, the theory establishes elaborate setoff standards by which the propriety of these local norms
should be judged. In order to be authentic, local norms must (1) have the consent of most members of the
community, (2) allow exit from the community, and (3) allow “voice” in order to permit change in the
norms, thus assuring that most members of the community regard them as binding. In turn, authentic
norms are judged legitimate if they do not violate any hypernorms. Hypernorms are the result of “a
convergence of religious, political, and philosophical thought” across a broad number of nations and
cultures (Donaldson & Dunfee, 1999: 44).Finally, these authors offer a set of priority rules for choosing
between/among competing legitimate norms. Legitimate norms that either do not conflict with or have
priority over other legitimate norms are considered binding ethical standards. ISCT is quite different from
the other theories described here, but, as discussed in the next section, it shares one important perspective
with those theories (Jones, Felps and Bigley 2007: 140).

Rule versus Act Applications of Ethical Theories

Application problem: teleology, deontology, distributive justice and corrective justice are all based on
principles. However, what is the ultimate source of appeal under each theory for the determination of
morally right and wrong actions? In this regard, it is conventional to distinguish between Act application
and Rule application of ethical theories.

The ACT application judges the morality of an act by applying a given moral principle directly to the
human act without any intermediary rules, while the RULE application judges the morality of a given act
only after verifying if the act conforms to firm and publicly advocated moral rules derived from that
moral principle or moral standards set up by past considered moral judgments. Thus:

RULE APPLICATION: Apply principles to rules, and rules to particular judgments or

actions and then judge the morality of the executive action.

ACT APPLICATION: Apply principles directly to particular actions or judgments to judge

the morality of the executive action.

Figure 15.1 traces the process that links the four sets (A: moral theories; B: Moral Principles; C:
Moral Standards and D: Moral Rules) to the derivations of moral judgments. This process may be based
directly on the normative moral theories and moral principles as ACT ethical applications; application of
these via moral standards (considered moral judgments) or moral rules is designated as RULE ethical
applications.

From everyday executive moral judgments result executive moral choices, decisions and strategies,
which in turn may be ethically assessed using ACT or RULE assessments as indicated in Figure 15.1.
From executive actions follow the action effect complex of consequences, which we also need to assess
by ACT or RULE applications of the four belief sets (A, B, C and D). Finally, from resulting from
executive action effect complex of consequences are executive responsibilities, which also may be

21
ethically assessed by ACT or RULE ethical application processes. In other words, one could start with
ethical and moral theories and arrive at moral judgments deductively using Figure 15.1 downwards.

Alternatively, one could start with one’s actual moral judgments and decisions, and work one’s way
upwards in Figure 15.1 and derive their moral justification via moral rules, moral standards, moral
principles and moral theories. The vertical bi-directional arrows in Figure 15.1 indicate this upward-
downward dynamic of assessing executive decisions.

Figure 15.1 characterizes the process of assessing executive moral decisions and actions by linking
belief-sets A, B, C, and D with the corresponding act and rule applications. Act applications can derive
from the interaction (indicated by a bi-directional arrow) of both ethical theories and their moral
principles. Similarly, rule applications can arise from the interaction (also indicated by a bi-directional
arrow) of both moral rules and considered moral judgments. Executive moral decision-actions can result
from either act or rule applications of major normative ethical theories such as deontology, teleology,
distributive justice, and virtue ethics with their respective moral principles.

Given these executive decisions and actions, the underlying intentions and reasons, duties and rights,
could be deontologically assessed by act and/or rule applications of deontological theories and principles.
Similarly, the social consequences of these executive decisions-actions could be teleologically assessed
by act and/or rule applications of teleological theories. The moral responsibilities of the social
consequences, particularly, in relation to the fair distribution of rights and duties, costs and benefits, could
be distributive assessed by act and/or rule applications of distributive justice principles.

Lastly, the executive moral responsibilities of promoting physical, functional and moral well-being
of all stakeholders affected by executive action could be morally assessed by act and/or rule applications
of virtue ethics principles. Appendix 15.1 presents an AOL5 based Exercise on the Moral Reasoning
Process of Executive Judgments and Justifications.

Executive Moral Dilemma and Challenges

The word dilemma is commonly understood as a "challenging problem" implying a "forced choice"
for the agent between two or more equally unfavorable (or fatal) choices or alternatives. Most moral
problems are usually posed as irreducible value-conflicting dilemmas, quandaries, predicaments or as a
multiple-choice problem (Whitebeck 1992). The attempt to force most moral problems into dilemmas
stems from one's neglect of what actually goes into the agent's deliberations, intentions, motivations and
reasoning processes. Kohlberg (1969) seems to assess one's moral development by one's forced choice
among limited alternatives proposed (Gilligan 1982).

Many business situations involve moral dilemmas where executives experience moral perplexity,
moral conflict or moral disagreement. As stated earlier, moral dilemmas originate at the level of moral
justification and not so much at the level of moral judgment. Executive moral dilemmas involve
concerns of moral obligation or moral rightness of a given executive action.

Business problems in general are best described as ethical-moral dilemmas that involve multiple
constraints, all of which may not be simultaneously satisfiable but which are definitely not just
dichotomous or multi-chotomous choices (Whitebeck 1992). Most business situations imply a real
human narrative form that extends over time, and not just faceless theoretical dichotomous dilemmas.

Ethical Dilemma and Corporate Executive Decisions

22
 An ethical dilemma is an undesirable or unpleasant choice relating to a moral principle or practice
(Maxwell 2003: 5). What do we do in such situations – the easy thing or the right thing? What should I
do when a clerk gives me too much change? What should I say when a convenient lie can cover a
mistake? How far should I go in my promises to win a business contract? How do I deal with executive
pressure – by cutting corners and over-rationalizing my downsizing decisions? How far do I doctor the
data in order to prove that I am turning around the company I am contracted with? How far should I go in
my promises to win a client?

In such circumstances, do we do the easy thing (ethics of convenience) or the right thing (ethics of
morality)? Many people believe that embracing ethics would limit their options, their opportunities, and
their very ability to succeed in business. In today’s culture of high debt and me-first living, ethics may be
the only luxury some people are choosing to live without! Hence, morality becomes a private and costly
luxury. In order to be ethical, we must be honest with ourselves before we can be honest with others. And
this could be very challenging and inconvenient. Practicing the honesty discipline is inconvenient.
Paying a high price for success is inconvenient. Losing a high potential client or a much desired
promotion is inconvenient. (Maxwell 2003).

There are really only two important challenges when it comes to ethics: a) a standard to follow, and b)
the will to follow it. Such a standard can be the Golden Rule. This Rule has been expressed in every
living culture (see Table 1.8, Chapter 01). Using the standard we should have the ability to discern right
from wrong, good from evil, just from unjust, fair from unfair, and propriety from impropriety. The
second challenge is that we have the dedication and commitment to do what is right, good, just, fair and
proper and that we have the moral courage to consistently avoid what is wrong, evil, unjust, unfair and
improper. Ethics entails decision and action, commission and omission (Maxwell 2003: 24-25).

Moral Dilemma and Executive Decisions

If we believe we have only two choices: a) win by doing whatever it takes, including being unethical,
and b) to be ethical and lose – we are faced with a real moral dilemma.

A moral dilemma is a situation in which an agent is morally obliged to do an action X and is also
morally obliged to do another action Y, when at the same time the agent is precluded by circumstances
from doing both.3For instance, if X is to “win” by doing whatever it takes, even if it is unethical, Y is to
be ethical and lose! Few executives set out with a desire to be dishonest, but nobody wants to lose
(Maxwell 2003: 7). At the same time, while we desire honesty and plain dealing, we are still not winning
the battle of ethics. Companies are even teaching “remedial ethics” to employees via online ethics
courses, not because they need ethics, but in order to evade punishment. Under federal guidelines,
companies that have ethic programs are eligible for reduced fines if convicted of wrongdoing (Ryan
2002).

The reasons supporting X and Y are weighty, but neither set of reasons is dominant to force action.
That is, each set of reasons, considered in itself, is a good set, but may not be sufficient to oblige or justify

3Technically, a trilemma (a conflict between three equally compelling choices), a quadrilemma, and so on are conceivable,
depending on the number of close competing economic alternatives we confront in making economic decisions that also have
moral implications. For instance, today free enterprise capitalism poses as an economic and moral trilemma: a) If we allow labor
productivity to grow faster than the growth of GDP, then we create less employment; b) When the real interest rate exceeds the
real growth rate of GDP, then debtors are impoverished and creditors are enriched; c) An increase of real GDP growth violates
the condition of ecological sustainability.

23
an action. If one acts on one set of reasons, the action will be desirable in some aspects but undesirable in
others. Hence, one needs both good and sufficient reasons to act morally.

In general, moral dilemmas may take two forms:

a) Some evidence indicates that act X is morally right while some evidence suggests that act X
is morally wrong, and the evidence on both sides is inconclusive; e.g., seeking downsizing
via massive layoffs; seeking bankruptcy to resolve chronic insolvency.

b) The agent believes that on moral grounds act X ought or ought not to be performed; e.g.,
plant closing; forced retirement of employees.

Moral dilemma of form (a) deals with the rightness of the act, while that of form (b) concerns
obligation. Most moral dilemmas are created by conflicting moral principles that generate conflicting
demands.4 Moral dilemmas and disputes not only involve conflicts between moral rules, principles and
theories but also on factual beliefs about the situation to which the rules, principles and theories are
concretely applied. Often factual beliefs reflect our current scientific, metaphysical and theological
(religious) thinking. The latter underlie our beliefs and help us to interpret current phenomena that create
moral dilemma. Factual beliefs often revolve around cost and benefits, and risks and uncertainties
associated with obliging actions.5

Resolving Moral Corporate Executive Dilemmas

Many situations involve ethical dilemmas created by conflicting moral principles, which in turn
generate conflicting moral demands. Typical examples are:

a) John, a recently hired salesperson is sure of a serious product flaw in a medical drug that the
company has been selling to generate revenues. If he does not continue to sell it, he may be fired; if
he pushes it well, he may turn the company around and reap high “success” bonuses. What should
he do?

b) Jane, another salesperson in the same company, finds that Jack Doe has been doing

4Some moral philosophers argue that there are many types of practical dilemmas but never genuine moral dilemmas. A genuine
moral dilemma is a situation in which two moral “oughts” are in a type of conflict in which an action that one ought to perform
cannot be performed without forgoing another action one also ought to perform. This is form (b) moral dilemma. These
philosophers advocate one supreme moral value that overrides all other values, moral or non-moral, with which it might be in
conflict. The only real ought, in this theory, is the “ought” generated by the supreme value (Gowans 1987, Santurri 1987). The
major problem here is to identify, establish and socially accept this one supreme moral value outside the context of one's religious
beliefs. Often it is difficult to determine which moral value is so supreme as to override other “oughts” (Beauchamp and
Childress 1989).
5 Moral dilemmas should be distinguished from "moral weakness". The latter revolves around the old Socratic problem: how
can one know what is right and yet do what is wrong? Hare's (1964) version is slightly different: If moral principles guide moral
judgments, and moral judgments guide moral conduct, then how can we think, e.g., that we ought not to be doing a certain thing,
and then not be guided by it? The normal answer to these questions is in terms of "moral weakness" or "weakness of the will" or
"overpowering desires", all of which are similar but not identical terms (Matthews 1966). In general moral weakness is a
tendency not to do something that we commend, or do something that we condemn. According to Aristotle (1984), moral
weakness may lead to two behaviors: 1) a marketing executive could cheerfully accept bad principles, act in accordance with
them, and not feel compunction, 2) a marketing executive may follow one's desires against one's moral principles, act on them,
and feel remorse. The former is "corruption", and the latter "weakness". Other forms of moral weakness are procrastination
(needlessly postponing moral decisions), backsliding (slipping from moral to immoral behavior type), irresolution (vacillating
from moral decisions) and intemperance (lack of self-control).

24
 exceedingly well in prospecting and realizing sales of that flawed medical drug. Jane has
also found that Jack has been bribing purchasing managers (e.g., offering kickbacks) to
stimulate purchasing. Should Jane let Jack continue his marketing strategy, or should she
discourage him from bribing, even at the risk of depressing sales?

c) Jim, a recruiter, has the authority and responsibility of filling a position in his firm. His
friend John applied and was qualified. However, another applicant, Jane, seems even more
qualified. Jim wants to give the job to John, but he feels guilty. He applies the moral
principle that one should be impartial. Nevertheless, Jim also argues from the virtue of
friendship: friendship has a moral importance that permits, or even requires, partiality in
some circumstances. He hires John and rejects Jane. Was he morally right?

In resolving these dilemmas, corporate executives may adopt the following procedure:

1. Specify the conflicting moral (teleological, deontological, distributive justice and virtue ethics) principles
involved in the dilemma.
2. Identify the conflicting moral (teleological, deontological, distributive justice and virtue ethics) obligations
involved. Thus for Case (a): duty to users, to prescribing doctors, and to USDA; also duty to the corporation, to
his own sense of executive integrity (virtue ethics), job security and performance. Case (b): duty to code of ethics
and virtue ethics that forbids bribes in the form of kickbacks; duty to consumers who must eventually pay for
the kickbacks; on the other hand, duty to the company, to the consumers of the drug, to self, and duty to
perform well. Case (c): duty to be impartial in hiring; duty to both John and Jane; duty to the company that
needs best skills, and duty to perform well as an executive. Hiring John in the place of Jane may involve conflict
of interest.
3. Identify other feasible alternatives to the one in question. Case (a): rectify the product flaw; warn the doctors;
warn prospective users; withdraw the product from the market. Case (b): let Jack progressively reduce
kickbacks; change kickbacks to alternative favors that are accepted by the corporation; change Jack's sales
territory. Case (c): recommend John to another company; hire Jane now, but John later if Jane proves
inefficient; or hire John and Jane on a part-time basis dividing the budgeted salary between them.
4. Consider which alternative would you choose if by fulfilling one obligation (alternative) another must be
contravened, and why?
5. What crucial circumstance would change the priority of obligations (alternatives) you have identified?

Other things being equal, an executive choice is more ethical if he or she seriously investigates more
competing alternatives before selecting the most socially beneficial alternative.

Executive Moral Conflict Management

Conflict has been perceived as a major problem in all organizations throughout the centuries.
Classical organization theorists argued that conflict produced inefficiency and was therefore undesirable,
even detrimental to organizations, and hence should be eliminated or minimized to the extent possible.
But with the emergence of social systems and open system theory, the older view of conflict has changed.
Organizational conflicts are now considered as legitimate, inevitable, and sometimes even positive and
desirable indicators of effective management (Rahim 1983). It is even believed that within certain limits
conflict may be essential to heighten productivity. Lobel (1994) even argues that the absence of conflict
might be a sign of an unhealthy organization. When dealt constructively, conflicts enhance creative
definition, formulation and solution of problems (King 1999:1); it can lead to change, adaptation, and
survival. However, much would depend upon two factors: the intensity of the conflict, and the way the
conflict is managed. In general, if the conflict intensity is moderate and if managed well will impact the
organization positively (Schermerhorn 2001 339).The issue then is to design and engage techniques that
empower individuals and organizations to handle conflicts productively (McNary 2003). In fact, most
scholars view today that conflicts, if properly channeled, can be an engine of innovation and change
(Dressler 1998:511).

25
 People respond to conflicts in different ways, depending upon the degree of assertiveness versus
cooperation people bring in to conflict management. Assertiveness is the desire to satisfy one’s own
needs, desires and dreams. On the contrary, cooperativeness is the desire to satisfy another’s needs,
concerns and desires.

Using these opposite concepts of cooperation and assertiveness, Schermerhorn and Chappell (2000:
218) distinguished and empirically verified five interpersonal styles of conflict management:

Assertiveness Cooperativeness Hypothesized Interpersonal Style for Conflict

Management
High High Accommodating or Smoothing
(Playing down conflict and seeking harming among parties)
High Low Collaborating or Problem Solving
(Searching for a solution that meets each other’s need)
Low High Avoidance
(Denying the existence of conflict and hiding one’s true feelings)
Low Low Competing or Authoritative Commanding
(Forcing a solution to impose one’s will on the other party)
Medium Medium Compromise
(Bargaining for gains and losses to each party).

Part II: Applying Specific Moral and Ethical

Theories to Executive Decisions
The first questions moralists want to ask are, “what actions are morally correct?” and “what actions
are morally wrong? “That is, what actions are morally right or what actions are morally obligatory?
Specifically, moral questions relative to corporate business executives are: As a corporate executive what
should I do? What should I not do? What ought I to do? What I ought not to do? What am I obliged to
do or not obliged to do? These are equivalent, if not identical, ethical questions. Other moral general
questions include “what things in life are worthwhile or desirable?”

Various theories of moral value or obligation respond to these questions, as well as the moral
dilemmas we illustrated in Part I. In addressing concerns such as these, moral philosophers make a
distinction between instrumental and intrinsic good.

• An instrumental good is good because of its consequences, e.g., work is good because of the wages it
earns, and wages are good because they provide buying power; buying power is good because it can
satisfy one’s consumer needs, wants, and desires, and satisfying one’s needs, wants and desires is
good as it makes us happy and contended, and so on. On the other hand,

• An intrinsic good is good by and of itself; e.g., happiness, honesty, integrity. These are terminal
goods sought for themselves. These are ends in themselves and not means towards further ends.

The concepts of moral value, obligation, instrumental and intrinsic good are important in the
understanding the free enterprise business system. [We will address the theory of “intrinsic evil’ in Part
III, under the theory of double effect]. Normative ethical theory is the reasoning process that one uses to
justify the moral (instrumental or intrinsic) goodness of judgments, actions, or institutions, given a free
enterprise market system. Ethical scholars distinguish at least two primary positions (e.g., teleology,
deontology) when evaluating moral rectitude of decisions, actions and institutions (Beauchamp 1993;
Frankena 1973).

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 According to teleology, a right conduct is determined solely by what is achieved by the conduct, that
is, by the intrinsic good it brings into the world. Consequently, a teleological theory of moral value or
obligation is dependent on some theory of intrinsic good (Grassian 1992: 51). Some teleologists define
intrinsic good as pleasure (these are called hedonists); others define it as happiness (these are called
eudemonists); others, as one’s own greatest good (this position is called ethical egoism), and yet others, as
the greatest good for everyone (this theory is called utilitarianism).

Teleologists further distinguish whether an intrinsic good is commensurable; that is, whether there is
some common unit or benchmark by which one can assess or rank the intrinsic good in terms of relative
value. Those utilitarians who are consequentialists affirm this common unit. Those who do not agree are
non-consequentialists who invoke the natural law theory. According to this natural law theory, there are
several independent (non-commensurable) intrinsic goods such as human life, children, and the family
that one cannot tradeoff for another good by some common scale of comparison.

The intrinsic goodness of life, child, family, and society, according to the natural law theory, either
comes:

• From the laws and purpose of nature upon which human nature is patterned (this was the position
of ancient Greek philosophers like Plato and Aristotle) or
• From our innate conscience that is implanted and informed by God; (this is essentially the moral
theology of Christian moralists such as Aquinas and John Locke).

Both positions are called “absolutist” since the immutable laws of physical and human nature are
finally traced to the immutability of God. Obviously, atheists, agnostics, and those who do not want to
“assume” God in moral discourse, do not accept the natural law theory.

Teleological Schools of Moral Obligation

An objective teleological (consequentialist) assessment would imply that one can (Leys 1952):

1. Foresee all the critical consequences of the action.

2. Pre-estimate their impact on various stakeholders including the environment.
3. Ascertain which consequences are willed or intended explicitly and which unintended but
implicitly built in.
4. Judge the net benefits of the willed action.
5. Seek other alternative actions that can do better, and
6. Accordingly, judge the merits of this action.

All six steps call for serious research and objective reflection. There could be lingering doubts
whether corporate executives would foresee all critical consequences and pre-assess their impact on all
stakeholders (Hunt and Vitell 1986). Lack of time, data, skills and moral endurance often make objective
application of teleology very difficult, if not impossible. Given our rapidly changing information-
intensive, volatile and turbulent environments (Achrol 1991; Glazer 1991, 1993), one may neither foresee
nor control all the consequences of one's executive decisions or strategies. Owing to this inherent
difficulty, teleology has evolved into many versions, each trying to be more practical than the other. The
major versions of teleology are egoism and enlightened egoism.

• Egoism states that some desired results are exclusively personal, and personal good takes primacy
over social good.
• Enlightened Egoism states that when personal good is sought it should be sought in conjunction

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 with long-term social good.

Enlightened egoism appears under three versions: Hedonism, Utilitarianism, and Eudemonism,
depending upon the specific rule applied.

• Hedonism states that an action is ethical when the social good desired is pleasure and when it
results in the gratification of the maximum number of people involved in that action and affected
by that action.
• Utilitarianism (especially, the version of Jeremy Bentham and John Locke) defines the rightness of
an action or institution as that which maximizes total utility (personal and social good) of the
greatest number, or that an act or institution is ethical only if the sum total of utilities generated by
it is greater than the sum total of comparable utilities produced by a competing alternative.
• Eudemonism requires that the social good sought should be happiness and self-fulfillment of the
maximum number.

The ethical systems of Plato (e.g., Republic) and Aristotle (e.g., Nicomachean Ethics) are
eudemonistic. In general, teleologists define morality of decision, action, or an institution by their
consequences.

Utilitarianism of Jeremy Bentham

Utilitarianism has a wider appeal among Americans because of its pragmatic nature. Most scholars
of ethics use the term “utilitarianism” to refer to the specific systematic theory of Jeremy Bentham (1748-
1832), an English jurist and philosopher, who was the first to coin this term. It also refers to the later
refinements of this theory at the hands of his many disciples, in particular, John Stuart Mill (1806-73), an
English philosopher and economist. Bentham criticized the natural law theory since the bourgeoisie of
his day complacently used it to defend the natural and inalienable rights of private property of the
privileged class, binding themselves to the legalized inequalities and exploitation that the exercise of
these rights entailed (Grassian 1992).

In the place of the natural law theory, Bentham proposed a universal principle of moral criticism that
could cut through the partiality of the bourgeois status quo and the abstractness of natural law and rights:
“the greatest happiness for the greatest number.” Bentham called it “the principle of utility.” This
principle, as Bentham saw it, had two great values: a) it was universal in that it referred equally to all
human beings and not just to some, and b) equating morality with the maximization of happiness was
determinable “real entity” capable of scientific measure (Bentham 1789/1948). Happiness (pleasure and
unhappiness or pain) can be measured and compared in quantitative terms. For each alternative, one
could use a “moral arithmetic” or “moral reasoning” that sums up items of pleasure likely to be
experienced and subtracts items of likely pain, and choose the alternative that has the greatest net sum of
pleasure for the greatest number (Bentham 1789/1948).

Thus, the rightness of an action or law depends upon its consequences. In this “moral accounting,”
all individuals would be treated equally, no individual’s pain or pleasure dominating another’s. One may
not be able to foresee all the consequences of pleasure and pain, and hence, moral judgment is subject to
correction as new and unforeseeable consequences come into light. There may not be certainty regarding
any moral judgment, and nor would there be exception-less moral rules (other than the principle of
utility). This is the inevitable price one must pay for the finiteness of human foresight (Bentham
1789/1948).

According to Adam Smith, Bentham’s contemporary, self-seeking individual interest will tend, in
the long-run, to coincide with the general interest. In Smith’s theory of laissez-faire economics, a situation

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of unfettered economic competition where each producer attempts to sell one’s own products and services
and maximizes one’s own profits, laissez-faire leads in the long-run, without any conscious intention, to
the most efficient economic system for all concerned. This is the foundation of capitalism. However,
most reject the laissez-faire theory of Smith as an over-optimistic assumption of human nature -that
individual and community interest would ultimately converge.

Bentham used this principle to develop his hedonistic utilitarian theory. The goal of life, he said,
was to create as much human happiness as possible. We should condemn a human desire only when it
comes into conflict with other desires that promise to create greater human happiness in the long-run.
One should not construe morality as a conflict between inclination and an abstract duty, but rather as an
attempt to arbitrate between conflicting inclinations as to maximize happiness. Either in a situation of
individual moral choice or in legislative deciding between conflicting laws, the right act or law is that
which among all alternatives produces the greatest happiness for the greatest number. The conventional
morality rules such as “never lie,” “never break promises,” or “never kill” are not absolute exception-less
rules, but are mere social conventions or moral guides precisely because they maximize happiness of the
greatest number, and this is the principle of utility.

There are obvious problems with Bentham’s version of utilitarianism:

1. If there are no absolute moral principles, so is the principle of utility. It may be a true principle, but how do
we know that our sole basic moral obligation is to maximize human happiness of the maximum? Bentham
never explained the source of our ultimate moral obligation to maximize human happiness, especially when
this obligation conflicted with our own interests (Grassian 1992: 76).

2. According to utilitarianism, morality is nothing more than a maximization of human desires, such as the
desire for happiness. In which case, human reason is subservient to one’s desires or passions. “Reason is the
slave of the passions,” said David Hume.

3. Further, Bentham agreed that he could not prove this principle since “it is used to prove everything else and a
chain of proofs must have their commencement somewhere” (Bentham: Theory of Legislation, Preface). That
is, this principle is either self-evident or known by intuition (Sidgwick 1907). According to the utilitarian G. E.
Moore (Principia Ethica, 1903), there are certain moral rules whose violation so regularly leads to bad
consequences that one would be mistaken in violating them in any given situation. Such is the principle of
utility. It is exception-less because a person will never have sufficient information in a concrete situation of
moral choice to know that in this situation breaking such a rule will have the best consequences.

4. The utility principle of maximizing happiness of the greatest number treats everyone equally; but there are
special social responsibilities that require we consider the happiness of our family, or close relatives and
friends as more important. That is, one must fulfill one’s special moral obligations that the principle of utility
seems to disregard.

5. Related to this, the principle of utility involves but does not distinguish between two maxima: total happiness
for all individuals and the total number of individuals who share that happiness. Which maximum is better:
total amount of happiness, or its wider distribution? Can one voluntarily sacrifice one’s share of happiness in
order to reach the sum of happiness to all, especially, the disadvantaged? Alternatively, can we kill someone
in order mistakenly to maximize the happiness of all? -Most martyrs were killed that way. Thus, the principle
of utility disregards principles of distributive justice. For instance, a war against a foreign country may
maximize happiness for all Americans, yet it does not justify it as thousands of innocent foreign people are
killed in the process. An act which maximizes the sum of human happiness is not the best until that happiness
is justly distributed among the greatest number, especially the most deserving.

6. Which is better, a world population of 10 billion with the same sum of happiness thinly distributed among
them, or a world of 5 billion people with each one’s happiness doubled? By the principle of utility, the first
should be better than the second alternative!

7. Happiness is subjective: the pleasure of one may be the pain of the other; the gain in happiness of one could be
at the loss of happiness to another. One could easily delude oneself as maximizing the happiness of others
while maximizing their pain. The recent cases of corporate frauds illustrate this.

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 8. Further, we may maximize our happiness, but thereby jeopardize the happiness of future generations. This
happens every time we damage our environment permanently by overusing or abusing its scarce resources.

9. Our obligation not to harm people is much more stringent than our obligation to help people. Utilitarians
cannot give any justification to this moral distinction.

The major difficulty with utilitarianism is that it is unable to deal with two kinds of moral issues:
namely, rights and justice (Bowie: Toward a New Theory of Distributive Justice, pp. 20-4). Certain
actions that are morally right by the principles of utilitarianism may be unjust by deontological principles
when such actions violate people’s rights (Velasquez 2002: 83-6).

Utilitarianism of John Stuart Mill

J. S. Mill, an ardent disciple of Jeremy Bentham, tried to anchor the “self-evident” principle of utility
to the doctrine of psychological egoism that asserts: the pursuit of individual pleasure is the sole human
motive. According to psychological egoism, people seek only to maximize their own pleasure, and seek
the pleasure of others only as a means of satisfying their own pleasure. Both Bentham and Mill agreed
that there is no guarantee that self-interest would naturally lead to consider all humans equally and seek
the happiness of the greatest number. Hence, the theory of psychological egoism, far from proving the
principle of utility, disproved it. In his famous essay On Liberty, John Stuart Mill argued that the principle
of utility implies a commitment to the value of freedom that allows individuals to make their own choices
as to what is best for themselves and for others. There is no guarantee, however, that these two values
(individual and social) would coincide.

Thus, the principle of utility for Bentham and Mill demands courses of actions that produce the
maximum possible happiness. In other words, an action ought to be performed if the sum of the
happiness of all affected individuals would be maximized by the performance of action.

Success, money, prestige, and the like are normal sources of pleasure and happiness. These may not
be directly sought always. Thus, highly dedicated professionals among research scientists may dedicate
lifelong hours to the point of exhaustion for the sake of knowledge they hope to gain, even though the
same individuals could have chosen different routes to happiness or pleasure. Knowledge, dedication,
integrity, and the like virtues are sought by the magnanimous. Friendship, health, and beauty are also
sought by people with high self-esteem. These are values that have intrinsic worth, apart from their
content of pleasure or happiness (Moore 1962). Those who seek these values seek happiness by making
humanity happy. Hence, the utilitarian principles of Bentham and Mill may not fully explain the
dedicated lives of scientists and saints, Olympic and major league athletes.

Deontological Schools of Moral Obligation

While in general, teleologists define morality of decision, action, or an institution by their
consequences, deontologists deny this claim and maintain that the morality of an action is independent of
its consequences. Moral rightness and wrongness are basic and ultimate moral terms (De George 1999:
80); they do not depend upon the commission or omission of good or evil, right or wrong. One’s duty is
do what is morally right and avoid what is morally wrong, regardless of the consequences of so doing.

The Theory of Kantian Ethics

Emmanuel Kant (1724-1804) wrote his famous ethical treatise Foundations of the Metaphysics of
Morals in 1785 before the rise of British utilitarianism, but he was well acquainted with the basic tenets

30
of that doctrine (Boatright 2003: 51). Hence, his ethical theory is best understood as a reaction to
hedonistic utilitarianism and its fundamental inadequacies: its reliance upon the notion of happiness as the
ultimate ground of morality, and its potential for injustice (Grassian 1992: 83). Kant rejected the view
that reason is a slave of human passions. Morality should be grounded in a value that gives human beings
their distinctive worth. Such a value cannot be a desire for happiness that is grounded in human
psychology. People may desire happiness, but they do not derive their dignity or moral worth as persons
from desiring happiness.

Human dignity is derived from human freedom and the ability to reason, characteristics that
distinguish humans from animals. What defines and grounds morality is human freedom and rationality.
Legal systems exist, said Kant, in order to secure the value of justice. Justice, in turn, demands that each
person enjoy the fullest possible liberty compatible with a like liberty to all. Hence, while the principle of
utility disregards distributive justice, Kant’s theory of moral worth affirms it.

Further, Kant, unlike the utilitarians, did not believe that people needed guidance in arriving at
enlightened moral judgments. The central problem of ethics is not what utilitarians pose: What would be
the right thing for a person to do in a given situation? Perhaps due to his deeply religious background,
Kant thought that the answer to this question should be obvious to every decent human being.

Discerning right from wrong was not the central problem for Kant; hence, he did not deal with moral
dilemmas or perplexities or conflicting obligations (this would be the central problem for Sartre). The
real problem is - having discerned what is right and what is wrong, how does one doggedly pursue right
and avoid wrong? That is, the ultimate question is, not what morality is, but how is morality possible?

Kant grew in a scientific world of deterministic laws, and consequently, his main inquiry was: how
do you reconcile free will (which is vital for any moral act) with physical determinism? If moral actions
were entirely governed by deterministic cosmic laws, then freewill would be an illusion, and people
would not be obliged to behave morally when they do not have a free will, which determinists seemed to
deny.

Hence, Kant made a radical distinction between the physiological part of human nature (sensual or
animal natures) that deterministic physical laws may influence, and the psychological or spiritual nature,
which grounds freewill and moral choice. Unlike classical natural theorists who derived their concept of
morality from a biological and social view of nature, Kant attempts to free his moral theory from such
considerations and instead base it on the moral and free rational person. Hence, the basic principles of
morality bind all rational or free people, regardless of their psychological desires for happiness. Thus, the
concept of morality inextricably connects the concepts of rationality, freedom, impartiality and justice,
and respect for the autonomy of persons.

This concept of morality provides a ground for:

• A theory of moral value (i.e., a theory of how we should determine when a person is morally
good).

• A theory of moral obligation (that is, a theory of how we should determine when an act is right
and obliging), and also,

• A theory of moral justification (that is, a theory of how we should determine when an outcome of
the act is good or harmful, and how the harm can be compensated).

Kant’s Theory of Moral Value

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 How do we determine if a person is morally good? It is insufficient to look at the person’s actions
and their consequences without considering the motives and the intentions. Actions by themselves do not
reveal the moral character. A bad person may do right things for bad reasons, or a good person, with right
intentions, may mistakenly end up doing wrong things. The only thing that makes a person morally good
is that he/she acts from duty for its own sake; such a person has goodwill, and has moral character. A
person who does one’s duty for any other motive (e.g., a retailer is honest for winning customer loyalty is
motivated by self-interest and not duty) does not deserve moral praise.

Even the person who is naturally good or kind and who does what is right or compassionate out of a
natural inclination without acting by a sense of moral duty is unworthy of moral praise. We should not
get credit for our natural inclinations since our heredity and environment largely determine them and over
which we have no control. However, if a person habitually does good out of duty, then his or her
subsequent actions, even if not done consciously out a sense of duty, are morally praise worthy because of
that person’s learnt disposition to act from duty.

For Kant, responsibility or moral worth stems from the underlying principle of the will than from the
purposes or ends or excuses that precede the action or from the consequences that follow it. In this sense,
Kant's Groundwork of the Metaphysics of Morals (1964) is a treatment of an Ethic of Duty, primarily as
the Categorical Imperative, and secondarily, as an Ethic of Hypothetical Imperatives.

A categorical imperative demands that “an action is as of itself objectively necessary, without regard
to any other end.” It is fulfilling duty for its own sake, and not for any other ulterior motives.
Hypothetical imperatives are instrumental: here the actions are done for specific ends. For instance, if I
intend to lose weight, then I must eat less; “eating less” is a hypothetical imperative conditioned on the
purpose of losing weight. If I do not need to cut down weight, then there is no imperative for eating less.

According to Kant, the "moral worth can be found nowhere but in the principle of the will,
irrespective of the ends which can be brought about by such action" (Kant 1964: 68). To use modern
terminology, Kant seems to argue for a deontological (i.e., duty-based) source of moral worth, than a
teleological (i.e., purpose-based) one. The underlying duty-principle makes an action a categorical
imperative, while the underlying purpose makes an action a hypothetical imperative. A categorical
imperative "declares an action to be objectively necessary in itself without reference to some
purpose - that is, even without any further end" (Kant 1964: 82). Categorical imperatives are "concerned
not with the matter of the action ... but with its form and with the principle from which it follows" (Kant
1964: 84).

On the other hand, hypothetical imperatives imply that "an action is good for some purpose or
other" (1964: 82). Such imperatives declare that an action is necessary "as a means to the attainment of
something else that one wills" (1964: 82); they concern ends and purposes, and hence, the matter (and not
the “form”) of an action. Categorical imperatives ignore purposes and ends, are not concerned with the
matter of the action (1964: 84) but only the principle guiding the will, and hence, refer only to the form of
the action (Wike 1987).6

6 However, it does not follow that the categorical imperative lacks purpose or ends. While purpose or ends may not be the source
of the categorical imperative itself, nor of its moral worth, the categorical imperative itself may have ends or purposes, just as the
hypothetical imperative has ends or purposes. The major end of a categorical imperative is "objective" or absolute end, valued in
itself (Kant 1964: 95). Thus, persons or rational beings are objective ends (Zwecke) (Kant 1964: 96). If there is a categorical
imperative, it is because an end in itself, or an objective principle of the will, forms or makes it (Kant 1964: 96). Thus, the end or
matter of a categorical imperative is the objective or absolute end that makes it categorical. On the contrary hypothetical
imperatives have relative or subjective ends or purposes, these subjective ends make the imperatives hypothetical (Wike 1987).

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 Although Kant does not directly connect categorical and hypothetical imperatives to responsibility,
yet one can deduce the following relationship: categorical imperatives generate categorical or
unconditional responsibility; they ground absolute or necessary responsibility. Whereas hypothetical
imperatives generate hypothetical or relative responsibility, conditioned or relative to moral agent's ends,
purposes, and circumstances (Mascarenhas 2008). Absolute ends that are valued for their own sake often
rule categorical imperatives; that is, they are ends-in-themselves.

Kant’s Theory of Moral Obligation

Fundamental to most conceptions of morality is a commitment to the value of justice. With
utilitarians, our major concern might be maximizing the good in society, and most of us would not
consider this alone as right. No doubt, an efficient society is one that is most capable of maximizing the
good and minimizing the evil for its citizens, but such a society is not a moral one unless its goods are
justly distributed. Hence, the value of distributive justice is more fundamental than the value of teleology
or deontology.

Justice is the cornerstone of Kant’s theory of moral obligation. In his theory, the notion of justice is
inseparably tied to the notions of freedom and rationality (Grassian 1992: 88). Justice involves treating
individuals fairly, and this, in turn, involves considering them as rational moral agents who have the right
to make their own choices unless these choices interfere with the freedom of others. Justice demands,
therefore, that people cannot be used as means but treated as persons, free and rational moral agents.
Demands of morality are categorical imperatives. They are not means for achieving any desires or
objectives as such, but are pursued for their own ends; they are values or actions that are objectively
necessary by themselves without regard to any other ends. That is, moral demands are not conditional or
hypothetical imperatives. For instance, our moral obligations to keep our promises are in a way
dependent upon whether we desire to keep them.

Kant claims that specific categorical moral demands follow from a supreme categorical moral
principle that he calls the categorical imperative. This categorical imperative (CI), Kant claimed, is so
basic to moral thinking that all rational persons who understand what it means would accept it as binding,
regardless of their specific psychological, political or religious beliefs. Kant presents five formulations of
CI that he claims have an equivalent meaning. Some formulations are:

• Act as if the maxim of your action (the subjective principle under which you act) were to become
through your will a universal law of nature (i.e., that everyone could not but follow that maxim).
• Act in such a way that you always treat humanity, whether in your own person, or in the person of any
other, never simply as a means, but always at the same time as an end.

The first version is also called the principle of universalizability. That is, when we act on a certain
moral principle, we must be willing to accept the right of everyone else to act on the same principle. For
example, if I act on the principle, “never break promises and never lie, regardless of the circumstances,”
then this not universalizable, since there is an equally valid principle, “lie if it is necessary to save an
innocent human life.”

This first formulation also stands for and demands impartiality. Impartiality is at the heart of the
golden rule: Do unto others as you would have them do unto you. Confucius has a passive version of the
golden rule: Do not do unto others what you would not have them do unto you. But, what if a
sadomasochist hates himself: can he hate others by the golden rule? What if a person does not want to be
loved: Can he refuse to love others? Kant’s CI expresses in a more precise manner the real spirit behind

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the golden rule without implicit reference to the vagaries or subjective preferences of human beings. To
what extent CI does this, however, is still debated.

The second formulation affirms human dignity that resides in rationality and freedom, equality, and
justice. This version of the CI expresses Kant’s view that if we treat people as means and not ends we do
not respect them as persons.

This Kantian doctrine has relevance for marketing. For instance, a recent marketing doctrine
considers customers as “sovereign.” One could interpret this to mean that customers are not means but
absolute ends-in-themselves, and therefore, marketers should bind themselves to customers by categorical
responsibility. Further, most marketing executive duties that directly deal with customers can be assumed
to be categorical imperatives such as, innovating and marketing consumer-safe products, truth in
advertising, being honest to customers, offering fair value to customers, and offering quality products and
services to all customers regardless of age, gender, color, race, and residence. On the other hand, some
executive duties may be deemed hypothetical or conditional responsibilities such as, offering discounts to
senior citizens, marketing state-of-the-art products, promoting salespeople based on sales-performance,
talent, education, age, or seniority, offering preferential credit terms to senior distributors, and satisfying
all company stockholders.

The Kantian doctrine of categorical imperatives has also relevance for business management. For
instance, consider the doctrine that some of your “stakeholders” are “sovereign.” One could interpret this
to mean that certain stakeholders are not means but absolute ends-in-themselves, and therefore,
executives should bind themselves to at least certain stakeholders (e.g., employees, secured creditors,
long-term suppliers and distributors) by categorical responsibility. Further, some executive duties that
directly deal with some stakeholders can be assumed to be categorical imperatives, such as paying
accrued taxes, paying deferred wages to employees, paying bills of suppliers who supply only for your
company, workout schedules with the major bankers, due diligence before undertaking divestitures,
mergers and acquisitions, innovating and marketing consumer-safe products for your retailers and
customers, truth in financial statements, being honest with your bankers, honoring warranties and
guarantees on your products and services, and the like. On the other hand, some executive duties may be
reckoned as hypothetical or conditional responsibilities such as, paying dividends to your shareholders,
repaying unsecured loans, offering stock options to your senior management, paying hefty severance
packages to your CEO, cooperating with your hostile takeover sharks, and satisfying all company
stockholders.

Kant’s critics would argue that human freedom is not best manifested in choices involving moral
duty. The disposition to do one’s duty may be as much determined by heredity, childhood training and
good school environment, for which they should not be morally praise worthy, rather than by any free
choice. Hence, why should a learnt disposition to duty be morally praiseworthy? Moreover, we do not
have a free choice whether we should have a good and kindly character even as we may not have a free
choice to be an evil and unkindly person. If the former does not deserve moral praise, the latter should
not deserve moral blame either. Kant would reply that people have less control over their temperament
and environment that makes them good or bad, but they can certainly control the moral principles under
which they choose to act.

Kant’s critics urge: it is one thing to act out of duty, but it is another to understand one’s duty
correctly. What if one acts out of duty wrongly understood and another acts out of duty rightly discerned.
Should we praise both of them equally? Alternatively, should we blame the first and praise the second,
even though both acted out of duty? What if the first one wrongly understood duty because of inadequate
childhood training and improper environment, and the second understood it correctly because of adequate
childhood training and proper environment? In judging moral character, we must consider what a

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conscientious (duty-conscious) person is conscientious about. Kant, given his deep religious training, did
not focus on this problem, as he thought that demands of duty were or should be clear to all.

Further, what if one’s duty as informed by one’s religion is not clear? For instance, consider this
case: Parents XYZ are Jehovah’s witnesses who believe that blood transfusions are morally wrong.
Their only son, a minor, meets with an accident, bleeds profusely and when rushed to the hospital the
doctors urge blood transfusion without which he will die. XYZ are confused in their duty: duty to a
religious belief versus duty to their only son. There are many similar situations when the “demands of
duty” may not be too clear. What would Kant advise? What would you? Is one duty to religious belief
just fanatical, fickle or secondary when one’s duty to save one’s only son from imminent death is real,
critical and primary? Who should decide this: the parents, the son, or the society?

Furthermore, where does moral effort feature in ethics? For instance, consider A is by disposition
very calm and compassionate, and B is by disposition very excited and violent. If both restrain
themselves equally well under very similar circumstances, should not we commend B more than A, as B
would have exerted much more moral effort?

Conscience and Moral Obligation

The existence of conscience is one of the most widely validated concepts in psychological,
sociological, religious, and philosophical literature (Covey, Merrill and Merrill 1994/2003: 65). Whether
called “inner voice” (Book of Wisdom) or the “collective Unconscious” (Sigmund Freud and Carl Jung),
our conscience has been recognized as a major part of human dignity and endowment. When corporate
executive develop their vision and mission statements, the collective unconscious of the corporate
executives frequently comes to the surface when most of them get deeper into their inner lives, regardless
of their religion, upbringing, nationality or culture. They seem to have a common unique sense of the
basic laws of life we call conscience. They all carry within them an educated conscience, and often, an
educated delicate moral conscience that we have nurtured, internalized and developed over almost all the
conscious years of our life.

Immanuel Kant said, “I am constantly amazed by two things: the starry heavens above and the moral
law within.” Conscience is the moral law within. It is the overlapping of moral law and behavior. It is
the voice of God in us or the innate sense in us of fairness and justice, of right and wrong, of kind and
unkind, of what is true or false, just or unjust, of what contributes and what detracts, of what beautifies
and what destroys. One’s culture may dress and translate this moral sense or conscience into different
kinds of practices and words, but this translation does not negate the underlying sense of right and wrong.
This universal conscience is a set of values, a sense of fairness, honesty, respect and contribution that
transcends culture, time, and space; it is self-evident; it is the requirement of trustworthiness. When
people live by their conscience, their behavior echoes in everyone’s souls. People instinctively feel trust
and confidence toward them. This is the beginning of moral authority (Covey 2002: 4-5).

Conscience was originally a term used by the Stoics in their gnostic moral philosophy. Conscience
was defined as that inner guide by which the wise persons regulated their activities regardless and spite of
the opinions of others. In this sense, conscience is conscientiousness or social consciousness. However,
conscience does not guarantee free autonomy, to think and do as far as one’s knowledge guides that
person. Good conscience surrenders to higher good such as fraternal charity, responsible citizenship, and
religious faith. Sometimes, even rightful freedoms must be foregone (e.g., engaging in a just war). A
good moral conscience needs to be educated by (Covey, Merrill and Merrill 2003: 67):

❖ Reading and pondering over the wisdom literature of various religions, especially their sacred scriptures; they
broaden our awareness of truth and common sense through time;

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 ❖ Standing apart from and learning from our own experience;
❖ Carefully observing the experience of others;
❖ Taking time to be still and listen to that deep inner voice, and
❖ Responding to that inner voice.

Both listening and responding to the inner voice is needed. Otherwise we dull our conscience. As C
S Lewis said, “disobedience to conscience makes conscience blind.” With our educated moral conscience
we connect with the wisdom of the ages with the wisdom of our heart; we become less a function of the
social conscience or social mirror and more of a person f character and conscience. Our security does not
come from the people we associate with as much from our own sense of integrity, a moral integrity.

Stephen Covey (2004: 77-82) emphasizes the following features of a good informed conscience:

• Conscience is an inner light, a small voice within, a moral sense, and a universal phenomenon. It is quiet,
peaceful, and harmony. The opposite voice – the ego – can be tyrannical, despotic and dictatorial.
• Conscience democratizes, challenges and elevates ego to a larger sense of the group, the whole, the community,
the greater good, - the common good. It sees life in terms of service and contribution, in terms of security and
fulfillment of the other.
• Conscience introduces us into the world of relationships; it moves us from independent to an interdependent
state. Conscience teaches us that vision and values must be shared before people will be willing to accept the
institutionalized discipline of structures and systems that embody those shared values. Such shared vision
creates discipline and order without demanding it. Conscience of ten provides the why, vision identifies the what
we are trying to accomplish, discipline represents how we are going to accomplish it, and passion represents the
strength of feelings behind the why, the what, and the how (Covey 2002: 9).
• Conscience also transforms passion into compassion. It engenders sincere caring for others, a combination of
both sympathy and empathy, where pain is shared and received. Compassion is the interdependent expression
of passion (Covey 2002: 9).
• Conscience is sacrifice – the subordinating of one’s self or one’s ego to a higher purpose, cause or principle.
Sacrifice gives up something good for something better, something immediate and vaporous for something
eternal and lasting.
• Conscience is discernment – discerning between right and wrong, good and evil, moral and immoral, ethical and
unethical, fair and unfair, just and unjust, and truth and falsehood.
• Conscience empowers. It reflects the worth and value of all people and affirms their power for freedom to
choose. It sees their potential for self-control.
• Conscience teaches us that ends and means are inseparable. That ends actually preexist in the means. That is,
means used to accomplish the ends could be as important as the ends (E. Kant). Machiavelli taught the opposite
- The ends justify the means.

The ego is threatened by negative feedback; it seeks to negate the message by destroying the
messenger or the prophet. It is myopic and interprets all life through its own agenda. It interprets all data
in terms of self-preservation. It constantly censors information for threatening elements. It denies much
of reality. On the contrary, conscience values feedback and attempts to discern whatever truth it contains.
It embraces information, does not censor it, but accurately interprets it. Conscience is a social ecologist
ever sensitive to and preservative of nature.

The spiritual and moral nature of people is independent of their religion, religious cult, culture or
religious approach, geography, nationality or race. Yet all the major enduring religious traditions of the
world are unified when it comes to certain basic underlying principles or values (such as respect,
compassion, kindness, fairness, contribution, honesty, and integrity). These values are timeless, transcend
ages, and are self-evident. Conscience is the moral law within. It is the intersection of moral law and
human behavior. It is the inner voice of God to his children (Covey 2004: 77-78).

A conscience raised and developed well can oblige. The human conscience is not merely a social
construction. It is a genuine human process of assessment and judgment. It derives etymologically from
con + scientia = with + knowing. In this sense, conscience is self-reflexive and socially connected, a

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knowing that is accountable to our deepest self, to human communities, and ultimately to God. Larger
purposes and standards beyond our self-influence and form the individual through conscience. Loyalty
and obligation to those larger purposes related the conscientious person to others in common cause and
mutual accountability (Spohn 2000: 122-123).

Conscience eludes precise definition, just like rationality, emotion, and choice. Conscience is not a
distinct or separate faculty of the mind. It integrates a whole range of mental operations. Conscience is a
personal, self-conscious activity integrating reason, emotion and will in self-committed decisions about
right and wrong, good and evil, fair and unfair, just and unjust (Callahan 1991: 14). Conscience begins in
initial sensitivity to moral salience and moves to conscious empathy. Conscience engages in “cross-
checking” one’s critical thought, intuitive insight, affective valence, empirical possibilities, imaginatively
grasped analogies, and social corroboration. Reason tutors emotion and emotion instructs reason;
intuition is assessed against remembered experience; imagination projects possible scenarios that are
evaluated by affective resonance and critical reflection. All of these operations converge to the act of
making a moral judgment with as much freedom and commitment as we can muster. Conscience enables
more than individual moral decisions; it enters into the self-constitution of the person over time. Our
moral choices shape our character; they can make us or mar us. We become what we decide and do
(Spohn 2000: 123-124).

Morality bears upon conscience, which must judge between right and wrong, good and evil, fairness
and unfairness of various alternatives or strategies such as firing, hiring, promoting, downsizing, plant
shut downs, massive layoffs, outsourcing, the plight of the laid-off or the displaced and their healthcare
coverage, preservation of the environment, and the dignity of human labor. Conscience is not just what I
think about these issues, but it is me in the act of thinking about what is just and true. Conscience is that
part of us that is bigger than us.

Conscience implies at least three levels of reflection (Bransfield 2008: 17-18):

a) Conscience is an inward reflection where I find a norm that obliges me (Catholic tradition calls this
synderesis). This awareness of the inner moral sense is the capacity of the person to hear the voice of God
within or the voice of faith. Conscience is founded upon truth – therefore, it looks to God as the author of
truth revealed through right reason and teaching of the sacred scriptures (especially, the prophets). This is
the subjective aspect of conscience – it relates to joy versus sadness, happiness versus guilt.
b) Conscience is also an outward reflection to understand the truth of the nature of things in themselves. This is
the objective aspect of conscience – conformity with nature outside us and its laws – it relates to objective
right and wrong, good and evil.
c) Conscience is the last and the best judgment I make based on my inward [level (a)] and outward [level (b)]
reflection; it is a virtuous fitting together such that the conscience is a manifestation of truth itself rather
our own preferences. Conscience emerges as a voice, greater than our own, from the two reflections.
Hence, a conscience needs to be informed, trained and educated.

Conscience has been described under two senses: a) anterior conscience and b) subsequent
conscience. The former is a mental and moral process; the latter is an outcome (e.g., my conscience
bothers me). O’Connell (1990: 110-114) distinguishes three meanings of anterior conscience as capacity,
as process, and as judgment.

Conscience as capacity: It is our capacity to determine good from evil, and right from wrong and to
recognize corresponding moral claims. It is our capacity for responsibility, accountability and
commitment. It defines the human species. Despite the skepticism of postmodernism, there is
considerable evidence for a common human morality. We live under analogous moral systems and can
argue about moral issues across cultural and linguistic boundaries.

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 Conscience as practical process: It is a reflective process. It seeks to determine the right and
appropriate action in particular situations by perceiving moral salience and by taking into consideration
the perspectives of others. Depending upon the complexity of the moral situation, we strive to seek the
best moral decision by scrutinizing our options and by assessing their relative moral worth; we foresee or
imagine their consequences, recall relevant standards and comparable experiences, seek advice, compare
one source against another, and then arrive at a moral judgment. This process of moral reflection is not
necessarily sequential but a more circular path integrating so many different aspects of a moral situation.
In order to deliberate wisely and accurately we need specific skills such as honest searching for the facts,
prudent reflection, a willingness to entertain dissenting opinions and unpleasant consequences, and
acknowledgement of personal bias and fallibility. At this juncture, conscience as processing skills and
conscience as capacity merge. Conscience reflects the degree of our personal maturity, emotional
stability, social awareness, and our virtues and vices.

Conscience as judgment: Our capacity and process of conscientious deliberations result in a

judgment, a decision that embraces truth and avoids falsehood, discerns right from wrong, and recognizes
and pursues good and avoids evil, and acts accordingly. At this stage we achieve a full congruent,
reflective equilibrium of reason, intuition, and emotion, and commit ourselves in a wholehearted decision
of conscience (Callahan 1991: 137). This is moral competence at its best. The truth discovered in the
process of our conscientious deliberation makes a claim upon us. We have found the right thing to do, a
morally compelling course to pursue, or follow the least harmful option. Failing to obey this claim would
violate our personal integrity. This is moral obligation.

We must distinguish the skills of acting well from the skills of reflecting well. To decide to act on
one’s conscience calls for another set of virtues: resoluteness, courage, persistence, and passionate
attachment to the moral good.

Conscience and Moral Formation

Conscience also relies on the moral quality of our family we were raised and nurtured, of the groups
(e.g., schools, college, workplace, religious and social affiliations) to which we belong. Our moral
formation comes from them; we gain our moral bearings from these communities; we carry their voices
and values, for better or worse. Values are transmitted through groups (O’Connell 1990: 170). We live
up or down to the standards of the groups to which we belong. In these groups we find our identity and
the inspiration and accountability to lead a moral life. We may trace the lack of a sound moral formation
among the youth today to a lack of sound moral values and crucial moral resources in our families and
society; there is too much value-neutrality, and occasionally, moral cynicism. The importance of moral
and role models in moral formation and social learning is more crucial than ever before (Bandura 1986;
Walker and Taylor 1991). The youth moral conscience is dull in USA today, as we do not nurture it with
an adequate moral value and vocabulary and when our own moral values are dulled by self-interest and
utilitarian advantage (Bellah et al. 1985; 1992).

Simply stated, relativism asserts that everything is relative; there are no absolutes. Thus, there is no
objective truth (ontological relativism). We cannot know or arrive at truth (epistemological or cognitive
relativism). There is no moral absolute truth or value (moral relativism). There is no objectively true and
permanently valued meaning and culture (cultural relativism).

Relativism has two major counterparts: cognitive relativism and moral relativism. Cognitive
relativism dates from the Greek classic period. In Theaeteus, Plato presents Socrates arguing Protagoras'
relativist doctrine: Man is the measure of all things (homo mensura). Hence, there is no objective truth
possible. Relativism lay dormant thereafter till it resurged in the twentieth century when cultural

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anthropologists made us aware of cultural pluralism and genuine cultural diversity in values, customs and
habits. At the same time 18th century Classic Rationalism (triggered by Kant and his followers) proposed
that man's reason can arrive at (even moral) truth independent of any revelation or authority or one's
religious faith. Classic Rationalism and Cultural Pluralism begot philosophical pluralism or relativism.

Cognitive relativism, in its modern version, holds that truth (or its cognates) is relative to a
conceptual framework or philosophical orientation. Truth is truth (i.e., univocal or uniquely assertable)
within that framework or paradigm or culture or philosophy. It becomes equivocal (i.e., not uniquely
assertable) outside that framework (Krausz 1984: 397). Thus, the central tenet of cognitive relativism is
that the truth or the evaluation of truth is relative to the conceptual schema of an individual or the
situational context within which the assertion is made (Muncy and Fisk 1987: 21). Hence, cognitive
relativism does not reject truth (or falsity), its existence and our capacity to find truth. Skepticism is the
philosophy that denies truth, but it is different from cognitive relativism (Krausz and Meiland 1982).

Relativism generally rejects the idea of categorical truth (something is either true or false) and
"absolute" truth that is valid and true across all times, places and cultures. Cognitive relativism does not
assert that such absolute truths are non-existent (there may be such truths or falsitudes), but they cannot
be proved or disproved as such, given the relativist framework of one's investigation. All that cognitive
relativism says is that truth is relative to one's investigative framework. Given this understanding of
cognitive relativism, one can distinguish several types of cognitive relativism:

• Aletheic Relativism: all truth is relative, relative to the individual, his or her purpose, or to the
conceptual scheme within which the truth is asserted;

• Epistemic Relativism: criteria for verifying truth are relative to the context or conceptual framework
in which truth is investigated;

• Subjective Relativism: any truth should be assessed in relation to the beliefs and attitudes of the
investigator system;

• Objective Relativism: ceteris paribus, truth is invariant; that is, other things being equal, truth can be
compared and assessed; when other things are not equal, then either the truth or its criteria are
relative;

• Conceptual Relativism: the conceptual framework of the investigator defines and determines the
truth or the perception thereof; as stated, this is a subtype of epistemic relativism.

The first two versions are distinguished by Vallicella (1984), and the latter three come from
Mandelbaum (1979). Often, relativism can be a combination of two or more types. Thus, Mandelbaum
(1979: 403) claims that the most common basic common denominator of relativism is the contention that
assertions cannot be judged true or false in themselves, but must be so judged with reference to one or
more aspects of the total situation in which they have been made. Obviously, this version of relativism
combines epistemic and subjective types of cognitive relativism.

Obviously, aletheic relativism is untenable; its assertion that "all truth is relative" must be itself
relative, unless one makes one's own position an exception to this rule, which Mandelbaum (1962) calls
the "self-excepting fallacy." Epistemic relativism or conceptual relativism are counterproductive - if all
truth must be evaluated only within the conceptual framework it is developed in, then other critics cannot
evaluate it, cannot appreciate it, nor use it, and epistemic-conceptual relativism degenerates to cognitive
enclavism. If science cannot be shared or interacted against, then it ceases to be "knowledge" or the
"received doctrine" on anything. Any theory is best evaluated against a framework different from the one
in which it was developed.

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 Moral relativism is closely associated with value relativism and cultural relativism. Cultural
anthropologists assert three propositions regarding cultural relativism (Krausz and Meiland 1982):

• The imperatives or values in a given culture should only be evaluated relative to the norms
of that culture.
• There are no transcendental or culture neutral norms to evaluate different cultures or
cultural elements within a culture.
• Hence, culture comparisons are meaningless; there is no such thing as a better or the best
culture.

Value relativism maintains that each set of values, including moral values, is as valid as each other set,
and hence no society has a right to change the values of any other society (Krausz and Meiland 1982: 7).

Following cultural relativism, moral relativism holds two major tenets:

• Whether an action is right or wrong can only be evaluated relative to the moral code of the
individual, society, group or culture where the action occurs.
• There are no absolute, impartial, objective moral standards for evaluating (praising,
condemning, or revising) decisions or actions across individuals, groups and cultures.

In general, cultural, moral and ethical relativism was motivated by an enlightened tolerance for
nonwestern cultures, by a desire for philosophical and theological pluralism, and by one's rejection of
ethnocentrism (a belief that one's culture is better than other cultures). While certain forms of value
relativism are laudable, using moral relativism to sanction social evils such as slavery, genocide, racism,
xenophobia, chauvinism, and anti-Semitism, far from indicating tolerance to other cultures, reveals deep-
seated intolerance of the equality status of others.

From a philosophical viewpoint, any relativism is self-refuting, since the principles on which it is
based (such as the principles stated above) are themselves relative and hence can be challenged. One
could always assess other values, cultures and moral imperatives, as long as one does not assert that the
criteria of assessment are "absolute" (Siegel 1987).

Following cognitive relativist and skepticist arguments, moral relativists have also denied the
possibility of ethical theory on the grounds that there is no ethical knowledge (e.g., Baier 1985: 263;
Williams 1985). This is typically a non-cognitivist normative theory stand. Arguments against cognitive
skepticism are also valid in combating this position. However, there are others who, while admitting the
possibility of ethical theory and knowledge, are against any sort of normative ethical theory that guides
human behavior by systematizing and generalizing moral judgments. Three major arguments supporting
this position are that normative theory is a) unnecessary, b) theoretically impossible, and c) undesirable.
Clarke (1987), Rawls (1971: 48-50) and others have successfully argued against this rationalist position
(which Clarke calls "anti-theory"). Rationalist normative theory requires moral principles that are definite
in meaning so that moral judgments may be deduced from them. The norms of actual moral practices,
however, are vague in order to permit context to play a role in determining their application. Most moral
norms (e.g., thou shall not kill, not covet they neighbor's wife) bring with them a very rich "cultural
baggage" (Baier 1985) if these norms are to have any moral content at all. These norms get determinate
content only against the histories of their background institutions and the ways of life of people affiliated
to these institutions. Moral rules or principles are too abstract to justify any definite conclusions without
the interpretive background of cultural institutions and moral practices. Most moral principles are best

40
interpreted and justified against social "conventions" that generated these rules or principles (Hamshire
1983: 163).

Table 15.4 summarizes the impact of cognitive and moral relativism, in some of their versions and
subsets, on moral decisions and executive responsibilities. Thus, every type or version of moral
relativism does not equally diminish executive responsibility. For instance, cognitive relativism with
all its versions may affect one’s “intellectual development” but not necessarily one’s “volitional
development” or “moral development.”

Applied to the executive’s moral development, the several versions of cognitive moral relativism
could imply serious consequences. For instance, in Aletheic Relativism all truth and therefore, all value
is relative, relative to the company or the executive, his or her objective, or to the business plan within
which the truth or value is asserted. Hence, the truth of a company statement (e.g., in a balanced sheet,
profit and loss statements or packaging labels) could be judged only within its conceptual framework,
which hardly makes sense. Moreover, if this were true, truth or knowledge would be insulated and
confined within the system in which it was generated, and could be hardly imported, used, and referred
to outside that system.

Similarly, according to Epistemic Relativism, criteria for verifying truth or genuine stakeholder
values are relative to the contextual or conceptual framework in which truth or value is investigated.
This would destroy the project itself that tries to persuade and negotiate products, services, values and
motivations across all its stakeholders, most of which are outside one’s contextual and conceptual
framework. If all truth should be assessed only in relation to the beliefs and attitudes of the executive’s
investigator system, then executives could not relate meaningfully to each other. If the conceptual
framework of the executive and the company solely defined and determined the truth/value of all
stakeholders, then this would lead to solipsism or business enclaves, both of which would defeat the
purpose of business management as a discipline or practice.

None of the above five versions of cognitive moral relativism, either individually or collectively, can
significantly and in the long run exonerate moral responsibility of the executive. Since, if all truth or
value is relative, the statement asserting moral relativism itself must also be relative (Mandelbaum 1962).
On the other hand, if the firm and the Corporate climate within it, are rampant with moral relativism either
in terms of absolute moral values (value-relativism) or cultural mores (cultural relativism), and if the
executives working within this firm and its climate are inextricably and inevitably constrained to decide
and act within such moral relativist frames, then to that extent their responsibility may be diminished
(Mascarenhas 1995; Mascarenhas 2008: 145-147). Nothing stops, however, a morally “conscientious
objector” to quit the firm in search of more morally conducive organizational cultures and climates.

Moral Obligations in Business Practice

With the discussions on moral worth and moral obligation and their principles thus far, we should be
able to apply them and put them to concrete business practice. Let us consider some practical cases. What
rules of deontological, teleological and distributive justice or moral obligation do the following strategies
uphold or violate, and why?

a) An aggressive marketing executive hires only at the entry level, and promotes employees from within. His reasons:
1) internal promotions enhance bonding and trusting relationships between the firm and its employees, 2) they
encourage job-training and skills development; 3) they promote informal relationships that make formal hierarchy
less important; 4) they provide a sense of justice and fairness (loyal employees will not be bypassed in favor of
outside candidates), and 5) they offer better incentives for good performance (Pfeffer 1994).

41
 b) A sales force manager will not contract out work formerly done by one's employees (Pfeffer 1994).

c) A purchasing manager prefers a small number of suppliers in order to 1) develop long term and mutually trusting
relationships, 2) so that suppliers may achieve reasonable economies of scale in their operations, and 3) that they
may timely invest in assets specific to the production of the purchasing firm's needs.

d) Japanese firms are reported to enter into long term "relational contracts" with their first-tier (important) suppliers
by manufacturing less than 30 percent of their components in house, whereas Ford and GM manufacture 50 and 70
percent of their components in house, respectively (Aoki 1988).

e) Recognizing that pressure from mining, tourism, ... could undermine local culture, hunting, fishing, ... of the Inuit
Eskimos in Alaska, the Alaska's Department of Natural Resources included the Eskimos in their planning process,
thus minimizing such intrusions and by encouraging more benign tourist activities [Schwab, Jim (1990), "Paul
Davidoff Award: Alaska's Northwest Area Plan," Planning, 56 (March), 11].

f) Hewlett Packard (HP) proposes to be an "intellectual asset to each nation and each community in which we
operate. ... This means contributing talent, time, and financial support to worthwhile community projects.... As
citizens of their community, there is much that HP can and should do to improve - either working as individuals or
through such groups as churches, schools, civic or charitable organizations" [Hewlett Packard (1989), Corporate
Objectives, Palo, Alto: CA, 15-16].

g) In view of the high cost of losing customers and high sensitivity of profits to the retention of customers (Reichheld
and Sasser 1990), a store manager adopts product return, guarantee, and recall policies.

In general, all seven cases (a) to (g) uphold rights of one’s internal stakeholders (e.g., employees,
customers, suppliers) and executive duties towards them. Overall, all seven cases advocate good policies as
they will contain costs and augment benefits. Hence, seemingly, deontological and teleological moral
obligations are satisfied. However, how do you verify about distributive justice-based moral obligations?
For instance, will strategies (a) and (b) generate excessive internal breeding, and hence, often perpetuate
mediocrity, without fresh and proven talent from the outside world? Bypassing better talent from outside in
favor of internal lesser skills may hurt the company in the long run. Thus, under what conditions are the
five reasons justifying internal promotions in case (a) and the three reasons rationalizing the small number
of suppliers in case (c) valid, reliable and non-discriminatory? In this connection, case (d) is no different
from case (c).

What do you think of the motivations underlying strategies under cases (d) to (g)? To what extent are
they altruistic? Do they tend to use the publics they intend to serve and support more as means to Corporate
ends rather than ends-in-themselves? Do these strategies evenly distribute rights and duties, costs and
benefits involved across all concerned stakeholders, especially the external publics?

Moreover, all strategies (a) to (g) fulfill moral obligations, if ever, as “hypothetical imperatives” and
“instrumental good.” How can you refine these strategies such they can approximate Kantian “categorical
imperative” generating “intrinsic good” of the stakeholders concerned?

Next, analyze the following arguments from a distributive justice point of view.

1. A firm has a social obligation to maximize profits. Firms buy the goods and services they need for
production. What they buy they pay for. What they receive in payment for selling their goods and
services, they receive because the buyers consider them worthwhile. This is a world of voluntary
contracts; nobody has to sell or buy. If they choose to sell or buy, they must be deriving benefits from
the transactions measured by the price paid or received. Hence, profits really represent the net
contributions that the firm makes toward the social good, and the profits should therefore be made as
large as possible - this regardless of the unequal distribution of income that results from unrestrained
profit maximization.

2. When firms compete with each other in buying or selling, they may have to raise or lower prices in

42
 order to get more of the market to themselves. In either case, benefits accrue both to the firms, the
suppliers and the customers, and hence society gains from competition.

3. The primary benefit of coordinating marketing plans and activities of diverse marketing agents is to
increase macro efficiency through region wide resource optimization, rather than individual marketing
efforts that sub-optimize resource uses (Samli 1992). For instance, multiple marketing agents (e.g., the
mayor's office, the chamber of commerce, a regional economic development association, a utility
company,) may purchase advertising for a region in consultation with one another, or coordinate
marketing efforts as advertising for new businesses (Vann and Kumku 1995). Such "pluralistic
coalitions" bring about both macro efficiency and distributive justice in resource allocation (Vann and
Kumku 1995).

4. Adam Smith in his Wealth of Nations (1776) wrote more than two centuries ago, "To widen the market
and to limit competition is always the interest of the dealers. To widen the market may frequently be
agreeable enough to the interest of the public; but to narrow competition must always be against it, and
can serve only to enable the dealers, by raising their profits above what they naturally might be, to levy
for their own benefit an absurd tax upon the rest of their fellow citizens," (p. 211).

5. A producer of luxury suitcases uses behavioral inputs (e.g., management, marketing, labor and
craftsmanship) and physical inputs (e.g., machines, plastics, leathers, and brass) at a cost of $200. The
customer is willing to pay $400 for it, and so it is priced at $400. The surplus $200 generated in the
process may be primarily attributable to the value added by the behavioral assets, and can be
consumed or transformed into either value paper (e.g. bank deposit, commercial paper, ...) or into a
physical asset (e.g., building a new plant), thus adding to the wealth of the firm. By continuously
creating new value for the customers, the firm also creates value for its owners - it increases the wealth
of the owners (Falkenberg 1996: 6).

6. If defect-free used cars of a certain vintage are worth $5,000 (Class 1) and similar cars with an average
number of defects are worth $3,000 (Class 2), and if prospective buyers of such cars cannot tell which
cars belong to which Class, two behaviors will result. Owners of Class 1 cars will not bring them to the
market for fear of receiving Class 2 price. Secondly, if Class 1 cars are not available in the market, and
only Class 2 cars are offered for sale, then prospective buyers will come to know that, and their refusal
to buy them will force Class 2 prices down, even eliminating Class 2 cars from the market. Soon only
worst cars (lemons) will be offered for sale. If the cost of car repair exceeds $3,000 to $5,000, the used
car market will collapse entirely. Hence, the absence of reliable information about individual used cars
can result in substantial market inefficiencies (Noreen 1988).

For a good distributive justice analysis of arguments (1) and (2), see Nobel Prize economist Kenneth J.
Arrow (1993).Argument (6) is similar to the “lemon problem” first stated and discussed by another Noble
Prize winner Akerlof (1970). All six arguments uphold competitive rights and free enterprise markets, thus
promoting market justice.

Arguments (1) and (2) reaffirm the “invisible hand” doctrine of Adam Smith (1776), (see argument
(4)), which still needs to be proven. Argument (3) favors "pluralistic coalitions" as they bring about both
macro efficiency and distributive justice in resource allocation (Vann and Kumku 1995).Pluralistic
allocations may spell macro-efficiency, but they do not automatically guarantee distributive justice. Our
modern healthcare in the U.S. is based on pluralistic coalitions of doctors, hospitals, pharmaceuticals and
insurance agencies – but this coalition has hardly generated an evenly distributed healthcare system.
Currently in the U. S., over 40 million people are uninsured and over 60 million are underinsured in critical
healthcare. Argument (5) assumes that by continuously creating new value for the customers, the firm also
creates value for its owners. Is the reverse true or often assumed true? Argument (6) tells us that serious
information asymmetry in the car industry can destroy markets because of either adverse selection or the
buyer’s curse (see Mascarenhas, Kesavan and Bernacchi 2008).

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 Distributive justice rules imply equity-based moral obligations to shareholders and to larger groups
of stakeholders such as competition, communities, community nonprofit institutions, and public facilities
(e.g., universities, libraries, parks, museums). Corporations have a moral obligation to put back into the
community what they got from the community they operate in (Goodpaster1991). Moral obligations are
not only toward just good deeds that an executive may or may not do. Long-term loyalty relationships
with consumers are generated more by observing equality than equity rules.

The Problem of Necessary Evil or Inevitable Harm

Thousands of American youth were agonizing over the Vietnam War during the 1970s. All college
youth were drafted to the war by lottery and had to enlist for war duty if called. For most of these young
men and women these were the most significant moral decisions of their lives. They were strongly
pulled in two directions: the obligation to serve their country – the call of patriotism, and their conscience
that lead them to believe that the USA government had a made a grave moral mistake in Vietnam – the
call of moral conscience. Despite their upbringing, moral and philosophical training, personal history and
life experiences, culturally inherited values, institutions and practices, most youth struggled with this
moral dilemma and did not know what to do. They had all the information they could want, some
marshaled all the arguments, pro and con, about Vietnam, and they had all the moral education they could
handle, and yet could not easily cope with the demand of duty and the demand of one’s conscience.
Some had many ideals, goals, commitments, laws, arguments, and motivations, and some of them were
quite incompatible with each other. Some options were good and presented themselves as strong legal
and moral obligations, and at the same time some options were evil and presented themselves as strong
illegal and immoral decisions, choices and strategies.

We continue to face similar situations from time to time when dealing with other contemporary
political situations such as terrorism, preventive wars, religious bigotry, ethnic cleansing and genocide,
abortions and infanticide, civil wars and civil disobedience, patriotic duty and moral conscientious
objections. We run into situations where we are confronted with conflicting goals and values, disparate
commitments, ambiguous moral laws, and irreconcilable motivations. Under each dilemma we confront a
diversity of goods, and we have no ultimate overriding principle for rank ordering them. Short of
deceiving ourselves, there is no such thing as “right” or “wrong” answer, and there is no simple method
for deciding how to act (Johnson 1993: 186-187). In any case, what is my duty to do good and duty to
avoid harm? While accepting praise for doing good, should I be held guilty for doing harm that I did not
intend? How should I take responsibility for the harm that I could not avoid?

One of the principle functions of normative ethics is the guidance of human choice and activity.
Ethics not only deals with protecting values and meeting human needs; it also attempts to provide us with
guidance about how we should act, what we should do and what we should not do if these values and
needs are to be fulfilled (Rehrauver 1996: 232). Both the Maker and the Citizen Metaphors and
paradigms of human action (see Chapter 02) provide us with norms and principles useful for the making
of important moral decisions prior to acting. The Maker paradigm says “act so as to produce or realize
the good,” while the Citizen paradigm will affirm “Act in a lawful and dutiful manner.” Obviously, both
these injunctions are very inadequate in dealing with doing things that produce inevitable harm while also
producing good. Both principles are very useful in evaluating actions after they have been performed, but
they do not provide with a foolproof recipe for determining what is the right thing to do in case of moral
dilemmas such as described above. Only the paradigm of the Responder could offer some relief and help
in this situation.

The Ethical Theory of Non-Malfeasance

44
 Often, some harmful effects are inevitable. A good action (e.g., surgery, business venture) may have
both good effects (cure, profits) as well as bad side effects (risk of bleeding to death, risk of failure).
Similarly, most actions of organizational downsizing (e.g., closing plants, offshore outsourcing, asset
divestitures, retiring models or products) have both good effects and bad consequences.

The principle of non-malfeasance states that an act should do no harm to anyone at any cost and at
any time. Non-malfeasance considers both the act itself as well as its consequences, judging whether the
act itself or its consequences are per se harmful. The principle of non-malfeasance as applied to any
executive act can imply four elements (Frankena 1973: 47):

1. The act should not inflict evil or harm (strict liability);

2. It should prevent evil or harm (preventive justice);
3. It should remove evil or harm (protective justice), and
4. It should do or promote good (beneficent justice).

The fourth element may not amount to a moral obligation, and constitutes the principle of
beneficence. The principle of non-malfeasance is primarily incorporated in the first element. The
remaining three elements are more principles of beneficence than of non-malfeasance. Preventing harm
and removing harm are alternate forms of promoting good (Frankena 1973). Procedural justice whereby
one is obliged to establish just procedures to prevent harm (e.g., of convicting the innocent or wrongly
releasing the guilty) is a subset of preventive justice.

According to Curd and May (1984), the following elements are essential to be ethically responsible
for a violation of the duty of non-malfeasance: a) the institution must have a duty to the affected party; b)
the institution must breach that duty; c) the affected party must experience a harm, and d) this harm must
be caused by the breach of duty. Duty may relate to commission or omission of an act. Imputability
accrues with breached duty, and accountability accrues with harm caused by breached duty. Duties of
non-malfeasance include not only not inflicting actual harm, but also not imposing "risks of harm." By
strict liability laws, it is not necessary to act maliciously or be even aware of or intending the harm or risk
of harm. The harm can be legally "recovered" through the laws of “strict liability” when the duty of non-
malfeasance is violated (Stern and Eovaldi 1984). Such violations may involve commission or omission.
Negligence is a failure to guard against risks of harm to others (Prosser 1971); it fails below the
"standards of due care" established by law and morality, or determined by the principle of protective
justice (Jonsen 1977).

Hence, given the principle of non-malfeasance whereby not only all harm must be avoided and
prevented, but also “risks of Harm” be minimized, when and how can we morally justify some inevitable
harm that accompanies or follows certain executive actions? It is under such conditions that we invoke
the principle of double effect.

The Principle of Double Effect

When executives are puzzled by the undesirable side effects of actions they feel morally obliged to
execute, then they could have recourse to the principle of double effect. This doctrine is grounded on the
principle of non-malfeasance, but differs from it. As discussed earlier, the principle of non-malfeasance
states that an act should do no harm to anyone at any cost and at any time. This principle is incorporated
in the Hippocratic Oath of doctors and physicians as a combined principle of non-malfeasance and

45
beneficence: "I will use treatment to help the sick according to my ability and judgment, but I will never
use it to injure or wrong them".

The correct understanding of the principle of double effect (PDE) has implications not only for the
licit self-defense of an individual (the context in which it was first stated by Thomas Aquinas, see
footnote below), but also for noncombatants in war, persons undergoing surgery who are significantly at
the risk of death, terminally ill patients receiving morphine for palliative care, and other cases that present
medical moral issues such as hysterectomy during pregnancy, ectopic pregnancy, and craniotomy. In
each case, the unintended death, though a foreseeable consequence of self-defense or surgery or
anesthesia, is a side effect of the directly intended aim of preserving life (Anscombe 1982). The PDE
applies to a police officer who in defending himself kills the criminal aggressor, as long as the officer
uses minimal force and does not kill because of his animosity against the attacker. Self-defense in such
cases may not only be permissible, but also required, when not to defend one’s own life is to act with too
little virtue of self-care (Keenan 2008). PDE rests on the ability to foresee harm without intending harm.

The principle of double effect states: when an action has a twofold effect, one good and another bad,
the agent is morally permitted to act as long as the bad effect is not intended. Five conditions must verify
in applying this principle (O’Donnell 1991: 30:

1. The action, in itself (independent of its consequences),must not be intrinsically wrong or evil; it must be morally
good or at least morally neutral;

2. The agent must intend only the good effect and not the bad effect; the bad effect may be foreseen, tolerated or
permitted, but not intended; the bad effect is allowed, but not sought; otherwise, the evil effect becomes a direct
voluntary effect;

3. The bad effect must not be a means to the end for bringing about the good effect; that is, the good effect must be
achieved directly by the action and not by way of the bad effect; otherwise, the evil effect, like any other means,
would be necessarily directly willed;

4. The good result must outweigh the evil permitted; there must be a favorable balance or due proportion between
the good that is intended and the bad effect that is permitted;

5. The good effect cannot be obtained in some equally expeditious and effective way without the concomitant evil.

The agent must verify all five conditions simultaneously, with no priority or bias for any one against
the other. Overemphasizing the second condition would reduce the principle of double effect to
deontologism. Insisting only on the fourth condition would reduce this principle to utilitarianism. When
the executive fulfills all five conditions, the principle of double effect kicks in to safeguard the principles
of strict liability, protective justice, pre-emptive justice, and the principle of beneficence.

How to apply these five conditions, however, to concrete cases is a matter of some debate. The
moral language of “defense,” “self-defense,” and “unjust aggressor” does not adequately resolve the
enigma of whether it is morally licit to act under certain circumstances.7

Hence, to make the principle of double effect even more rigorous one adds the fifth condition: that
the action undertaken be seriously necessary, that is, it is the last and only feasible alternative or resort,
given the then level and availability of technology. With this condition, an executive may not want to do

7 A classical clinical case when applying the PDE is hysterectomy when the woman is pregnant and her womb is malignant
(carcinoma of the uterus). If the physician takes no action, the cancer will likely metastasize throughout the woman’s body,
resulting in her death; chemotherapy or radiation therapy might cause malformation of the fetus, and eventual death. Assuming,
therefore, that surgery (hysterectomy) is the only and necessary treatment, PDE applies. But the fetus is not an “unjust aggressor”
in this case. Perhaps, the doctor would have performed hysterectomy even if the woman was not pregnant.

46
what he intends to do; that is, he reluctantly does something (e.g., plant closings, outsourcing) that he
cannot morally avoid under the circumstances, even though it causes a bad effect (e.g., massive labor
layoffs, impoverishing worker families).The executive wills and decides plant closing directly as
something inevitable (condition 5), but does not intend the bad effect that accompanies it (e.g., massive
layoffs). The latter is circumstantial necessity. The effect (massive layoffs) that the executive clearly
sees will happen or that is very likely to occur is not intended. Some ground for this fifth condition may
be found in Faden and Beauchamp (1986, chapter 7) and Beauchamp and Childers (1989: 131-34).

However, it is not true that just because someone does not want a particular effect of a voluntary
action, that the person is relieved of all moral responsibility for causing the effect. The theory of double
effect is "not an attempt to absolve persons of responsibility for what they bring about but only to
determine what it is permissible to bring about" (Beauchamp and Childers 1989: 132). In other words,
the PDE speaks of moral permissibility of the action and not its strict liability. Moreover, in judging
responsibility the underlying intentions, motivations and character of the agent should be the most
important factors to consider (Hauerwas 1981).

Schematically, the principle of double effect may be characterized as in Figure 15.2. There may a
situation that is unique to the agent of the action, to the act itself, to the good effect that follows and is
intended, and to the inevitable evil effect that follows and is just tolerated. Figure 15.2 incorporates the
fifth condition. The major problem in applying the principle of double effect is in determining the
difference between what is intended and what is unintended, what an intentional action is, and what an
un-intentional action is. The evil effect that is foreseen, even though not explicitly "sought," is indirectly
intended. Undesirable effects or risks of harm that attend particular procedures almost always fall into this
category.

Choices are actuations of the will, guided by moral norms, by which we determine ourselves with
respect to human goods (Grisez 1970). That is, a choice is a determination of the will following upon
deliberation among competing alternatives. Thus, not every form of voluntariness involves choice (e.g.,
spontaneous willing that responds to an attainable good without considering alternative courses of action).
In choice or choosing, one adopts a proposal to act in a certain way. This proposal includes both the good
at which the agent aims, and anything that one chooses to do as a means to an end. On the other hand, the
side effects of the agent’s action are not included in the proposal that one adopts. The side effects are not
chosen, and they do not determine the stance of the will involve in a choice. One may accept the bad side
effects of one’s act but not cause them. One does not intend the bad side effects, even though they one
may accept them voluntarily or involuntarily. Such bad side effects are considered “indirect” effects.
The agent’s intention is the sole morally determinative factor. Thus, an act may be morally justified, if
the agent’s intention is morally good, and the bad effect is not necessarily included in the attainment of
the intended good. The causal relation between the good and the bad effect is not a criterion for moral
evaluation.

For example, a woman who shoots her would-be-rapist in self-defense does not intend his death; she
intends to stop his attack, and only accepts his death as a side effect. Note that she could have stopped the
attack by seriously injuring or maiming him, but not killing him. An action with both good and bad
effects is not defined by the bad effect unless the bad effect is necessarily included in the agent’s
intention. The woman’s action is focused on the good effect (e.g., self-defense) and not on the bad effect
(e.g., killing). The action of self-defense may result in many other actions other than killing, as long as it
stops the attack. The more she considers other alternatives to stop the rapist (e.g., persuasion, pleading,
screaming, running away from the scene, diverting his attention, injuring the rapist that does not kill him)
the more morally defensible is her action of self-defense.8

8Distinguish this case from euthanasia. A doctor, who kills his/her patient to relieve him/her from intractable suffering, directly kills the patient,

47
 Certain goods are basic and intrinsic (e.g., life, knowledge, friendship) in the sense that they are
desirable as ends-in-themselves, while other goods are non-basic and extrinsic (e.g., wealth, physical
fitness, health) that are sought for the sake of attaining the basic goods. Each intrinsic good is intrinsic to
the human person and participates in the dignity of the person, a dignity that is beyond any price, a
dignity that is inalienable (Porter 1996: 615). The basic goods enable us to achieve integral human
fulfillment. We direct most of our actions to some basic good or other, though not every action aims at
attaining or safeguarding a basic good. Admittedly, we cannot aim at all the basic goods all the time, but
we can always act in such a way as to remain open to those basic goods that we do not actively pursue.
Only in this way will our actions be reasonable, that is, morally good.

Summary and Concluding Remarks

Not all moral rules bind equally, nor do they define the same degree of ethicality or morality. These
rules could be hierarchically arranged in relation to the degree of internal commitment they demand of the
executives, and in terms of their universal binding power. Deontology is a duty ethic based on norms and
commandments, while teleology is means-end ethics based on consequences of the act. For most
practical applications one would need a combination of both ethical theories. People cannot claim
complete control of their lives (as means-ends ethics seems to assume), nor can they reduce their
responsibilities to obedience to general norms (as duty ethics assumes). Rather, they have to respond to
persons and events that confront them in real life in ways that maximize human values. Morality then
becomes a prudential ethic.

Morality is not always a matter of obedience to the will of God (this is theonomous ethic of the
Judeo-Christian tradition) or of a lawmaker (heteronomous ethic), or even obedience to one's own
conscience (autonomous ethic). Often morality is the process of intelligently seeking socially
appropriate, positive (net benefits) human behavior that supports personal and communal goals. Laws
and duties are necessary, but what makes laws and duties righteous or obligatory is "their helpfulness in
guiding prudential decisions to successful goal achievement" (Ashley and O'Rourke 1989: 161).

even though the doctor may not will it. The death of the patient and the act of euthanasia are one and the same act. Whereas, in the case of the
woman killing her assailant in an act of self-defense, the death of the assailant is not necessarily connected to her act of self-defense, as she could
use other alternatives to overpower or dissuade him. Distinguish also the case where someone chooses to kill one person to save the life of
another – there is intentional killing and intentional saving of life involved here(Porter 1996: 622-24).

48
 Figure 15.1: The Process of Justifying Corporate Executive
Moral Judgments and Decisions

Set A: Set B: Set C: Set D:

Normative Moral Moral Moral
Ethical Theories Principles Standards Rules

Corporate
Judgments,
Decisions and
Act Application of Strategies Rule Application of
Ethical Theories Ethical Theories

What rights/duties
and norms/ Rule
Act Deontological
principles does the Deontological
Assessment
corporate action Assessment
uphold?

What are the social

Rule
Act Teleological consequences of
Teleological
Assessment this corporate
Assessment
decision and
action?

Does this action

Act Distributive evenly distribute Rule
Justice Assessment costs/benefits and Distributive
rights/duties Justice
across all Assessment
stakeholders?

Does this action

Act Virtue Ethics promote the Rule Virtue
Assessment physical, functional Ethics
and moral well- Assessment
being of all
stakeholders?

49
Figure 15.2: The Dynamic Structure of the Principle of Double Effect

Situation Situation Situation

Unique to the Unique to the Unique to the
Agent/Act Good Effect Bad Effect

Condition 1: The Condition 2a: The Condition 2b:

act must be morally agent must intend The agent must
good or at least the good effect. only tolerate the
morally neutral. evil effect.

Condition 3b: if the

evil effect directly Condition 3a: The
follows from the act, it evil effect must not be
must occur a means to bring about
simultaneously with the the good effect. That
good effect but not is, the evil effect must
before. follow or stem from
the good effect.

Condition 5: The Condition 4: The

action must be the good effect must
last resort or the outweigh the evil
best alternative. effect.

50
 Table 15.1: Basic Moral Reasoning Paradigms
Ethical Rule Based on Ethical Theory
Theory
Teleology That executive action is moral (teleologically)
if it decidedly produces more benefits than
corresponding costs and to the greatest
number
Deontology That executive action is moral
(deontologically) if it decidedly upholds more
rights of stakeholders than it violates
corresponding duties of the greatest number
Distributive That executive action is moral (by distributive
justice standards) if it decidedly distributes all
Justice
costs and benefits, all rights and duties evenly
or equally or equitably across all relevant
stakeholders
Corrective That executive action is moral (by corrective
justice standards) if it decidedly sets up just
Justice
procedures to bring about a just distribution
among the greatest number, when the
previous three rules have failed.
Ethics of That executive action is moral (by human
dignity standards) if it decidedly sustains and
Human
empowers human dignity of people affected
Dignity
by the action and under all situations
regardless of nationality, color, creed, gender
or age.
Ethics of That executive action is moral (by ethics of
virtue) if it is decidedly based on the practice
Virtue
of at least the four cardinal virtues of
prudence, temperance, justice, and fortitude,
and in relation to the greatest number.
Ethics of That executive action is moral (by ethics of
the virtue of trust) if it is decidedly based on
Trust
the practice of mutually benefiting trust
between exchange partners, and under all
circumstances of contingency.
Ethics of That executive action is moral (by ethics of
the moral responsibility) if it duly owns and is
Responsibility
answerable to the action before the act, and
fulfills after the act all accountability,
obligations, duties, and liabilities to all
affected parties in relation to the greatest
number.
Ethics of That executive action is moral (by ethics of
the virtue of compassion) if it is decidedly
Compassion
treats all people with compassion, and under
all circumstances of contingency.
51
Major Problems in Rule Application
What is a benefit? What is a cost? To whom: One man’s meat is
another man’s poison. A cost to one is benefit to the other.
Costs and benefits are both consequences or outcomes. When are
they known fully: before, during or after the executive action?
What is the greatest number: 1.2 billion in India?
What is a right? What is a duty? Whose: One man’s right is another
man’s duty to respect that right. A duty to one is right for another.
Rights and duties are given and defined by whom: God, state,
society, employer? Rights and duties are both antecedents to action.
When are they known fully: before, during or after the executive
action? What is the greatest number: 1.2 billion in India?
What is equality? What is equity?
How is equality or equity determined: by need, want, abilities,
efforts, contributions, market value, social status, or entitlement?
Who distributes: state, society, company, status, caste?
What should be the goal of distribution: income equality or economic
equality or social equality or opportunity equality, and why?
What are just procedures: those that minimize harm? Those that
prevent harm? Those that protect people from harm? Those that do
good to people?
Who sets up these just procedures, why, when and where: the nation,
the state, the district, the municipality, one’s company?
What is human dignity? Is an objective or universal standards or a
categorical imperative? What does sustaining and empowering
human dignity mean? Who defines this, and for whom, and by what
rules or standards?
What is virtue? What is vice? Is virtue power (“virtus” in Latin)? Is
it excellence (following its Greek derivation “arête”)? Hence, is it
power of excellence or power of greatness? Why are cardinal virtues
cardinal (i.e., upon which all other virtue are hinged)? Prudence
should discipline temperance, fortitude and justice. Hence, prudence
should be the cardinal virtue. Is prudence practical wisdom? But
how does one cultivate it? Via virtue? This is circular thinking? Via
experience of being wise? Then ethics of virtue makes sense, as long
we grow wise through good experience or experience of doing good.
What is trust? When do you begin to trust somebody? Through
mutual interaction and knowledge? Then how do you trust
strangers? How does a patient trust the doctor whom she has never
met before? All trust is a blind leap into believing in the goodness of
the other – hence vulnerability is built into trust. Does one have to
be vulnerable in order to trust?
What is responsibility? Answerability? Accountability? Obligation?
Duty? Imputability? Liability? Acting or compensating to allay one’s
guilt or blame? When is one responsible to the action itself, rather
than to its outcomes? To what extent are our choices and actions
deterministic or owned by our free-will? Are they freely initiated and
posited or constrained? If constrained, is responsibility exonerated
proportionate to the constraint or pressure? When do we act
voluntarily? When involuntarily? And when under “duress”?
Responsibility is a function of all three. If so, how assessed?
What is compassion: kindness, mercy, graciousness, forgiveness,
condescension, being benign? Real compassion is never judgmental,
never condemnatory, always forgiving, and always giving. Is this real
or practical or viable or doable or desirable? If not, how can it be a
rule of moral or ethical action?
 Table 15.2: Some Practical Distributive Justice Principles
Distributive Justice Distributive Justice Principles
Theory
Egalitarianism Equal access to the goods of life that
every rational person desires based on
need and equality.
Libertarianism Equal access to social and economic
liberty to all.
Utilitarianism Equal access to the goods of life such that
public utility is maximized.
Fair Opportunism No person should be granted social
(Rawls 1971) benefits based on undeserved advantage
(e.g., royalty, inheritance, status) or
disadvantage (e.g., gender, age, race,
color, disability, religion, and
nationality).
Non-malfeasance 1. Above all, do not harm.
Frankena (1973) 2. Protect or remove people from harm.
3. Prevent people from harm.
4. Set up procedures that minimize
harm.
5. Do good whenever possible.
Well-being by Due The act should serve the well-being of all
Care (Jonsen 1977) stakeholders by carefully employing
standards of due care and assessing
risk-benefits and detriment-benefits of
the act.
There is no pattern of just distribution other than
that of the un-patterned free-market system based
on three principles: acquisition, transfer, and
rectification:
a) The principle of justice in acquisitions: it is the
Libertarian theory of principle and process whereby originally
"unheld things" began to be appropriated in
justice, Nozick (1974) the first place.
b) The principle of justice in transfers: it is the
principle and process whereby people acquire
and transfer holdings from one to another.
c) The principle of rectification in acquisitions: it
relates to rectification of acquisitions and
transfers if the original principles and
processes of acquisitions and transfers were
unjust.
52
Critical Comments
What needs: real, felt or
created? What equality:
human, economic, social,
racial?
Advocates fair procedures and
systems rather than
substantive outcomes.
The free and equal access could
be abused, thus reducing
public utility.
This is a universalizable and
reversible principle (by
Kantian criteria) and very
appropriate in a situation.
Morality and goodness of the
executive act increases from
the first to the fifth principle.
This can be a good and
practical management
principle that seeks welfare of
all affected stakeholders.
Distributive justice should have two
components: from each and to each,
and the two component principles are
related. What society chooses to do
for one may be a function of what one
chooses to do for society.
A person who acquires a holding in
accordance with any of these three
principles is entitled to that holding.
If principles (a) and (b) are just, then
we have a just distribution of
holdings; given (a) and (b), the
complete principle of distributive
justice states that a distribution is just
if all are entitled to the holdings they
possess under a given distribution.
 Table 15.3: A Hierarchical Process of Ethical-Moral Reasoning for
Corporate Executives
Rea- Rea- Moral A Typical Example of Moral Judgments or
soning soning Justification Ethical-Moral Reasoning in
Step Process based on: Corporate Situations
“Round-Trip Sales” to boost profits in a failing
business is wrong because:

One Deductive Ethical Theory of:

Deontology Round trip sales cannot be justified deontologically.
Teleology Round trip sales cannot be justified teleologically.
Distributive Justice We cannot justify round trip sales based on distributive and
Corrective Justice corrective justice ethics.
Virtue Ethics Round trip sales cannot be justified from a virtue-ethics theory.

Two Deductive/ Ethical-moral

Inductive Principles:
Deontology Round trip (RP) violates my duty towards those affected by it.
Teleology RP harms the persons the exchange is dealing with.
Distributive Justice RP does injustice to the corporation, industry and economy.
Corrective Justice RP needs to be rectified immediately to save bankruptcy.
Virtue Ethics RP is outright dishonest, deception and trickery.

Three Deductive/ Ethical-moral RP violates moral standards (MS) of:

Inductive Standards:
Deontology Integrity towards those affected by RP.
Teleology Transparency towards all harmed by RP.
Distributive Justice Entitlement towards all impacted by RP.
Corrective Justice Fair procedures towards all impoverished by RP.
Virtue Ethics Honesty towards all tricked by RP.

Four Inductive Moral Rules:

Deontology The affected stakeholders have the right to know the truth.
Teleology Every stakeholder must benefit from this action.
Distributive Justice It must treat every stakeholder with fairness and equity.
Corrective Justice The system that allows round-trip sales needs to be corrected.
Virtue Ethics The action is against the Corporate virtue of executive integrity.

Five Situational Moral Judgments:

Assessment Deontology It violated my own duty to do the right thing.
Teleology It will eventually make me unhappy about this strategy.
Distributive Justice It will bring harm to numerous stakeholders down the line.
Corrective Justice It will rationalize and justify incorrect procedures.
Virtue Ethics It is eventually self-deception and violates self-esteem.

Six Ethical- Moral Justification: How do you justify (explain to others) your moral judgment?
moral Deontology It violates my duties towards all stakeholders.
Teleology Net benefits to most stakeholders are decidedly negative.
Assessment Distributive Justice Uneven distribution of costs/benefits, rights/duties of this action.
Corrective Justice Round trip sales uncorrected will deceive and cheat the public.
Virtue Ethics This action violates almost every executive virtue that must
promote the physical, functional and moral well-being of my
stakeholders.

53
 Table 15.4: Corporate Responsibilities as a Function of Cognitive and Moral
Relativism
[See also, Mascarenhas 2008: 150]
Relativism Subsets of Definitions and Moral Implications Corporate Executive
Type Relativism Assumptions Responsibilities

Ontological or Man is the measure of all Hence, the truth of corporate Nor can absolute relativism as a
Absolute things. There is no objective assertions or the morality of position be verified; hence, it is
Relativism, or truth. corporate actions can never be untenable for executives.
verified or falsified.
Skepticism
Categorical There is no categorical truth; Hence, the truth of corporate Even if true, the corporate
Objective Relativism i.e., a statement can be assertions or the morality of executive must take responsibility
Relativism partially true or false. corporate actions can only be for at least the partial falsehood.
partially verified or falsified.
Dogmatic Even revealed truth is relative Hence, the truth of corporate Regardless of one’s religion, one is
Relativism to the context and culture in assertions or the morality of legally or morally accountable for
which it was revealed. corporate actions can only be one’s actions.
partially judged relative to a
dogmatic (religious) value
system.
Philosophical A statement is true only Hence, the truth of a given This insulates truth and knowledge
Relativism within one’s philosophical corporate statement or and thus, makes them falsely
system, and not outside it. assertion can be judged only immune from criticism outside the
within one’s philosophical philosophical system.
system.
Contextual or Truth is relative to and bound Hence, the truth of a given This also insulates truth and
Aletheic by its own conceptual schema corporate statement or knowledge and thus, falsely
Cognitive or investigative framework. assertion can be judged only immunizes it from criticism outside
Relativism
Relativism within its conceptual its conceptual framework.
framework.
Cultural Truth is relative to the culture Hence, the truth of a given This also insulates truth and
Relativism within which it is born, corporate statement or knowledge, and thus falsely
nurtured or investigated. assertion can be judged only immunizes it from criticism outside
within its cultural framework. its cultural system.
Epistemic Criteria for verifying truth are Criteria for verifying the truth This position creates knowledge or
Relativism valid and relative to its of corporate statements or culture enclaves. Universal truths
epistemological schema or assertions are valid only within are universally verifiable, and
investigative framework. its epistemological framework executives should explore and
they apply. endorse them.

Philosophical A moral norm or value is true
Relativism only within a given
philosophical system, and not
outside it. There are no
transcendental moral values
or norms.
Contextual or A moral norm or value is
Moral Aletheic relative to and bound by its
Relativism Relativism own conceptual schema or
investigative framework.
Cultural A moral norm or value is
Relativism relative to the culture within
which it is born, nurtured or
investigated.
Epistemic Criteria for verifying a moral
Relativism norm or value are valid and
relative to its own
epistemological schema or
investigative framework.
Hence, the morality of a given
corporate decision or action
can be judged only within its
philosophical system or
framework.
Hence, the morality of a given
corporate decision or action
can be judged only within its
conceptual framework.
Hence, the morality of a
corporate decision or action
can be judged only within the
culture it is made.
Criteria for verifying the truth
of corporate statements or for
judging morality of corporate
actions are valid only within
the epistemological framework
they apply.
This position insulates morality and
thus, falsely makes it immune from
criticism outside the philosophical
system.
This position also insulates
morality and thus, falsely
immunizes executives from
criticism outside its conceptual
framework.
This position also insulates
morality, and thus, falsely
immunizes it from criticism outside
its cultural system.
This position also creates morality
enclaves, and corporate executives
should explore their harmful
consequences.

54
 Appendix 15.1:
AOL5 Based on the Moral Reasoning Process of Executive Judgments and
Justifications
In general, any moral justification of one's corporate judgment and decision involves five supporting
sets of beliefs and values held by a particular person in one or more of the following hierarchical series of
moral values:
A. A set of normative ethical theories;
B. A set of moral principles derived from set A;
C. A set of moral standards derived from sets A and B,
D. A set of moral rules derived from set C, and
E. A set of moral judgments resulting from applying sets A, B, C or D while assessing concrete actions

Briefly, each set may A to E be described as follows:

❖ Set A: Moral or ethical theory is the reasoning process that one uses to justify one's moral judgments and ethical
actions. Major moral normative ethical theories are deontology, teleology, and distributive and corrective
justice. Major moral self-principled (i.e., non-normative) executive ethical theories are those of ethics of
executive human personhood (Chapter 09), ethics of executive virtue (Chapter 10), ethics of executive trust
(Chapter 11), ethics of moral executive leadership (Chapter 12), ethics of executive critical thinking (Chapter
13), ethics of honoring rights and duties (Chapter 14), ethics of executive moral reasoning (Chapter 15), and
ethics of moral executive responsibility (Chapter 16). Table 15.1 summarizes and critiques all these ethical
theories.

❖ Set B: Moral principles are more general moral axioms or guidelines derived from moral theories that pertain to
human or social welfare (teleological moral principles), to personal or social rights/duties (deontological moral
principles), to social justice (distributive justice moral principles), or to a sense of personal and spiritual fairness
or righteousness. More moral principles can be derived from recent ethical theories include based on human
personhood (see Chapter 09), virtue ethics (Chapter 10), ethics of trust (Chapter 11), ethics of leadership
(Chapter 12), ethics of moral critical thinking (Chapter 13), ethics of rights and duties (Chapter 14), ethics of
moral reasoning (Chapter 15), and ethics of moral responsibility(Chapter 16. Example: The deontological
principle of non-malfeasance: Do not harm others; or the Golden axiom: Do unto others what you would like
others to do unto you.

❖ Set C: Moral standards are less general (i.e., more specific) moral norms of behavior that require, prohibit or
allow certain actions. Such norms are derived from moral theories and their moral principles. Moral standards
are teleological if they relate to social costs and benefits; they are deontological if they uphold rights and duties;
they are related to distributive justice if they deal with issues of fairness and justice; they relate to corrective
justice if they deal with processes and procedures that rectify current unjust distribution of common good; and
lastly, they are related to the human person, human virtue, the virtue of trust, the virtue of accountability and
honesty, and like theories, if they promote a general sense of physical, functional and moral wellbeing. Examples
of deontological standards: Do not kill; capital punishment is wrong; do not steal; do not lie; do not be
avaricious; child labor is evil; sweatshops are dehumanizing. Some teleological standards are: maximizing
benefits over costs is good if it spreads them to the greatest number; big is better if the big reaches all; “small is
beautiful”.

❖ Set D: Moral rules are concrete applications of moral principles and moral standards to a society, corporation,
government or any social institution, given the situational context of economy, politics, culture, science and
technology. Example: Do not produce or market harmful products since: every consumer has a right to product
safety (deontological); a harmful product harms consumers and society (teleological); harmful products bring
about serious injustices to the public (distributive justice), and any harm destroys the physical, functional and
moral well-being of people (virtue ethics). Statements of corporate codes could be typically moral standards or
norms, which are also derived from moral theories, but they are less general than moral principles or moral
rules. Table 15.2 provides some well-known distributive justice moral rules.

❖ Set E: Moral judgments: These are practical moral assessments of concrete executive decisions, strategies and
actions based on sets A, B, C and D. Some of these could be “considered moral judgments” applicable to several
actions over longer time-periods; then, these are tantamount to corporation standards of ethical conduct or the

55
 corporate Code of Ethics. Some examples of moral judgments: Child labor in India is wrong; sweatshops in
China are dehumanizing; Dassault Aviation Project failed owing to Indian politics (Case 11.1); Media
dominance has compromised Indian democracy (see Case 14.3); Paid Media is no objective media (see Case
14.2); Mukesh Ambani’s legal wealth maximization is morally not good since its effects did not spread over
Indian masses (see Case 15.1); Chakan’s failure is a management’s failure more than that of the labor union (see
Case 10.3).

Two criteria characterize moral principles:

❖ Supremacy: moral principles override other considerations such as contingencies, situations, self-interest, group
interest or politics. Examples: Do not harm. Speak the truth. Do not lie.
❖ Universal: moral principles apply to all people under comparable conditions with no exceptions based on any
socio-biological factors such as gender, age, race, color, religion, nationality or social status. Examples: Kant’s
Universalizeable principle: Whatever you do should be a moral rule for all others. Kant’s reversible principle:
What all others do should be a moral principle that you should follow.

Besides moral theories, principles, standards and rules, there may be specific conditions and
circumstances that render a given moral judgment morally defensible. Moral justification is needed when
one has to defend one's moral convictions or judgments under a given situation.

Thus, particular judgments are justified by moral rules; moral rules are justified by moral standards;
moral standards are derived from moral principles, and moral principles are derived from appropriate
ethical theories. Table 15.3 captures this hierarchical process of moral reasoning. The derivation of
moral justification based on ethical theories is deductive. Moral justification based on the application of
moral principles is deductive-inductive, since this process may have some inductive elements of deriving
the moral principles through empirical inquiry. Moral justification via moral rules is inductive, as both
moral rules and their concrete applications to a given situation require search and empirical inquiry.
Moral justification through moral judgments is situational, as most moral judgments consider the
concrete business situation.

Exhibit 15A: A Framework for AOL 5: Reverse Moral Justification

Step Reverse Moral Justification
E Start with a specific moral judgment based
on a given Case[See examples of several
moral judgments under Set E above]
D What specific moral rules justify this
moral judgment and why? [See Set D
above].
C What specific moral standards justify this
moral judgment and the rules it is based
on, and why? [See Set C above].
B What specific moral principles justify this
moral judgment and the rules and
standards it is based on, and why? [See Set
B above].
A What specific moral or ethical theories
justify this moral judgment and the rules,
standards and principles it is based on,
and why? [See Set A above].
Steps What have you learnt in this iterative
moral reasoning and backward judgment
E-A and justification process?
Assessment of Justification
Be sure you think clearly, objectively and rationally before you
arrive at this judgment. Why do you judge so? Why is it critical
and important for the understanding and analysis of the Case?
If no acceptable moral rules justify this moral judgment at this
stage, then go back to Step E and revise your judgment, or look for
other rules (Step D).
If no acceptable moral standards or rules justify this moral
judgment at this stage, then go back to Step E and revise your
judgment, or search for other sound rules (Step D) or moral
standards (Step C).
If no acceptable moral principles, standards or rules justify this
moral judgment at this stage, then go back to Step E and revise
your judgment, or search for other moral rules (Step D), sound
moral standards (Step C) or moral principles (Step B).
If no acceptable moral theories, principles, standards or rules
justify this moral judgment at this stage, then go back to Step E
and revise your judgment, or look for other moral rules (Step D),
sound moral standards (Step C) or moral principles (Step B), or
ethical theories (Step A).
In general, how would you frame, compose, and formulate your
considered moral judgment about a given case so that it is morally
justifiable (backward) to the greatest number of affected persons in
the Case?

56
 Exhibit 15B: A Framework for AOL 5: Forward Moral Justification
Step Forward Moral Justification
A Study a given Case thoroughly, holistically, and
identify the critical problem that defines and
undergirds the Case. What ethical theories
would you invoke in understanding,
characterizing and defining this problem? What
are the key subjects, objects, properties and
events (SOPE) of the Case? Why? [See several
ethical theories presented in Chapters 09 -16.
and Set A under AOL 5].
B From these ethical theories what specific moral
principles would you derive that will enable you
to explain, analyze and morally assess the key
subjects, objects, properties or events (SOPE) of
this problem, and why? [See Set B under AOL
5for a sample of moral principles].
C What specific moral standards would you derive
from the moral principles derived at Step B in
order to justify your explanation, analysis and
moral assessment of SOPE under Step B, and
why?
D Fourthly, what specific moral rules would you
extract from the moral standards (Step C),
moral principles (Step B) and ethical theories
(Step A) to further justify your explanation,
analysis and moral assessment of SOPE under
Steps B and C, and why?
E Given Steps A, B, C and D, and the moral
assessment of SOPE under each, what specific
moral judgments can you arrive at regarding
key SOPE in the Case, how and why? How can
you thereby justify this moral judgment and the
rules, standards, principles, and ethical theories
it is based on, and why?
Steps What have you learnt in this iterative moral
A-E reasoning and forward moral judgmental
justification process?
57
Assessment of Justification
Be sure you have invoked the best ethical theories relevant for
the Case. How do you justify the selection of ethical theories to
resolve this Case? Are you sure your selection has the most
important and relevant theories to resolve the Case? Otherwise,
go through Step A again and revise your set of theories selected
for a better understanding of the Case.
If your derivation and selection of moral principles is
inadequate to understand the Case Problem, then go back to
Steps A and B and revise your selection of ethical theories (Step
A) and the derivation of moral judgments(Step B) for a better
and more holistic understanding of the Case.
If your derivation and selection of moral standards from the
moral principles and ethical theories is inadequate to
understand the Case Problem, then go back to Steps A to C and
revise your selection of ethical theories (Step A), the derivation
of moral judgments (Step B), and the specification or derivation
of moral standards (Step C) for a better and more holistic
understanding of the Case.
If your derivation and selection of moral rules from the moral
standards, moral principles and ethical theories is inadequate to
understand the Case Problem, then go back to Steps A to D and
revise your selection of ethical theories (Step A), the derivation
of moral judgments (Step B), the derivation of moral standards
(Step C), and the selection or derivation of moral rules (Step D)
for a better and more holistic understanding of the Case.
Be sure you think clearly, objectively and rationally before you
arrive at this moral judgment regarding SOPE in the Case.
Why do you judge so? Why is this moral judgment critical and
important for the understanding, analysis and resolution of the
Case?
If no acceptable moral theories, principles, standards or rules
justify your moral judgment at this stage, then go back to Steps
A to E and look for other moral theories (Step A), sound moral
principles (Step B), sound moral standards (Step C) or moral
rules (Step D), and thereafter, revise your moral judgment(Step
E) and/or re-justify your moral judgment. This iterative
process may be continued till you arrive at the best, moral and
just judgment.
In general, how would you frame, compose, and formulate your
considered moral judgment about a given case so that it is
morally (forward) justifiable to the greatest number of affected
persons in this Case?
 Chapter 16
Moral Justification of Corporate Outcomes
"One of the Greatest Diseases is to be nobody to anybody,” - Mother Teresa.

This chapter provides the ethical foundations for sound corporate moral reasoning, moral judgment, and
moral justification of corporate decision-outcomes by systematically applying major theories of moral reasoning
and metaphors, such as deontology, teleology, distributive and corrective justice theories and their sub-theories,
for analyzing and assessing corporate executive decisions in terms of their ethical inputs, process, and outputs.
From earlier chapters we assume that the corporate executive moral decision and moral act and actions are
framed in their constitutive components of ethical inputs, ethical process, and ethical outputs. Input and process
elements are assumed to constitute the executive decision or ACT, while the output elements are understood to
constitute the CONSEQUENCES under a concrete decision action situation. We present three cases to illustrate
the contents of this Chapter: Case 16.1 deals with the recent Maggi controversy in India. Case 16.2 reviews the
Maruthi plant massacre at Manesar, and Case 16.3 reflects on the current list of India’s Superrich. There are
two parts to this chapter: Part I: Major Normative Ethical Theories for Assessing the Morality of Corporate
Outcomes; Part II: Deriving Moral Rules from Ethical Theories for Assessing Morality of Corporate Outcomes

Case 16.1: The Maggi Controversy and the FSSAI Response

For the nine years Sudha H C worked in the garment industry, sewing buttons, stitching labels and doing sundry
other jobs, she often turned to Maggi, a foolproof timesaving meals-aid. Several times a week, when her mornings
got consumed up filling water from the municipal tap outside her tiny home in Balajinagara in southern Bangalore,
she fed her husband and her school going son Maggi noodles for breakfast with minimal time and fuss in the
kitchen. She herself relished the noodles and then bundled her son into the school auto before rushing off to make
the garment factory’s punch-in time. On some days, she returned to find that her son had rustled up to snack on
Maggi. On other days, when she came back bone-tired from long factory hours, she gave herself respite from
cooking by preparing instant noodles for dinner — sometimes adding a vegetable or two picked up on her way back
from the factory.

It has been two years since Sudha, 38, quit the garment industry and started working as a cook. But old habits
die hard. She chops, grinds and steams in the homes she cooks in. But in her own home, where she is always
confronted with a pile of washing, a mound of dishes and house-mopping, she takes recourse to the Maggi quick-fix.
Her son, now a college student, eats it every other day too. “He loves the taste and I like the convenience,” she said.
Traditional foods like idli, dosa, akki rotti (rice pancakes) and ragi mudde (millet mounds) are still part of their
intake but if the family had a food pyramid, it would be Maggi occupying the base. Quite naturally, the recent
controversy over the high lead content in Maggi has upset Sudha. “How can I eat the noodles now? They say it is
poison,” she said, adding that the stores near her home no longer stock Maggi.

The allure of the two-minute noodles has been the strongest for lower middle- and middle-class Indian women
as they stormed into the urban labor force, working in factories, supermarkets and offices in the mid-1980s. For this
category of women, who almost singlehandedly manage their kitchens and tend to their children while
supplementing the family income by working outside the home, packaged instant noodles have eased the burden of
grinding, prepping and cooking traditional Indian foods. Besides the convenience, the cost has been a draw. Instant
noodles help busy working mothers save time outside the kitchen too, with elaborate Indian meals consisting of
grains and vegetables giving way to “one pot” noodles meals. [See more at: http://indianexpress.com
/article/opinion/columns/fifth-metro-without-maggi-its-absence-leaves-a-huge-hole-in-the-lives-of-middle-class-
working-women/#sthash].

A Timeline of Major Maggi Events

1
 June 3, 2015: The Food Safety and Drug Administration (FDA) in Uttar Pradesh had collected more than two
dozen packs of instant noodles from stores across the state. According to a Reuters report, they found a lead
concentration of 17.2 parts per million (ppm), which is way beyond the permissible limit. They also found very high
levels of MSG (monosodium glutamate). [NDTV Food, Modified: June 03, 2015 17:17 IST]

June 4, 2015: A Mumbai retailers’ organization on Thursday ordered all members to immediately stop stocking
or selling Maggi noodles till the controversy over its safety aspects is cleared. “We have directed all our 25,000
provision stores to stop stocking and selling Maggi till the results of the Maharashtra government tests are declared,”
Federation of Retail Traders Welfare Association (FRTWA) president Viren Shah told IANS (See India Trending
Network (ITN), Front page, June 4, 2015, Mumbai). “All food and provision stores are requested to stop selling
Maggi products till the same is replaced by the company and certified by the government authority to be safe for
consumer,” the directive issued on Thursday morning said. Besides, all other retailers have also been urged to halt
Maggi sales with immediate effect, he added. In the past few days, Shah said, retailers have reported a sharp drop of
50 percent in Maggi noodles sales.

June 11, 2015: The U.S. Food and Drug Administration (FDA) is testing samples of Maggi, a Nestlé instant
noodle brand, which was recalled from stores across India last week, a spokeswoman for the Swiss food group said
on Thursday. [#World #US #NewsTracker #Nestle #FDA #Maggi #instant noodles #MSG #lead #Maggi
Controversy]

June 15, 2015: FSSAI bans Nestlé’s Maggi, saying it was "unsafe and hazardous" for consumption after finding
excessive levels of lead and violation of labeling regulations on taste enhancer monosodium glutamate (MSG).
Nestle India had recalled Maggi from markets since.

July 8, 2015, New Delhi, India News: The Parliamentary Standing Committee on Food and Consumer Affairs,
headed by JC Divarkar Reddy, will deliberate on recent food safety issues in packed food as well as packaging and
labeling regulations, among others, sources said.

July 30, 2015: Affected by a countrywide Maggie recall, its ban on June 5, 2015, and the consequent destruction
of its instant noodle brand, Nestlé suffers first loss in 17 years. Maggie, India’s largest food firm by revenue took a
one-time charge of Rs 452 crore that hit its bottom line, and Nestlé India reported a net loss of Rs 64.4 crore for
April-June 2015, Nestlé India’s most challenging quarter to date. The quarter ending in June 2015 experienced a
drop in sales to Rs 1,934 crore, compared to Rs 2,419 crore a year ago. Meanwhile, Nestlé India is making every
effort to engage with authorities to bring Maggi Noodles back to the shelves, said Suresh Narayanan, MD-designate
of Nestlé India (Business Standard, Thursday, July 30, 2015, p.1).

The Maggi Controversy

Some time back, Food Safety and Drug Administration (FDA) of Uttar Pradesh found monosodium glutamate
(MSG) and excessively high quantity of lead in sample testing. MSG, which is used as a flavor enhancer can cause
headache, nausea, and the like ailments. The lead amount was 7 times more than what was permitted. FDA claims
that they tested two dozen packets of Maggi for this. While Nestlé claims that they do not use MSG in Maggi, and
that they are awaiting their own test results over this issue. With Maggi in India enjoying 80% of market share for
instant noodles, and 30% of Nestlé India's revenue coming from Maggi, it is a cause of big concern for Maggi.

The development came a day after the Maharashtra government cracked down on multinational Nestlé’s
popular Maggi brand of noodles and sent samples collected from around the state for testing in government
laboratories. Food & Civil Supplies Minister Girish Bapat said the test results are expected on Friday, June 5, 2015,
and depending on the outcome the government will take further steps. The samples have been picked up from
Mumbai, Thane, Nasik, Pune, and Nagpur and are being tested in government labs in Mumbai and Pune. The
samples are being tested for metallic lead content and the amount of aginomoto salt (aka MSG) which is used for
flavoring the noodles. Maharashtra Food & Drugs Authority (FDA) officials said that 25 samples, including four
from Mumbai and Thane and 15 from Pune, are being tested in the FDA lab in Mumbai and a central government
lab in Pune. “If the reports of the Maggi noodles and the accompanying masala are positive, then we have the
powers to ban the product from sale or distribution in the markets. The FDA can also initiate action against the
2
celebrities endorsing the product in such a case,” the official, requesting anonymity, said. Referring to the losses
suffered by retailers, Shah said it hardly matters since the dealers’ margin on Maggi is barely 10 percent.

In the wake of the controversy over the presence of lead and monosodium glutamate (MSG) beyond permissible
limits in Nestlé’s popular noodles brand Maggi, India’s national focus has shifted towards improving food safety in
the country. The Maggi phenomenon seems to have made Food Safety and Standards Authority of India FSSAI)
more accountable.

For the first time in Indian history, a global food brand is being recalled and banned for sale by multiple state
governments. The overall public mood as reflected in media debates seem to be strengthening and raising food
safety standards in the country. But, that cannot happen without making the Food Safety and Standards Authority of
India (FSSAI) more accountable. The agency was established as an independent statutory authority under Food
Safety and Standards Act, 2006. Before the act, there were a plethora of acts and orders handled by various
ministries and government departments often resulting in chaotic situations, which ultimately transpired into
ineffective administrative response. As a single reference point, the FSSAI is supposed to lay down standards for
food articles and to regulate “their manufacture, storage, distribution, sale and import to ensure availability of safe
and wholesome food for human consumption.”

While the FSSAI did act promptly in the Nestlé Maggi issue, the agency has underperformed, if not entirely
failed, in implementing its mandate since its creation. Inadequate regulation and standards have created a highly
toxic and ineffective system for providing food that is safe, nutritious and accessible to all.

The use of cancer causing chemicals on vegetables and fruits produce, and the contamination of milk with
chemical additives have become common practice due to weak and fragmented standards for food safety and lack of
enforcement across the supply chain. In fact, a recent survey by the FSSAI in 33 state-districts found that 68.4% of
1,791 samples were contaminated with milk powder, fat, glucose, water, bleach, and even fertilizer. Various studies
from food safety advocacy groups point that the use of fertilizers, pesticides and insecticides in the agricultural
sector post-Green Revolution is rampant. It has ensured a slow accumulation of toxins within water, soil, food, and
humans. Traders and sellers further contaminate vegetables and fruits by using toxic colors and chemicals for
ensuring attractive look on the produce.

The “long and low-tech” supply-chains in India augment the tendency of producers and sellers to resort to
unnatural and artificial ways to preserve, present and sell the product. These problems afflict especially the urban
areas. In quantitative terms, as much as 70% of our cities’ food supply-chains face the problem. Already
condemned to bear the enormous pollution levels in our cities like Delhi and Mumbai, toxic food items severely
depreciate the quality of an average Indian’s life. Incidents of food contamination have injured and killed thousands
and will result in serious illnesses for many in the future.

National Newspaper columns wrote: As an agency responsible for enforcing food safety regulations in India,
the FSSAI must increase audits, inspections, and training programs to improve standards and create a modernized,
comprehensive, and cost-effective system to guarantee food safety in India. In fact, the FSSAI is trying to
implement safety standards on street food for the first time, as well as adopting new food packaging requirements.
FSSAI needs to strengthen both its own capabilities vis-à-vis staff, research and inspection laboratories, and
benchmarking. It can learn and adopt best international practices like the U.S. Food and Drug Authority (USFDA),
which has stringent quality testing procedures and capabilities.

India needs to initiate reforms in supply-chain operations so as to ensure that farm produce is transported safely
and at affordable prices to all, particularly in the urban areas. Advanced technology will help modernize safety
standards and create a more transparent and efficient system to ensure food safety. But for all this to happen, the
FSSAI must rise to the challenge and enforce food safety regulation to feed the growing and young population of
India.

On July 29, 2015, the Maharashtra Food and Drug Administration (FDA) argued in the Bombay High Court
that Nestlé India had burnt several tons of Maggi after the state’s ban order on Maggi was imposed, instead of opting
for a retest of the samples. If Nestlé India was so sure about the safety of its products, it should have cooperated with
3
FDA for further testing. The Bombay High Court was hearing a petition filed by Nestlé India against FASSAI’s
June 5 order banning nine variants of Maggi, said FDA Counsel Darius Khambata. FDA randomly selected 20
samples of Maggi and found five of them tested positive for containing lead beyond permissible limits. This was
enough for FDA to issue notice to stop production and sale of all the nine variants of Maggi, Khambata said.
Meanwhile, Nestlé sent Maggi samples to labs in London, New York, and Paris and placed 2,700 test reports before
FDA to show that lead content was within proper limits, Khambata said (Business Standard, Kolkata, Thursday,
July 30, p. 3).

References:
“Maggi Noodles Controversy: Nestlé India to Be Prosecuted,” NDTV Food, Modified: June 03, 2015 17:17 IST
MBA Forum d’Assistance, Tuesday, 09 June, 2015 11:40 AM
“US FDA to test Maggi samples for excess lead and MSG,” #World #US #NewsTracker #Nestlé #FDA #Maggi #instant noodles
#MSG #lead #Maggi Controversy, Jun 11, 2015
http://indianexpress.com/article/opinion/columns/fifth-metro-without-maggi-its-absence-leaves-a-huge-hole-in-the-lives-of-
middle-class-working-women/#sthash.U7WN77UW.dpuf
“Parliamentary panel to take up food safety issues on 10 July following Maggi controversy,” Jul 8, 2015 15:44 IST
Dutta, Arnab (July 30, 2015), “Maggi cuts deep; Nestlé suffers first loss in 17 years,” Business Standard, Thursday, July 30,
2015, p.1.
“Nestlé India did not opt for re-test, instead burnt Maggi: FDA,” Press Trust of India, Mumbai, Business Standard, Thursday,
July 30, 2015, p.3.

Ethical Questions:
1. What are the legal issues in the Maggi Case, and why?
2. What are the ethical issues in this Case, and why?
3. What are the moral issues in this Case, and why?
4. What are the spiritual issues in this Case, and why?
5. If, as later developments attested, there could have been contamination or sabotage by competitors, how would you
handle this grave injustice, and why?
6. Apparently, there was a clash of test results from Maharashtra FDA and Nestlé’s independent tests from London,
New York, and Paris. How would you legally, ethically and morally resolve such conflicts when the safety of millions
of consumers is at stake?
7. Did the Food Safety and Standards Authority of India (FSSAI) act too slow or too quick, and with what effect?
Discuss.
8. How would you resolve the problem of Maggi from a deontological view of rights and duties? Apply deontological
moral rules R01 - R09. Which Rule applies best, and why?
9. How would you resolve the problem of Maggi from a teleological viewpoint? Apply teleological moral rules R10 to
R12. Which Rule applies best, and why?
10. How would you resolve the problem of Maggi from a distributive justice perspective? Apply distributive justice
moral rules R13 to R28. Which Rule applies best, and why?
11. How would you resolve the problem of Maggi from a corrective justice mandate?
12. Since Maggi enjoys an 80% market share of the noodle market in India, what should have been the legal, ethical and
moral responsibilities of Nestlé in the wake of this controversy? Discuss.
13. If you were CEO of Nestlé India, what would be your ethical and moral judgment and subsequent marketing
strategy in this regard, and with what presumed effect?

Case 16.2: Maruti Plant Violence at Manesar and Thereafter

July 18, 2012: MANESAR in Haryana: Awanish Kumar Dev, Maruti Suzuki's General Manager (Human
Resources) was burned beyond recognition to death in the violence that erupted at the Maruti car plant allegedly
triggered by workers for which 91 workers were arrested. Some 100 others were injured. Kumar's body was
identified by his family the next day. Maruti alleged that the violence was an orchestrated act of mob, which has
implications beyond one company or region. The 91 workers that were arrested were produced before a local
magistrate who remanded them to 14 days judicial custody. They have been accused of various charges including
rioting with weapons, murder, attempt to murder, unlawful assembly, assault and trespass. The violence in which

4
several executives, managers and supervisors were attacked and office facilities, security office and fire safety
section gutted arose out of an alleged caste remarks by an official against a worker.

Maruti Suzuki India Ltd. has been having a harrowing time since Wednesday (July 17, 2014) when about 3,000
workers rioted, leaving a senior manager dead, more than 100 people injured, and part of the premises charred.
India’s largest car maker by volume was wracked by labor unrest for much of last year at its plant at Manesar, in the
northern state of Haryana. But a nearby plant at Gurgaon, a suburb of New Delhi, has been functioning relatively
smoothly. [Gurgaon, an industrial hub neighboring the national capital, was the scene of large scale violence by
workers and outside forces at the Honda Motorcycle and Scooter India's unit and subsequent strikes in other units.
Maruti has witnessed strikes on three occasions last year (2011), and has already announced plans to set up a new
plant in Gujarat at an investment of Rs 4,000 crore, a move which was interpreted as coming against the backdrop of
violence in the region].

Underlying the tension at the Manesar plant has been a year of strained relations, especially between managers
and the new Maruti union, whose leaders have been accused by the car maker of instigating Wednesday’s violence.
The labor problems at the Manesar facility, located about 50 kilometers from New Delhi, date back to June 2011
when workers halted all activity and demanded recognition from Maruti’s management of their newly-formed
Maruti Suzuki Employees Union. Workers had pressed for a union that, they said, fairly represents them and
functions independently from the one at Maruti’s Gurgaon plant, which they claim is pro-management.
A 10-day agitation then ended after the management agreed to take back 11 workers who were fired for
disciplinary reasons. The company, however, did not agree to recognize the new Manesar union. In August 2011,
Maruti asked workers from Manesar to sign a so-called “good conduct bond” after the company found what it
claimed were “serious and deliberate” quality problems in cars made at the plant. Workers were prevented from
entering the factory before they signed the bond, leading to an impasse that lasted more than a month.

The workers at Manesar finally relented, signed the bond, only to re-organize their protests within the factory
premises. Production was stalled for another two weeks. Their principal demand was recognition for the union
though they also called for the reinstatement of more of the fired workers. The strike ended on Oct. 21 only after
intervention from the Haryana state government. As part of a tripartite agreement between Maruti’s management,
the workers’ union and the Haryana government, Maruti agreed to take back 64 suspended workers but continued its
inquiry against 30 other suspended employees.

The 30 workers who remained under suspension included two of the top office bearers of the Maruti Suzuki
Employees Union, Sonu Gujjar and Shiv Kumar. In November, 2011, The Economic Times reported that Maruti
paid Mr. Gujjar and Mr. Kumar 4 million rupees ($72,365) to leave the company. The report also alleged that the
remaining 28 expelled workers were asked to quit their jobs in exchange for 1.6 million rupees each.

Later, R. C. Bhargava, chairman of Maruti, said that the 30 workers took voluntary retirement but declined to
elaborate. Sonu Gujjar and Shiv Kumar have been unavailable for comment since last year. With that, Maruti may
have thought its days of unrest were over. But workers at the plant found new leaders and regrouped under union
chiefs Ram Mehar Singh and Sarabjeet Singh. They began negotiating with the management on issues such as
wages and the registration of their union.

This time, Maruti agreed to recognize the workers’ union. “The state government, taking a cue from the
incidents in the past, wasn’t interested in registering the union. But we insisted and the union was finally registered
in February this year,” S.Y. Siddiqui, Maruti’s chief operating officer for administration, said on Saturday. “In fact
the workers sent me a box of sweets after we helped them in registering the union.” The new Maruti Suzuki
Workers’ Union took charge at Manesar with Ram Mehar Singh and Sarabjeet Singh spearheading it as its president
and general secretary, respectively. The two men today are among 12 union leaders and several others workers
wanted by the Haryana state police for their alleged involvement in Wednesday’s riot. They were not available for
comment.

“The relations were improving bit-by-bit. We learnt our lessons and established a communication channel that
never broke down,” Mr. Bhargava said on Saturday, July 20, 2012 at New Delhi. The Wednesday’s incident came as
a complete shock to us; we were still talking to the workers. Maruti Suzuki said last week’s violence began after a
5
worker and a supervisor got into a scuffle. Workers claim that the supervisor made a caste-based insult, but both the
company and police deny that. The Manesar union is not affiliated to any of the umbrella organizations of trade
unions in India. But, expressing its solidarity with the Maruti workers, D. L. Sachdev, national secretary of the All
India Trade Union Congress, blamed the Maruti management for the current crisis. “The discontent among regular
and contract workers has been going on. Unfortunately, the management hasn’t been able to resolve the issue,” Mr.
Sachdev said.

Maruti Suzuki India Ltd has announced an indefinite lockout at their plant at Manesar, Haryana. Maruti
Chairman, Mr. R. C. Bhargava described Thursday’s incident as an “absolutely unforeseen event”. “No outstanding
issues from previous strikes were left unresolved,” he said and dismissed suggestions that prolonged wage-
settlement negotiations could have contributed unrest at the plant. The Manesar facility has an annual capacity of
about 5,50,000 cars and accounts for about a third of Maruti’s total production and produces almost all of its diesel
cars and all versions of the best-selling Maruti Swift, Swift Dzire, SX4 sedan and A Star hatchback. Last year
(2011), analysts estimated that labor troubles at the facility had cost the company about $500 million in lost
production. The company ruled out importing cars to meet domestic demand and reiterated its commitment to its
Manesar facility in the backdrop of persistent rumors that Maruti would shut down the facility once their plant in
Gujarat was complete.

Two Years Later

Sushma’s husband is one of the 147 workers of the Maruti Suzuki’s Manesar plant who have been languishing
in jail for two years now, charged with one murder, and some rioting and criminal conspiracy following the death of
HR Manager Awanish Kumar Dev in a fire on July 18, 2012, the result of a violent clash between workers and
security guards. According to Sushma, the media has never asked to this day the most obvious question: Why and
how could 147 poor workers come together to kill one man? Of the 147 workers jailed, seven claimed to have been
away on leave, seven to have been on morning or night shifts, and several claim to have been working in units 1.5
kilometers away. Defense lawyer Rajender Pathak says, “The judiciary is biased, 100 of the arrested are casual
workers, with no union connections. Why would they join the violence?”

While the post-mortem report on Awanish Kumar says that the death was caused due to shock and asphyxiation,
defense lawyer Rajender Pathak argues that it is almost impossible for the workers to have started a fire, as they are
thoroughly checked for any items like matchboxes, lighters and cigarettes before they enter the factory, as per a
standing order issued by Maruti and approved by the Haryana government. On the contrary, continues Pathak, it is
only the top management that is allowed to carry matchboxes or lighters. Vikram Khazanchi, prosecution witness
and chief of plant operations, accepted in court that officers were allowed to smoke within the factory premises.

What arouses further suspicion is that a police contingent, summoned by the Maruti management in anticipation
of violence, was present outside when the incident happened. Narendra Kumar, then ASI of the Gurgaon police
station, says that the plant security-in-charge Captain Deepak Anand had asked him not to send the police inside.
When Vikram Khazanchi, prosecution witness and chief of plant operations, was asked by the court if the security-
in-charge had been indicted for the lapses and violence, he admitted in court that no action was taken against him.

With the charge-sheet already filed, and the investigation complete, lawyers say there is no reason for the
workers to be still in jail. Nobody has been granted bail yet. Meanwhile, the Punjab and Haryana High Court state
extraneous reasons of a possible impediment in foreign investment as a reason for not granting bail. This is
extremely unfortunate, says the defense lawyer in the high court, Vrinda Grover. While the Supreme Court held that
eyewitnesses have to be examined before bail is granted, Grover says the prosecution has deliberately withheld
eyewitnesses to prolong the case. Twenty one of the twenty three eyewitnesses are yet to be examined (Supreme
Court, February 2014). While bail has been granted to the accused even in cases like the 2013 Muzaffarnagar riots
(death toll 62) and the 2G spectrum scam, the failure in granting bail even to one of the 147 Maruti workers for the
last two years is seen as a sign of Maruti’s clout in Gurgaon and over the police and the judiciary in Haryana.
Special prosecutor K. T. S. Tulsi says the prosecution hopes to complete examining of witnesses in August 2014.

6
 The Manesar workers always claimed that they had been fond of Awanish, who they claim was sympathetic to
the workers’ cause. Moreover, Awanish’s relations with Manesar plant workers were very cordial; they had no
reason to kill him. So was it just an accident? Or was there an ulterior motive to get rid of Awanish? These
questions have not been raised nor answered by the Haryana police since July 18, 2012. The final trial is yet to
commence and witnesses are yet to be examined (District Court, December 2012). Meanwhile, the violence has cost
Maruti a loss of Rs 500 crore (Punjab & Haryana High Court, May 2013), but the loss has been duly claimed from
the insurance companies.

T. T. Ram Mohan, Professor, Finance and Accounting Area, Indian Institute of Management Ahmedabad, who
has spent considerable time on this case has this to say: “We cannot take seriously the insinuation that the problems
are the work of 'Naxalites' who have infiltrated the workers at the plant. Nor can we subscribe to the notion that it
was the result of vaulting aspirations of a new generation of workers, who are keen to have the good things of life
without regard for issues of affordability or productivity. It takes a lot for workers to rebel seriously in a situation
such as Maruti's because the odds are stacked against them. There is a fundamental asymmetry in management-
worker relationships: the management has financial muscle and staying power, backed by support from the
government which includes the police force and the labor department of the state. Workers eke out a precarious
living and cannot do without their wages for long. To risk disruption and jobs and to incur the wrath of the law
enforcement authorities would require serious provocation” (Ram Mohan 2012).

Maruti SuZuki, meanwhile, has been moving on regardless of the Manesar tragedy. Its net profit for FY 2012-
2013 stood at Rs 23,921 million; it declared a dividend of 160% compared to 150% in the previous year.

References:
Maruti's Manesar plant GM (HR) burned to death, 91 workers arrested; government says business confidence intact, PTI | July
19, 2012, 07.22PM IST
“Maruti declares lockout at Manesar plant,” The Hindu, July 21, 2012.
Nikhil Gulati and Santanu Choudhury (2012), “In Manesar, Months of Tension Then Tragedy,” Economy & Business, 8:30 am
IST, Jul 25, 2012
Pavithra S. Rangan (2014), “Those Men of Manesar,” Outlook, 11 August 2014, pp. 12-15.
Ram Mohan, TT (2012), “Maruti's Manesar Plant,” The Big Picture, Monday, August 20, 2012

Ethical Questions:
1. What are the legal issues in the Manesar Case, and why?
2. What are the ethical issues in this Case, and why?
3. What are the moral issues in this Case, and why?
4. What are the spiritual issues in this Case, and why?
5. A stitch in time saves nine: How would you have reacted and intervened in this strike much before it escalated to
its current proportions, and why?
6. Analyze this case with the Hohfeldian analysis. What additional insights do you garner, and how useful in
resolving this issue?
7. How would you have resolved the problem of Maruti-Manesar from a deontological view of rights and duties?
Apply deontological moral rules R 01 - R 09. Which Rule applies best, and why?
8. How would you have resolved the problem of Manesar from a teleological viewpoint? Apply teleological moral
rules R10 to R 12. Which Rule applies best, and why?
9. How would you have resolved the Maruti problem from a distributive justice perspective? Apply distributive
justice moral rules R13 to R 28. Which Rule applies best, and why?
10. How would you have resolved the Maruti-Manesar problem from a corrective justice mandate?
11. How would you have handled this case with insights from the ethics of virtue, and why?
12. How would you have handled this case with insights from the ethics of trust, and why?
13. How would you have handled this case with insights from the ethics of responsibility, and why?
14. Finally, if you were the HR Director of Maruti, how would you have handled this case with insights from the
ethics of corporate moral and social responsibility, and why?

Case 16.3: India’s Super Rich: The High Jumpers

7
 A runaway rise in stock prices has catapulted a handful of promoters into the super-rich league in India. The
share prices of a company often fluctuate wildly, often despite no growth in operations, earnings or profits. Poor
and delayed disclosure and the inability on the part of the promoters to explain their business model make some of
these companies difficult for analysts and investors to understand. “Companies like Globus Constructors, Trinity
Tradelink, HPC Bio-Sciences, and Esteem Bio-Organics have witnessed significant rise in promoter wealth, mainly
because of unexplained stock market outperformance,’ reports Business World Super Rich Survey 2014 (see
Business World, July 14, 2014, p. 62). Exhibit 16.3.1 lists ten high jumper companies with surprising market
capitalization gains. Often, rise in stock prices cannot be linked to fundamentals of a company. Unexplained spurt
is not very healthy, says Ambareesh Baliga of Edelweiss Financial Services.

Exhibit 16.3.1: India Super Rich: The High Jumpers

[See Menn, Shailesh (2014), “India’s Super Rich: Up, Up and Way,” Business World, July 14, p. 60-62].

Promoter Family Company Market Cap Market Cap Absolute %

in FY 2012- in FY 2013- Difference Change
2013 2014 (Rs.
(Rs. Crore) (Rs. Crore) Crore)
Arush Tandon & Akash Khanna Globus Constructors ….Globus 2.132 1,216 1,214 569.23
Power Generation
Ramsh Chandra Partani & Fly Matra Kausahl Enterprise 1.091 280 279 255.71
Vikrant Kayan, Sukumar Das & Fly Trinity Tradelink 5.658 895 889 157.14
Madhu Anand & Tarun Chauhan HPC Bio-Sciences 14.354 184 170 11.81
AS Bisht, BK Sabharwal & Fly Eco-friendly Food Processing Park 23.535 285 261 14.11
& Esteem Bio-Organic Food
Processing
Dinesh Ramlal Shah, Jaymoni Keni Sunrise Asian 90.882 628 537 5.91
Yalal Joshi, Mukesh Chauhan & Fly
Ajay Relan & Fly Bharat Seats & Sharada Motor 28.983 159 131 4.53
Industries
Ketan B. Kothari & Fly Finkurve Financial Services 25.185 127 102 4.05
Amarchand Rander & Fly Rander Corporation 38.485 151 113 2.94
Girdhari Lal Goenka & Fly Golden Goenka Fincorp 30.289 109 79 2.61

For instance, Globus Constructors promoted by Arush Tandon and Akash Khanna, has had frequent changes in
its core business in recent years. Till 2008, the company was in the business of manufacturing carpets and woolen
garments. Subsequently, it switched to construction and real estate, and changed its name to Globus Constructors
and Developers. In 2012, it changed its mission and forayed into the clean energy generation business, and once
again rechristened its name to Globus Power Generation. In spite of no growth in operations and earnings, its
stock rose from Rs 5 to Rs 35 between August 2010 and March 2013. Worse still, between April 1, 2013 and March
31, 2014, its shares have surged over 20 times (i.e., over 2,000%). Meanwhile, promoters’ wealth has increased
from Rs 2 crore to Rs 1,216 crore in less than a year, an absolute increase of 1,214 crore over 2 crore in 2013 – a
percent annual growth of 56,923%! But the company’s performance is dismal – it posted a loss of Rs 1.9 crore on a
turnover of Rs 36 lakh in the quarter ending March 31, 2013. Despite repeated attempts, Business World could not
get in touch with the promoters to understand their business (Menon 2014: 60).

Similar is the Saga of Trinity Tradelink. The company was incorporated in 1985 as Sharp Trading & Finance
with a mission of general trading and financial activities. In 2010, it had a change of management, and its new
promoters, Vikrant Kayan and Sukumar Das, changed the mission of the company to oil, gas and petroleum, and
renamed the company Omnitech Petroleum. Currently, the company is called Trinity Tradelink. It is yet to file its
March 2014 earnings. It has suffered losses in all the quarters preceding December 2013. Low performance and
profitability have seemingly not affected its stock performance. Shares of Trinity Tradelink zoomed 140% to Rs 99
in Fiscal 2014. Subsequent rise in promoter wealth, Trinity recorded market cap of Rs 895 crore in 2014 (from Rs 6
crore in 2013), a meteoric rise of 15,714%!

However, some promoters have really deserved the market cap gains. For instance, Secunderabad-based Matra
Kaushal Enterprises promoted by Ramesh Chandra Patrani & Fly, reported profits of Rs 79 lakh on a turnover of Rs
7.18 crore. Its share skyrocketed from Rs 11 to Rs 550 during FY 2013-2014, and the corresponding wealth impact
was market cap of Rs 1 crore in FY 2013 to Rs 280 crore by FY 2014, an absolute jump of Rs 279 crore or a
8
percentage annual jump of 25,571. According to Patrani, the company underwent an amalgamation with a larger
company during fiscal year 2013-2014 that increased its capital base from Rs 3 crore to Rs 22 crore. The company
is well capitalized now and is well positioned for further expanding its markets. Their sales and earnings numbers
look even better since April 1, 2014, and the company plans to do some diversification in its product range.

Bloomberg’s latest (July 31, 2015) list of India’s Billionaire Club includes among the ten richest Indians a new
addition: Micky Jagtiani, a retail baron and owner of the unlisted Dubai-based retail chain Landmark, whose net
worth is estimated at $6.6 billion. [For a longer list of India’s superrich, see Case 10.1, in Chapter 10]. Jagtiani has
reaped the benefits of a retail boom in India and the West Asia. Close runner up with Micky is Birla who is currently
facing a price down cycle with the share price of flagship Hindalco Industries falling. Bloomberg has excluded
Bharti group Chairman Sunil Mittal, who according to Forbes, had an estimated wealth of $7.8 billion, and the
Hinduja brothers with estimated wealth of $13.3 billion in 2014 (Chatterjee, Dev, 2015: 1).

Micky Jagtiani, 63, a college dropout, started with $6,000 in 1973. After cleaning hotel rooms and driving
taxis in Bharain, his first business was to sell baby food in Bharain. He opened his first Shoe Mart in Dubai in 1990.
The Group today has over 50,000 employees, sells 25 of its own labels and 40 franchise brands, and generates $5
billion in revenue from 1,900 stores across the region. The Group is the largest importer of non-food items in the
Persian Gulf. With active support from wife Renuka, Micky operates the Lifestyle branded stores in India and has a
stake in Debenhams, UK’s second largest apparel retailer. In India, the company grew 25% in 2014-2015 to report
Rs 4,700 crore of revenue. The Group plans to open 7 Lifestyle stores, 4 Home Center stores, and 25 Max stores in
India in 2015. Jagtiani plans to expand his food chain, Foodmark. He also set up Mark Trust in 2000 to improve the
quality of education in India (Chatterjee, Dev, 2015: 1).

References:
Menon, Shailesh (2014), “India’s Super Rich: Up, Up and Way,” Business World, July 14, p. 60-62.
Mitra, Geore (2014), “India’s Super Rich: Good Times Coming for I-Banks,” Business World, July 14, p. 72-74.
Motilal, Oswal (2014), “India’s Super Rich: Economic Moat is Key,” Business World, July 14, p. 68.
Mukherjea, Saurabh (2014), “India’s Super Rich: Battle for Legitimacy,” Business World, July 14, p. 70.
“India’s Super Rich: Methodology of Listing Wealth,” Business World, July 14, p. 84.
“India’s Super Rich: The Ivy League,” Business World, July 14, p. 46-51.
“India’s Super Rich: Market Movers,” Business World, July 14, p. 52-55.
“India’s Super Rich: Making the Cut,” Business World, July 14, p. 56-59.
“India’s Super Rich: Market Movers,” Business World, July 14, p. 52-55.
“India’s Super Rich: Making the Cut,” Business World, July 14, p. 56-59.
“India’s Super Rich: The High Jumpers,” Business World, July 14, p. 62.
Chatterjee, Dev (2015), “Micky Jagtiani among 10 Richest Indians,” Business Standard, Weekend, Saturday, August 1, 2015,
p.1.

Ethical Questions:
Legal, Ethical, Moral and Spiritual Questions and Concerns:
1. What are the legal issues in India’s Superrich Case, and why?
2. What are the ethical issues in this Case, and why?
3. What are the moral issues in this Case, and why?
4. What are the spiritual issues in this Case, and why?
5. Even though billionaires in India (e.g., Mickey Jagtiani) might have aggregated wealth legitimately, how would you
ethically and morally justify wealth maximization in India by few of its billionaires when the gap between India’s
rich and the poor is widening irreversibly?
6. How would you morally justify India’s superrich? Apply deontological moral rules R 01 - R 09. Which Rule applies
best, and why?
7. How would you morally justify India’s superrich? Apply teleological moral rules R10 to R 12. Which Rule applies
best, and why?
8. How would you morally justify India’s superrich? Apply distributive justice moral rules R13 to R 28. Which Rule
applies best, and why?
9. A runaway rise in stock prices has catapulted a handful of promoters into the super-rich league in India (see Exhibit
16.3.1). Is this a distributive justice based process that is good for the overall growth and development of the
country?
9
10. What corrective justice procedures do you suggest such that innocent investors, both retail and institutional, are not
trapped and harmed thereby?
11. Rise in stock prices cannot be linked to fundamentals of a company. Unexplained spurt is not very healthy, says
Ambareesh Baliga of Edelweiss Financial Services. Explain the ethical and moral implications of support in market
cap with no real company progress and performance to account for it.
12. “Companies like Globus Constructors, Trinity Tradelink, HPC Bio-Sciences, and Esteem Bio-Organics have
witnessed significant rise in promoter wealth, mainly because of unexplained stock market outperformance,’ reports
Business World Super Rich Survey 2014, Business World, July 14, 2014, p. 62. Is this spurt of wealth economically
sustainable, culturally divisive, and ethically justifiable? Discuss.

The Ethics of Moral Justification of Corporate Outcomes

The search for a completely satisfactory ethical theory is an endless project (De George 1999:52).
There is no single ethical theory on which all people and all philosophers agree. Hence, throughout the
history of moral philosophy several ethical theories and ethical systems have been proposed and followed
or rejected. Through earlier centuries, two approaches have been predominant: teleology and deontology,
and more recently, a third system, distributive justice, and a fourth theory, corrective justice, which is a
subset of distributive justice. We will discuss all four theories and their derivative versions. This chapter
provides the ethical foundations for sound corporate moral reasoning and justification by systematically
applying major theories of moral reasoning and metaphors, such as deontology, teleology, distributive
and corrective justice theories and their sub-theories, for analyzing and assessing corporate executive
decisions in terms of their ethical inputs, process, and outputs.

There are two parts to this chapter: Part I: Major Normative Ethical Theories for Assessing the
Morality of Corporate Outcomes; Part II: Deriving Moral Rules from Ethical Theories for
Assessing Morality of Corporate Outcomes

Part I: Major Normative Ethical Theories for Assessing the

Morality of Corporate Outcomes
All moral reasoning in general, and business executive moral reasoning in particular, occurs in a
concrete situation of people as actors and observers in a given time, space, polity and place, in a concrete
situation of actions and interactions between reason and will, thoughts and emotions, knowledge and
desire of actors and observers, amidst several obstacles to moral reasoning such as ignorance, pressure,
passion, force and fear, and several subtle impediments such as habits, prejudices, biases, personalities
and temperaments, and sometimes, mental illness. Yet, in spite of all these positive and negative forces
that affect human and moral reasoning, there is some sanity and stability to human reasoning, and to
moral executive reasoning in particular, which we explore now.

The Structure of Executive Moral Judgment, Choice and Action

Moral judgments, decisions and actions involve moral intentions or moral intentionality. Thus:

• Moral intentions primarily define moral choices.

• Moral choices often imply moral consequences.
• Moral consequences imply moral responsibilities.

10
 Moral decisions and choices are more than just economic, political, legal, cultural, technological or
ideological choices. Real moral judgments, decisions and choices involve choices between human values
and human disvalues, between right and wrong, between good and evil, fair and unfair, between just and
unjust, ethical and unethical, and between moral or immoral subjects, objects, properties or events.

Like other moral acts, executive moral choices or acts are never single isolated acts. They are
complex unities involving decisions, company's historical contexts surrounding the decisions, goals
intended by the decision makers, and consequences that follow on the decisions. All these elements
imply relationships with human and corporate meaning. The integral order or intelligibility that unifies
this complete set of relationships of meaning constitutes the real (formal) object of executive moral
choice and executive moral action (Lonnergan 1970; Melchin 1990).

In the business context, Figure 16.1 visualizes a comprehensive set of relationships and meanings
that business executive acts or decisions confront and generate. Any business firm may be said to have
three basic environmental systems (Emery and Trist 1973):

▪ The internal environment system (made up of technology, patents, R&D, personnel, production,
finance & accounting, marketing and service) which defines a company;
▪ The transactional environment of industry drivers (cost, competition, governments, customers
and corresponding technology under each) as portrayed by Porter (1985) or the direct
"stakeholders" (suppliers, creditors, stockholders, consumers, competitors, distributors,
employee unions, and governments) that define the local or national domain of company's
business transactions (Ansoff 1965; Freeman 1984) and
▪ The contextual environment of indirect external stakeholders (international and global
government communities with their pacts and agreements, regulation structures, laws and
order; global suppliers; global promoter- and investor shareholders; global banks and financial
markets; global labor markets and trade unions; continental and global trade regions; global
distributor networks and retailers, and global communities, advocacies, cultures and
civilizations) which the company scans, monitors and responds to.

All three systems (internal, transactional, and contextual) interact with each other as pointed out by
the multiplicity of arrows connecting them. Currently, the four major drivers of the company (cost,
competition, customers and governments) represent their impact by the technology that defines them
(Porter 1996). That is, whatever is offered in the market, a brand, product or service, what really defines
them and the firm is their unique competitive technology and convenience its offers. That is the four
drivers should be characterized as cost technology, customer technology, competition technology, and
governmental technology. Technology is the central pivotal point or the innermost core of a business
system. Dependent upon one’s technology and translating technology to its transactional environment are
four major functions of a company: production, personnel, financing and marketing. Each of these four
functions is immediately determined by at least three transactional environment systems, and remotely
affected by at least four contextual environment systems (Emery and Trist 1973).

For instance, the production system of a company is proximately determined transactionally by its
"suppliers" of materials, "its creditors", and by "governments" (laws and agencies that regulate
production, quality, advertising, liability). Its production system is also, even though remotely, affected
by at least four contextual systems: domestic versus global suppliers, domestic versus global producers,
domestic versus global financial markets, and domestic versus international governments. The other three
functions of the business entity (finance, personnel and marketing) are characterized similarly in terms of
their transactional and contextual systems.

11
 A typical business choice, decision or action can affect one or more components of the internal,
transactional and contextual environments of a company, producing a series of cost- or benefit- effects
(teleological effects), generating a series of rights or duties (deontological effects), and involving several
equitable or inequitable spreads of costs and benefits, rights and duties (distributive justice effects). A
complete characterization of an executive moral object or moral choice must take into account the entire
"action-effects" complex involving all three environments of the company. The consequences of day-to-
day business decisions can reach into the future, into remote sectors of the world, into the lives of
millions of people. Such consequences may promote and sustain structures of development or
oppression, affect the global ecosystem positively or negatively, and can promote economic, political and
cultural ideologies whose effects could be developmental or detrimental to the long-range future of one's
civilization (Melchin 1990: 398).

Characterizing the Executive Act

From earlier chapters we assume that the corporate executive moral decision and moral act and
actions are framed in their constitutive components of ethical inputs, ethical process, and ethical outputs.
Input and process elements are assumed to constitute the executive decision or ACT, while the output
elements are understood to constitute the CONSEQUENCES under a concrete decision action situation.

The executive decision and act, from a systems viewpoint, can be divided into corporate inputs,
corporate process, and corporate outputs (see Figures 16.2 and 16.3 that are imported from Chapter 01).
For the sake of simplicity, if we may combine corporate "inputs" and "process" into one major component
of business conduct designated as the executive act, and consider ethical "outputs" and "consequences"
under one component designated as the corporate consequences, then in general, the morality of a given
decision or act can be judged by:

a) Only the act;

b) Only its consequences;
c) Both the act and its consequences, and
d) Neither the act nor its consequences.

This four-fold categorization provides the taxonomy for a mutually exclusive and collectively
exhaustive (MECE) typology of ethical-moral assessment of human conduct, in general, and corporate
conduct, in particular. 1 The treatment of major ethical-moral theories applicable for assessing executive
conduct uses this four-fold taxonomy. Table 16.1 details a taxonomy of such ethical theories.

For reasons discussed later, we assume that:

• Deontological theories are best suited to assess executive conduct as an ACT composed of rights
and duties, antecedents, determinants, concomitants, decisions and actions.
• Teleological theories are most appropriate for evaluating executive conduct in its
CONSEQUENCES that also includes consequences of consequences.
• Distributive justice theories are best deployed to judge the spread of right and duties, costs and
benefits of both the "ACT" and the "CONSEQUENCES" of corporate conduct, and

1
For other taxonomies of ethical systems, see Ashley and O'Rourke (1989: 149), Broad (1930), Feinberg (1974) and Leys
(1954).

12
 • Non-cognitive theories do not per se analyze the ACT or the CONSEQUENCES for deriving
ethical conclusions regarding executive or corporate behavior. 2

Table 16.1 lists specific ethical-moral theories that apply to specific components of corporate
conduct or executive action. Table 16.1 incorporates the non-cognitive system of logical positivism (see
footnote 3 below) and emotivism in moral assessment even though no concrete rules can be specified
regarding one's emotions and feelings. Emotivism is a non-cognitive ethical system. That is, it is not
based on knowledge, reason or theory in arriving at ethical-moral conclusions.3 It reduces all values of
"acts" and their "consequences" to subjective feelings or emotional attitudes about them (Ayer 1936). It
judges the morality of an action by instinctive feelings about an act or its consequences, without
necessarily analyzing either the act or its consequences. "I feel it should be right" or "my gut feelings tell
me that this decision is wrong" are some emotivist expressions. Emotivism comes in different forms:
individual emotivism as expressed by one's own strong emotions and feelings; social emotivism as
revealed in strong ethnic or cultural stereotypes, and national emotivism often expressed by national
opinion (e.g., gallop polls) or patriotic sentiment.

Certainly, not all feelings are wrong, but neither can all feelings be trusted. Believing that the
common, unsophisticated human being is close to nature implies real and genuine feelings that are right,
and one often construes these feelings to be "common sense" or the basis of one’s national or ethnic
culture and confidence. This is the justification of opinion polls. One assumes that what most Americans
"feel" is right (via Gallup polls) is probably right. Analogously, what the executive instinctively and
genuinely feels to be good could probably be moral. However, as Aristotle maintained (1985), emotions
and feelings can be trusted only when they are refined, educated, and disciplined by virtue, or when they
emanate from men and women of "character" (Hauerwas 1981; Melchin 1990).

2 One knows unity through distinction (Maritain 1959). The purpose of distinction is to unite in such a way that the richness of
the unity is appreciated as the internal coherence and integration of its contributory parts (Mahoney 1992). The richness of the
unity of the moral act is best seen by dissecting it into parts: ethical inputs, process and outputs, or as "act" and "consequences."
Similarly, the fourfold classification of ethical-moral theories presented here is not to divide but unite. Deontology as a science
of duty, is a science of the act, but does not exclude the consequences. Teleology is par excellence a science of the
consequences, but does not exclude the act as the source of the consequences. In this sense, deontology is limited teleology, and
teleology is limited deontology (Mieth 1989), and distributive-corrective justice is limited deontology and limited teleology
combined.

3
The emotivist view is pioneered by A. J. Ayer (1936) and further expanded by Stevenson (1944). For a discussion on
Emotivism, see Urmson (1969). C. K. Ogden and I. A. Richards first introduced the term "emotive meaning” in The Meaning of
Meaning [London: Routeledge and Kegan Paul, 1921]. Ayer is more famous for his Logical Positivism than for Emotivism, the
latter theory being based on the former. Logical Positivism, originally expounded in Ayer's doctoral dissertation [Language,
Truth and Logic (1936)], maintains that only tautological sentences (e.g., 2 + 2 = 4) and empirically verifiable propositions are
meaningful. All other sentences, such as theological (e.g., God is love), and ethical (e.g., to kill is immoral) are "non-sense"
since they are neither tautological nor empirically verifiable. Moral judgments are non-scientific statements that merely express
emotions: one cannot prove or disprove them by the "verification principle." Moral judgment and analysis is beyond sense data,
or is "non-sense." If we do judge any ethical value, then it is based on our instinctive feelings about an act or its consequences,
without necessarily analyzing either the act (deontology) or its consequences (teleology). However, some ethical judgments are
useful even though non-sense, for they express emotions and help to persuade others to act in desirable ways. This view has
come to be known as Emotivism, a non-cognitive ethic that opposes the classical view that ethics is based on reason. Emotivists
hold that ethical statements are really expressions of emotions designed to influence people's behavior. Emotivism reduces all
ethical values and propositions to subjective feelings or emotional attitudes about them (Ayer 1936; Stevenson 1944). Another
non-cognitive ethical theory is Prescriptivism of R. M. Hare [The Language of Morals, Oxford University Press, 1952]. On the
other hand, cognitive ethical theories that deny objectivity of moral values and rules are not, for that purpose, included in our
taxonomy. Such major theories include Meta-ethics of G. E. Moore [Principia Ethica, Cambridge University Press, 1903],
Moral Skepticism of J. L. Mackie [Ethics: Inventing Right and Wrong, Penguin 1977], and Moral Nihilism of Gilbert Harman
[The Nature of Morality, Oxford University Press, 1977].

13
 It is conventional to distinguish between an act and the rule application of ethical theories. An act
application judges the morality of a strategy or an institution by applying a given moral principle directly
to the act, strategy or institution without any intermediary rules, while the rule application judges
morality only after verifying if the act, strategy or institution conforms to firm and publicly advocated
moral rules derived from moral principles.

In this Chapter, we invoke both act and rule applications of ethical theories. Moreover, since this
Chapter relates to ethical-moral reasoning for executives, and since by definition non-cognitive theories
do not emphasize reasoning, we will not deal with non-cognitive ethical theories. On the other hand, the
thrust of deontological, teleological and distributive justice theories is moral reasoning (Toulmin 1950),
and we invoke these three theories regularly.

Cognitive Ethical-Moral Theories

As stated earlier, Anglo-American ethics distinguishes at least three positions in judging the moral
rectitude of human actions (Schuller 1979):

a) The moral correctness of all actions is determined EXCLUSIVELY by its consequences - this is
utilitarian teleology or consequentialism, a moral philosophical theory that judges an act solely by its
consequences.
b) The moral correctness of all actions is ALWAYS ALSO, BUT NOT ALWAYS ONLY, determined by
its consequences, but also determined by certain principles, rules, rights and duties of involved
subjects. This is deontology or situationalism, a moral philosophical theory that judges an executive
act also by its antecedents, i.e., intentions or motivations that inform the act, and by the standards,
rights and duties that precede and characterize the act.
c) The moral correctness of AT LEAST SOME ACTIONS is in no way solely determined by their
consequences. That is, while teleologically an action may have positive net benefits, and
deontologically it may not violate any known moral principle, standard, right or duty, yet in the
distribution of its costs and benefits, rights and duties, the act may promote certain injustices.
Hence, the need for a third ethical system - that of distributive justice. The moral philosophy of
distributive justice looks first at the act itself, whether by its very nature it is geared to spread the net
costs or benefits equitably or proportionately across all social units affected by the act. Next, it looks
at the actual spread of costs and benefits in terms of equity and equality.

The other ethical theories such as Relativism, Egoism, Hedonism, Utilitarianism, Eudaimonism,
Formalism, Proportionalism, Situationalism and Existentialism discussed in ethics literature (e.g.,
Beauchamp and Bowie 1993; De George 1986; Ferrell and Fraedrich 1989; Velasquez 1992) might be
subsumed under the three major ethical theories, as indicated in Table 16.1. The taxonomy of Table 16.1
incorporates the act versus rule distinction of ethical-moral theories.

Deontological Moral Reasoning: Based on Rights and Duties

Deontology (deon in Greek is obligation) literally means the science of duty. It is a moral philosophy
that judges the rightness or wrongness of actions based on the rights and duties of individuals involved in
the decision or action, and on the intentions and reasons of those who decide and/or act. It argues that the
concept of duty is independent of the concept of good, and that right actions are morally not determined
exclusively by their consequences (Broad 1930). The essence of deontology is that some actions are right
or (wrong) for reasons other than their consequences. Hence, deontology may be construed as more
suitable to analyze the act than its consequences.

14
 Deontological theory is traceable to Immanuel Kant (1724-1804) and his seminal work Groundwork
of the Metaphysics of Morals (1964). Kant proposed two guidelines or “categorical imperatives”
(Velasquez 1992: 79-86):

• Principle of Universalizability: all moral norms or maxims must take the form of the following
categorical imperative: "Act so that the rule of your action can be the norm for all persons equally."
Act as if you are acting for humanity; that is, every act should be based on a reason that everyone
can act on, at least in principle.

• Principle of Reversibility: The action must be based on reasons that the actor would be willing to have
all others use to judge even the actor's action.

Both rules offer no actual ethical content but contain the form of pure disinterestedness or
universalizability that any moral rule must have in order to be truly moral (Frankena 1980). According to
Kant, an action is morally right for a person in a certain situation if and only if the person's reason for
acting is a reason the person would be willing to have every person act on in any similar situation.

Both rules, therefore, focus on a person's reasons and interior motivations, and not on the
consequences of the action. The form (intentions or reasons) of the act determines the morality of the act.
This position may be designated as formalism (Feinberg 1973, 1980; Frankena 1980).

Simpler and more practical versions of these two Kantian rules or categorical imperatives are:

• Treat others as they would have them treat you – the golden rule.
• Respect the dignity of every human being.
• Respect the fundamental human and moral rights of others.
• Treat people as autonomous persons with personal freedom.
• Treat all persons as ends in themselves and never only as means to your own ends.
• Treat subjects as capable of living their own lives and not as mere objects that exist for your
purposes.
• Cease treating employees as mere factors of production or mere “resources” to be managed.

Kant's formalist ethic in its original form is not practical. Psychologists maintain that pure altruism
does not exist, and hence, pure disinterestedness (Principles of Universalizability and Reversibility) is
more conceptual than real. The Kantian principles as stated are hardly applicable in real life. Exception-
less absolute rules are theoretically possible but historically non-existent (Fuchs 1984).

Thus, in determining human acts as right or wrong, deontologists invoke various principles such as
intuition or common sense (e.g., Ross 1930), social contract (e.g., Rawls 1971) or rights-based theory
(e.g., Nozick 1974, 1981). Rawls' (1971) version of Kantian formalism attempts to found morality on an
implied contract by which human persons agree to protect each other’s rights. Frankena's (1980) version
of Kantian ethic relies on the two principles of beneficence and justice to which all other moral rules can
be reduced. Different deontological theories compete with each other and with utilitarian theories, thus
offering more diversity of theory than in teleology.

Kant gave great importance to motives for acting—making the right decisions for the right reasons
being the ultimate goal. Kant was quite explicit regarding appropriate reasons for moral actions—that is,
moral obligation. An act performed for reasons of personal satisfaction (or the benefit of the firm) carries
less moral weight than it would if it were performed because of a duty to do so. Kant also argued that the
principles ought to be universalizable; that is, if everyone adopted the principle, it should not be self-
defeating. For example, if promise-breaking were to become universal law, promises would have no
15
meaning. The idea behind this prescription is that no moral code ought to apply only to oneself. Kant is
also credited with the idea that principles ought to be reversible, a notion well-captured by the Golden
Rule: “Do unto others as you would have them do unto you” (Jones, Felps, and Bigley 2007: 139).

Act versus Rule Deontological Reasoning

ACT deontologists argue morality from the act itself without the intermediary step of moral rules.
They affirm that there is some feature of the moral act rooted in its unique situations that must be taken
into account in its moral evaluation. This position may be construed as deontological act situationalism.
An extreme form of Situationalism is that of Jean Paul Sartre, often called existentialism. Sartre denied
the existence of divine laws, revolted against the injustice of positive (State) laws, and denied the power
of human reason to legislate for itself in advance of the unique situations that every individual must
confront (Jeanson 1980). Hence, he argued, the unique set of situations that every human act confronts
defines the morality of the act. In this sense, action precedes rule, reaction precedes law, and existence
precedes essence. This position is also called situationism.

RULE deontology, on the other hand, judges the morality of a given act by verifying if it upholds or
violates any derived moral rules. It may be studied under Formalism, Legalism, and Parenesis.4 All
systems are often invoked when intermediary or derived deontological moral rules conflict. Thus, it is
often difficult to know which principles are right, which are wrong, which are universally true, and which
can be applied right now for assessing the morality of a given action.

Rule deontological theories may be monistic or pluralistic. A monistic theory holds that there is a
single principle or rule (e.g., the Golden Rule: treat others as you would like others treat you), or the
"categorical Imperative" of Kant from which all other rules or judgments about right and wrong can be
derived. Thus Donagan (1977: 66) cites the principle: "It is impermissible not to respect every human
being as a rational creature" as the fundamental principle. Ramsey (1978) cites love or "covenant
fidelity" as the prime principle. Veatch (1981) argues the principle of equality to be monistic, while
Engelhardt (1986) considers the priority principle of respect for autonomy as his monistic principle.

Pluralistic deontologists affirm more than one basic rule or principle. Thus, Ross (1930) maintains
several basic irreducible principles such as fidelity, beneficence and justice. When principles conflict we
use various methods for reconciling them (e.g., Rawls 1971; Rescher 1966; Ryan 1942). Pluralists
arrange the principles of (distributive) justice in a serial or lexical order using the concept of "social
justice" (Ryan 1942), or the "principle of legitimate claims" (Rescher 1966), or the "principle of fair
opportunity" (Rawls 1971).

Deontological theory, in so far as it speaks of rights, includes contractual rights (Contractualism), or

legal rights (Legalism). All laws (criminal or civil), acts and ordinances bind. Legitimately promulgated
laws are a type of rule that we must follow, even when it does not promote happiness. For instance, we
have a duty to pay taxes, stop at red lights, obey traffic speed limits, and refrain from illegal drugs, even
though following these rules is not always pleasant, convenient or efficient. This law-based ontological
position may be called legalism. On the other hand, Contractualism or contractarianism as a theory of
social contract maintains that the ultimate determinant of the structure and performance of any society is a

4
Parenesis is closely connected to the lex praemians (the law that rewards) as opposed to the lex poenalis (the law that
punishes), to the lex praecipiens (the law that prescribes) and to the lex prohibens (moral law that prohibits). Normative ethics
calls for responsibility. Parenetic ethics exhorts and recommends and defines reprehensibility. Biblical parables, allegories,
metaphors and other literary forms are exhortatory or parenetic, while the commandments are normative (Spohn 1990).

16
set of reciprocal, institutionalized duties and obligations that are broadly accepted by its citizens. The
acceptance itself may be regarded as an implicit or explicit social contract.

Deontological theory speaks of "binding principles." It should be carefully distinguished from

parenesis, which refers to general exhortations that relate to ethical practice. Parenesis is thus different
from normative ethics. The latter binds, the former exhorts (Schuller 1979).

Industry conventions, market customs, and international trade agreements are often strongly
recommending or parenetic, but not legally binding. A company's agreed upon code of ethical behavior
or an association's code of conduct is more parenetic than normative. Some rules are based on our social
roles as parents (love and discipline children), neighbors (do not gossip about friends; do not blast your
radio or TV when living in close neighborhoods), athletes (workout regularly; obey the referee), students
(do not plagiarize or cheat), citizens (do vote), church-goers (do tithe), and the like. These are parenetic.
They are our social contracts.

Teleological Moral Reasoning: Based on Costs and Benefits

Teleology as a moral philosophy advocates that a corporate act is considered morally right solely if it
produces some decidedly desired results such as: pleasure over pain, benefits over costs, good over evil,
justice over injustice, win-win over loss-loss, profits over losses, growth over decline, development over
underdevelopment, employment over unemployment, prosperity over poverty, concord over discord,
harmony over disharmony, democracy over despotism, peace over war, life over death, and the like.

Teleology, particularly its version of consequentialist utilitarianism, judges the morality of corporate
conduct (e.g., hiring, firing, organizational downsizing, plant closings, massive labor layoffs), by
considering the positive and negative effects of executive actions. If positives clearly outbalance the
negatives, then the executive action is ethically justified by utilitarian considerations.5 While teleology,
and specifically utilitarian teleology, is future-oriented in terms of assessing consequences, deontology
examines the past antecedents and the present circumstances defining the act. Utilitarianism adopts a
teleological approach to ethics and claims that actions are best judged by their consequences. Thus,
according to this view, actions are not good or bad in themselves. Actions subsume moral value only
when one considers their effects on all people (De George 1999: 58).

We may trace the foundations of contemporary market capitalism to Adam Smith’s Book: The Wealth
of the Nations (1776). Smith’s ethical goals were dominantly utilitarian. He argued that economic
institutions should be arranged in ways that would promote the overall wealth of the nation, rather than
the personal wealth of royalties, nobilities and aristocracies. Smith argued that if society adopted certain
economic principles, such as those that we now call market capitalism, then the pursuit of individual self-
interest would as if “led by an invisible hand” result in greater prosperity for all. Smith was a utilitarian
who believed that a free market economy was the most efficient means to attain the utilitarian goals
(Hartman and Desjardins 2007: 68).

5
Utilitarianism has its roots in 18th and 19th century social and political philosophy. It is usually credited to David Hume
(1711-1776), A Treatise of Human Nature, (1771). The classical version of utilitarianism is represented by Jeremy Bentham
(1789), An introduction to the Principles of Morals and Legislation, and John Stuart Miller (1861), Utilitarianism. Two
important later developments of utilitarianism are those of Henry Sedgwick (1874), The Method of Ethics, and G. E. Moore
(1912), Ethics. Contemporary versions of utilitarianism include those of Richard Brandt (1963), “Toward a Credible Form of
Utilitarianism,” and R. M. Hare (1981), Moral Thinking. Limitations of Utilitarianism are discussed in Smart and Williams
(1982) and Miller and Williams (1982).

17
 Utilitarianism proposes that we should act in ways that produce better overall consequences than the
alternatives we are considering. In general, the “better” consequences are those that promote human well-
being such as happiness, health, dignity, integrity, freedom, and respect for all the people affected.
Teleology has spawned several versions depending upon the nature and scope of the utility value of the
results of the action. Major versions are:

• Egoism: Some desired results are exclusively personal, and when personal good takes primacy over
social good, this extreme teleological position is called egoism.

• Enlightened Egoism: when personal good is sought in conjunction with long-term social good, this
teleological position is called enlightened egoism.

Teleological enlightened Egoism primarily appears under three versions depending upon the specific
rule applied:

• Hedonism: when the social good desired is pleasure and gratification of the maximum number, this
position is Hedonism. In its crudest form, it maintains that human actions must be judged from their
capacity to arouse gratification either individually or socially. Hedonism reduces all utility values
ultimately to pleasure.

• Utilitarianism: when a teleologist defines that action right that maximizes total utility (personal and
social good) of the greatest number, this position is called Utilitarianism. Utilitarianism holds that an
executive action is right if it produces, of if it tends to produce, the greatest amount of good for the
greatest number of people affected by that action. Otherwise, the action is wrong. Alternately, an
act is ethical only if the sum total of utilities generated by this act is greater than the sum total of
comparable utilities produced by any other alternative to this act. As far as the utility concerned is
solely related to the consequences of an act and not the act itself, this utilitarian position is also called
consequentialism.

• Eudemonism: when the social good sought after is happiness and self-fulfillment of the maximum
number this position is Eudemonism.

This concept of happiness may also be translated as blessedness or prosperity; “it is the state of being
well and doing well in being well” (MacIntyre 1984: 148). Cooper (1985: 89), following Anscombe
(1958), translated eudemonia using a postmodernist term “human flourishing.” Human flourishing
implies the possession, use and fulfillment of one’s mature powers or natural capacities over a long period
of time. It maintains that the highest good or ultimate end of a human being is happiness, fulfillment,
beatitude, and human actions must be judged according to their relationship to this end. As long as the
action is conducive to happiness of all persons affected by it, it is ethical (J. S. Mill 1969: 36). The
ethical systems of Plato and Aristotle are eudemonistic.

Utilitarianism invokes a mixture of criteria for maximizing good. In so far as utilitarian theory
regards "justice" itself as one of the utilities to be maximized, not to the exclusion of other competing
utilities, some utilitarians classify distributive justice as a subset of utilitarianism. Utilitarianism was part
of the same social movement that gave rise to modern democratic market capitalism. Much of
neoclassical economics, and its embedded model of business and management, has its roots in utilitarian
thinking (Hartman and Desjardins 2007: 67). The emphasis on producing the greatest good for the
greatest number makes utilitarianism a social philosophy that provides strong support for democratic
institutions and market capitalism.

18
 A strong criticism of utilitarianism is that ethical and unethical acts are determined by their
consequences. That is, the end can justifies the means! Common sense tells us that under certain
conditions ends cannot justify the means. That is, there are certain decisions and actions that we must
undertake no matter what the consequences. Deontologically, we have certain duties or responsibilities
that we must fulfill, even when doing so would produce less overall happiness. The duty of parents for
disciplining children, the fidelity-duty of spouses unto each other, one’s professional duty (as a doctor,
lawyer, teacher) to confidentiality, one’s civic duties as a citizen, an employee’s loyalty to the company,
and the like are some actions that are ruled by the opposite rule: The ends do not justify the means. We
make certain commitments and we have certain duties that cannot be violated even if doing so would
increase the net overall happiness.

Business contracts and agreements are such commitments that we ought to honor even if the
consequences turn out unfavorable. There are certain actions, such as slavery, child labor, torture,
terrorism, unjust war, murder and the like that violate fundamental ethical principles of human dignity,
human respect, equality, justice, and charity. Such actions cannot be justified no matter what their
beneficial consequences. Some decisions must be based on deontological principles of rights and duties,
regardless of consequences. Alternately, there are certain principles or rules we ought to follow, even if
doing so could prevent good consequences from happening or even it results in some bad consequences.
In other words, the ends do not always justify the means. For instance, the presumed ends of preventing
attack on the United States may not justify using severe treatment bordering on torture to extract
information from the prisoners captured in Afghanistan and Iraq. The presumed end of saving Enron or
Satyam cannot justify the corporate fraud its CEO and CFO got embroiled in during 1999-2001 (in the
case of Enron) or 2005-2008 (in the case of Satyam).

Distributive Justice Based Moral Reasoning:

Justice is commonly defined as giving unto others what rightfully belongs to them (Rawls 1971).
Justice, therefore, deals with the deontological aspects of one's rights and duties in society. Minimally,
“good behavior” intends no harm and respects the rights of all affected and, accordingly, “bad behavior”
is willfully or negligently trampling on the rights and interests of others (Rawls 1985: 223-51). The way
justice is defined, determined and executed has certain teleological consequences on society. However,
standards of justice are generally taken to be more important than purely teleological or utilitarian
considerations (Rawls 1971: 3-4). For instance, slavery or child labor is unjust, even if it makes society
more productive. Moral rights of slaves and children to be free and equal cannot be sacrificed in order to
secure more benefits for the landowners or manufacturers.

According to Rawls, given the presence of others and our need of these others both to survive and to
thrive, ethics is elementally an ethic of justice, fair play, and equity. Hence, ethics has to do with
developing standards for judging the conduct of one party whose behavior affects another.

Justice is based on individual and moral rights, and the moral right to be treated as a free and equal
person lies behind the theory of distributive justice that benefits and burdens should be distributed equally
(Vlastos 1964). Thus, distributive Justice considers both deontological and teleological aspects of human
actions and consequences. While deontological distributive justice reviews the "act" for its proper
distribution of rights and duties among people affected by the act, teleological distributive justice looks at
the consequences of costs and burdens, to see if they are properly distributed among all people concerned.
Thus, distributive justice is construed as considering both the "act" and "consequences" of an (executive)
act.

19
 Justice and fairness are interchangeable terms, even though some (e.g., Rawls 1958: 67; Hare 1978:
119) consider the concept of fairness as more fundamental. Justice is fairness. It is giving each one one's
due. For instance, corporate executives act justly when they give customers and clients what they (or
their monies) deserve.

Justice confers an entitlement - a claim based on justice is an entitlement right. Injustice involves a
wrong where one has been denied that to which one is entitled. What persons are entitled to is based on
certain morally relevant properties they possess. Thus, one could deserve a promotion based on one's
established track record of loyalty, productivity and profitability. Another could claim federal welfare
based on one's naturally disadvantaging disabilities or historical circumstances. Both fairness and
entitlement (deserts) are central to the understanding of justice (Beauchamp and Childers 1989).

Aristotle (1985, Book V) distinguishes between universal justice and particular justice. The former
refers to the virtue of being a just or morally upright person who always does what is morally right and
obeys the law. Particular justice concerns specific situations, and Aristotle distinguished three such forms
- distributive, compensatory, and retributive. These three classic forms of particular justice or fairness are
distinguished, depending upon the specific moral rule or standard used:

• Distributive justice that deals with an equitable distribution of rights and duties, benefits and
burdens, and states that equals should be treated equally and unequals, unequally.

• Retributive justice that maintains that one should adequately reward a person for right done and
punish (blame) a person for wrong perpetrated.

• Compensatory justice that affirms that one should compensate the wronged person for the wrong
done by restoring the person to his/her original position.

Compensatory justice corrects "involuntary" wrongs such as those that result from accidents or
harmful products, and compensation should at least restore the wronged person to his/her original
equilibrium. Retributive justice corrects "voluntary" wrongs such as those resulting from assaults, sexual
harassment, crimes, and thefts. Besides compensating the victims, retributive justice prescribes adequate
punishment for the evildoer.

The classic theory of distributive justice is based on the minimum principle of distributive justice,
traditionally attributed to Aristotle. This principle states that equals must be treated equally, and
unequals must be treated unequally.6 In so far as distributive justice applies the Aristotelian rule, it may
be designated as rule distributive justice. As an elementary principle of formal justice or formal equality,

6
More precisely, the fundamental principle of distributive justice has been expressed as follows: "Individuals who are similar in
all respects relevant to the kind of treatment in question should be given similar benefits and burdens, even if they are dissimilar
in other irrelevant respects; and individuals who are dissimilar in a relevant respect ought to be treated dissimilarly, in proportion
to their dissimilarity" (Velasquez, 1992: 91). This principle does not specify the "relevant aspects". Are race, color, religion,
gender, age, nationality and the like "relevant aspects" in distributing jobs, taxes, health care, education, voting rights, holding
public office, property rights, and other resources among citizens? A "monistic" theory of distributive justice will invoke one
"relevant aspect" (e.g., human nature) as a guarantee for an equal treatment of all. Pluralistic theories of distributive justice will
claim multiple "relevant aspects." Thus Egalitarianists [e.g., Ake (1975), Nielsen (1978), and Vlastos (1964)] hold there are no
relevant differences and that all should be given exactly equal shares of society's benefits and burdens. Opponents of
egalitarianism [e.g., Bernard Williams (1962), Feinberg (1973), and Bowie (1971)] reject this as unjust and offer other "relevant
aspects" as basis for distributive justice (e.g., libertarianism, utilitarianism). Others arrange the relevant aspects in a serial or
lexical order based on "social justice" (Ryan 1942), "principle of legitimate claims" (Rescher 1966) or "principle of fair
opportunity" (Rawls 1971).

20
distributive justice applies to retributive and compensatory justice, and hence the latter two are considered
as subsets of rule distributive justice (see Table 16.1). As defined, compensatory and retributive justice
are concerned with correcting wrongs (Boatright 1993: 92). Basically, all wrongs are corrected using the
distributive justice rule.

The minimum principle of distributive justice is called "formal" justice (Feinberg 1973; Nielsen
1978) since it states no criteria for judging what can constitute or institute equality or inequality in a given
society, nor does it furnish criteria by which people can be classified as equals versus unequals. It merely
asserts that, regardless of what aspects or criteria are considered, no person should be treated unequally
among equals. Abstract or formal principles of justice can provide only rough guidelines when specific
actions must be taken. Moral argument is needed to affix the "relevant properties" against each case so
that proper material justice principle could be generated and applied.

Giving each one his or her due without any a priori moral rule is act distributive justice. If one
follows just one's intuition in (giving) distributing dues, this act distributive justice may be called
intuitionism (Ross 1930). If one uses no other principle other than love or "loving action" to determine
what belongs to whom, how and when, then this position is similar to situationism of Fletcher (1982).

The theory of distributive justice is particularly relevant when different people put forth conflicting
claims on society's rights and duties, benefits and burdens, and when not all claims can be satisfied. In
such cases, the standards of justice are generally taken more seriously than utilitarian considerations
(Hare 1978; Rawls 1958). For instance, slavery may be more productive and hence, moral as per
utilitarianism, but in as much as it violates the individual moral rights of slaves (to be free and equal
persons), it violates deontologist and distributive justice. The moral right to be treated as free and equal
person is the basic foundation of distributive justice (Vlastos 1962).

According to Ryan (1942), distributive justice looks at two important factors: a) What is distributed; b)
How it is distributed. What is distributed (e.g., healthcare, welfare, employment, unemployment
compensation) must itself be generated by production, whether one produces agricultural products,
manufactured goods and commodities, or information services (Ryan 1942: 181). On the other hand,
one's share of what is distributed would also depend upon one's differential claims and deserts (e.g.,
efforts, abilities, contribution, need, and merit). Distributive justice consists in treating people according
to each one's claim or entitlement as outlined in Exhibit 16.1.

Exhibit 16.1 includes some sub-theories of rule distributive justice, as well as those that are later
discussed. These well-reasoned comparative theories of rule distributive justice have been advanced to
determine how goods and services could be justifiably and unequally distributed. For instance,

• Egalitarianism emphasizes equal access to the goods of life that every rational person desires based
on need and equality.
• Libertarianism focuses on equal access to social and economic liberty, and invokes fair procedures
and free-market systems rather than substantive outcomes.
• Naturalist Justice rewards one's innate merit or ability.
• Utilitarianism invokes a mixture of criteria so that public utility is maximized.

As far as utilitarian theory regards "justice" itself as one of the utilities to be maximized, not to the
exclusion of other competing utilities, it classifies distributive justice as a subset of utilitarianism. Exhibit
16.1 provides the classical canons of Distributive Justice (Ryan 1942; Rescher 1966; Rawls 1971).

21
 Exhibit 16.1: A Schema of Distributive Business Justice Canons
Entitlement Relevant Justice Relevant Major Business Justice Problems: How do you reward
Based on Canon or punish based on this canon of distribution?
Stakeholder:
Equality Egalitarian Canon 1 of What is equality in a corporation?
Justice Equality What is equalizandum (should be equalized) in a firm (e.g., income,
opportunity, training, …) and among whom, and why?
Need Socialist Justice Canon 2 of What is customer or employee or supplier need?
Need What or who determines it and how? When and why?
Merit Evaluative justice Canon 3 of What is objective versus subjective merit among employees or
Merit executives? Is it contingent on circumstances? How do you assess it?
Ability Naturalist Justice Canon 4 of What is ability in a firm? Is it inherited, innate or DNA based?
Ability Is it cultivated by the organization? Among whom?
Effort Contributive Canon 5 of What is effort in a business context? How do you assess efforts of
Justice Effort workers naturally disabled, disadvantaged or mentally challenged?
Contribution Capitalist Justice Canon 6 of What is productivity? How measured? What if one’s age, gender,
Productivity race, nationality, history of oppression and suppression, chronic
poverty, and the like have affected contributive productivity?
Social Utility Social Canon 7 of What is common good in an organization? What is common, social
Libertarian Common Good or public utility? Who determines it and how? What is common good
Justice by the doctrine of Eminent Domain?
Market Individual Canon 8 of Is one’s market exchange value based on luck or serendipity? Then
Exchange Libertarian Supply- why reward it? What is a just system of supply or demand in a
Value Justice Demand competitive or unjust world? Or vice versa?

Rescher (1966) criticized all eight canons of Ryan (see Exhibit 16.1), and proposed his own, a
combination of all the above eight canons, and called it the Canon of Legitimate Claims. This canon
invokes the ethical principle of justice itself. Questions and issues about distributive justice arise mostly
in the assessment of how our social, economic and political systems distribute the benefits and burdens of
their activities over people affected by these activities. The major thrust of the principle of distributive
justice is to distribute benefits and burdens (costs) justly across concerned groups and members of
society. In some instances, a just distribution is one in which each person shares equally. This is the
stance of Egalitarianism that emphasizes equal access to the goods of life that every rational person
desires based on need and equality.7 In other instances, unequal sharing may be justified if the inequality
is in accord with some principle of distribution that promotes greater common good.

Distributive justice is comparative if it considers the distribution of costs and benefits to a given
individual not in absolute amounts but relative to others in the social system. When distribution of costs
and benefits is done individually with no reference to others, then this is non-comparative distributive
justice (Feinberg 1974, 1980). Thus, graduated income tax which taxes the wealthy more than the poor,
or tobacco and liquor taxes which tax the purchasers/users more for deterring excessive use are instances
of unequal sharing of burdens and comparative distributive justice. To the extent that wrongs done to one
are considered absolute or "non-comparative," retributive and compensatory principles of distributive
justice are non-comparative, and are classified, accordingly, in Table 16.5.

Rawlsian Concept of Social Justice

7 For a discussion of Egalitarian justice see Bedau (1971), McCloskey (1966), Nielsen (1979), Rawls (1958, 1971), and Vlastos
(1962). [See also footnote 11]. Moderate egalitarianism defines human equality relatively. Equality is not something fixed or
mathematical (e.g., sales tax common across all) but something relative or differential (e.g., graduated income tax). Equality
could be of rights or duties (deontological justice), of opportunity or prospects (Rawls), of risk, burdens, and benefits
(teleological justice), and of sacrifice or effort (canon of effort), access or consideration (retributive justice). The notion of "equal
share" or "equal treatment" is very important, though the relevant properties of an equal or fair share or treatment are far from
established.

22
 The American philosopher John Rawls has developed one of the most powerful and influential
accounts of justice (Hartman and Desjardins 2007: 81). Rawls (1971) proposes a contemporary version
of the social contract theory that understand basic ethical rules as part of an implicit contract necessary to
ensure social cooperation. His theory of justice has two major components: a) a method of determining
the principles of justice that should govern society, and b) the specific principles that are derived from (a).
Following Kant, Rawls proposes a society that recognizes its members as free and equal moral persons.
For Rawls (1958), questions of justice or injustice arise primarily when free and equally moral persons
attempt to advance their own interests and come into conflict with others pursuing their self-interests.
The key to a well-ordered society is the creation of institutions that enable individuals with conflicting
ends to interact in mutually beneficial ways to come up with a system of basic rules of social justice that
they all agree in and abide by. Fairness is the primary underlying value in the Rawlsian concept of
justice.

In arriving at this basic system of social justice principles, Rawls (1958, 1971) proposes the following
method, which is a version of the hypothetical social contract:

• The Veil of Ignorance: A fair decision or rule is an impartial decision. According to Rawls (1958),
equal rights are a fundamental element of social justice. A group with the greatest care and equality
is the only one that can arrive at fair decisions or equal rights or equal share. Hence, imagine
rational and self-interested individuals (as members of a constitutional convention) planning to
choose and agree on the fundamental social justice principles for our society. To ensure that the
principles are fair and impartial, imagine further that these individuals are ignorant of their social
standing (e.g., race, lineage, social talent, abilities, their social structure, and their social status in that
structure). This veil of ignorance will presumably empower them to generate fair and impartial
principles of social justice such as: all people are free and equal moral persons; treat each individual
as an end and not as a means.

• The Original Position: In the original position, individuals would demand as much freedom as
possible. However, no rational or self-interested individual would be willing to sacrifice his own
equality simply to secure more freedom for others. These conditions of impartiality constitute the
“original position” that guarantees that the principles chosen are fair. The idea of this “original
position” of having to make decisions behind a veil of ignorance, is at the heart of Rawl’s theory -
that fairness is the central element of a just decision or just organization (Hartman and Desjardins
2007: 81).

Given the hypothetical social constructs of the “veil of ignorance” and the “original position,” Rawls
(1971) developed a material libertarian justice principle called Fair Opportunism, which is another
version of comparative distributive justice. Fair opportunism implies two principles:

• Each individual should have an equal right to the most extensive system of liberties. This first
principle, therefore, argues that equal rights are a fundamental element of social justice.

• Benefits and burdens of a society should generally be distributed equally. An unequal distribution
could be justified only if it would benefit the least advantaged members of the society and only if
those benefits derive from positions for each person has an equal opportunity.

Differences between persons are relevant in distributional rules only if those persons are responsible
for and deserve these differences, or if they would benefit everyone. Fair opportunism maintains that no
persons should be granted social benefits on the basis of undeserved advantaging properties (e.g., white
color, male gender, aristocracy, blue blood or nobility) because no persons are responsible for having
these properties, and that no persons should be denied social benefits on the basis of undeserved
23
disadvantaging properties (e.g., blacks, minorities, congenitally disabled) because they are also not
responsible for these properties. Properties distributed by the lottery of social and biological life are not
grounds for morally acceptable discrimination between persons, if they are not the sorts of properties that
people have a fair chance to acquire or overcome. Both principles of fair opportunism can ground
specific socio-economic policy conclusions such as affirmative action, banishing slavery, criminalizing
child labor, differential tax policy, and executive compensation, unemployment compensation, and
government regulation.

Principle of Non-malfeasance for Corporate Executives

The principle of non-malfeasance inscribed in the Latin dictum "primum non nocere" (above all, do
no harm) states that an act should do no harm to anyone at any cost and at any time. This principle, often
proclaimed as the fundamental principle in medical ethics, is incorporated in the Hippocratic Oath both as
a combined principle of non-malfeasance and beneficence: "I will use treatment to help the sick according
to my ability and judgment, but I will never use it to injure or wrong them".

Hart (1961: 190) invokes the principle of non-malfeasance as a rule-utilitarian maxim. "The common
requirements of law and morality consist for the most part not of active services to be rendered but of
forbearances, which are usually formulated in negative form as prohibitions. Of these the most important
for social life are those that restrict the use of violence in killing or inflicting bodily harm." Others (e.g.,
Rawls 1971: 114; Ross 1930: 21-36) claim the principle of non-malfeasance as a rule-ontological theory
of duty-ethics that obliges all to beneficence. 8 We prefer to classify it under the ethic of distributive
justice since non-malfeasance looks both at the act itself and its consequences, with an added emphasis on
the just distribution of rights/duties and benefits and burdens prior and during the act, and just distribution
of costs/benefits after the act. In so far as the principle of non-malfeasance relates to individual acts, it is
an instance of non-comparative distributive justice. The principle of non-malfeasance as applied to any
act can imply four elements (Frankena 1973: 47):

• The act should not inflict evil or harm: strict liability justice or non-malfeasance justice;
• the act should prevent evil or harm: preventive justice;
• the act should remove evil or harm: protective justice;
• The act should do or promote good: beneficent justice.

The fourth element may not amount to a moral obligation, and constitutes the principle of
beneficence. The principle of non-malfeasance is primarily incorporated in the first element. The
remaining three elements are more principles of beneficence than of non-malfeasance. Preventing harm
and removing harm are alternate forms of promoting good (Frankena 1973). Table 16.5 classifies
preventive, protective and beneficent justice under comparative distributive justice since they reflect the
principle of beneficence, which is a comparative concept.

8 Ross (1930: 21-32) regards "not injuring others" as synonymous with the principle of non-malfeasance. Some type of moral
rules of non-malfeasance (e.g.: "Do not cause pain," "Do not disable," "Do not deprive one of freedom,") could be formulated as
far as the seriousness and comprehensiveness of the specific harm is concerned and some priority can be assigned to them. The
highest priority should be accorded to those that involve serious magnitude of harm such as death, blackmail, rape, capture,
captivity, or invasion (Davis 1980). Gert (1973, 1992) justifies a moral system or morality that applies to all moral agents based
on rules prohibiting causing five harms that all rational persons want to avoid: 1) do not kill; 2) do not cause pain; 3) do not
disable; 4) do not deprive freedom (of opportunity), and 5) do not deprive pleasure. To these Gert (1992) adds five more, failure
to follow which increases harm: 6) do not deceive; 7) do not break your promise; 8) do not cheat; 9) do not break the law and 10)
do not neglect your duty.

24
 The concept of "harm" needs explication. When X harms Y, the term "harm" may mean many things
such as X wronged Y, X treated Y unjustly, or that X invaded and thus thwarted, defeated, or set back Y's
interests (Feinberg 1984: 32-36; Gert 1973). Similarly, the companion word "injury" may mean many
things such as harm, disability or death on the one hand, or injustice or wrong on the other. Thus Ross
(1930: 21-32) regards "not injuring others" as synonymous with the principle of non-malfeasance.

Procedural Justice: Standards and Procedures

Pre-emptive and protective justices are really subsets of procedural justice, which, in turn, is a subset
of distributive justice. Procedural justice demands that structures and procedures be set up in society
which are just and which produce just outcomes. Structures and procedures are relative to each group,
society, state or country. Hence, procedural justice is another instance of comparative distributive justice.

A distinction is made between 'just procedures' that ensure just outcomes (procedural justice) and 'just
results' (consequential justice). In some cases, just procedures are solely sufficient to ensure just results
(e.g., state lottery procedures that result in fair outcomes). In some cases procedures may be just, but not
the results. For instance, despite excellent and objective legal jurisprudence and procedures, one may
occasionally punish the innocent or acquit the guilty.

Sometimes, just results may stem from unjust or imperfect procedures, when, for example, a society
may create a legal system that protects more the innocent than punish the guilty. Distributive justice that
looks at both the act (procedures) and the results (consequences) implies both procedural justice and
consequential justice. The latter two forms of justice are often called "justice principles" (Mascarenhas
1990: 219). If we follow Case 16.3, the superrich billionaires (“just” results) may come from just
processes (e.g., creative innovations, timely market entries, market success, market luck or serendipity) or
from unjust procedures (e.g., unjust bidding processes, unfair license grants, money laundering, or just
fraudulent accounting practices).

Part II: Deriving Moral Rules from Ethical Theories for

Assessing Morality of corporate Decisions
Given the taxonomy of ethical-moral theories detailed in Part I, the corporate "act" is morally
assessed best by deontological principles, the corporate "consequences" are best evaluated by teleological
principles, while the entire system of "personal ethical inputs," "corporate ethical inputs," "ethical
process" and "ethical outputs" can best be analyzed holistically based on distributive justice principles.

Distributive justice theory when applied to assess the morality of business conduct takes into account
the whole process of executive action: inputs (antecedents and determinants), process (the act with
concomitants), and outputs (results or consequences). In as much as distributive justice theory looks into
rights and duties, intentions and objectives of an act, this theory has deontological dimensions. In as
much as it evaluates consequences of the act in terms of its costs and benefits to different stakeholders,
distributive justice bears teleological properties. Finally, in as much as it prescribes responsibility and
accountability for these consequences, distributive justice prescribes a just distribution of net benefits and
burdens of executive acts.

Moral Rules, Axioms and Corollaries from Ethical-moral Theories

25
 Moral philosophy concerns human conduct. It contains moral theories, moral principles, moral
standards and rules that help people arrive at right moral judgments, decisions, and actions, and to avoid
wrong or unethical judgments, decisions, and actions (see AOL5). Business ethics as a science of
business or corporate conduct is also governed by ethical-moral theories, moral principles, moral
standards, and moral rules that can help executives arrive at right (ethical) judgments, decisions and
actions, and avoid wrong (unethical) judgments, decisions and actions. In the remaining sections of this
Chapter, we gradually unfold and justify the taxonomy of deontological, teleological and distributive
justice ethical-moral theories and sub-theories, and derive from them useful moral rules for assessing
turnaround executive decisions and actions.

Webster's Unabridged Dictionary defines "rules" in about eleven meanings, (1983: p. 1584) three of
which are pertinent here:

1. An established guide or regulation for action or conduct;

2. A fixed principle that determines conduct, habit or custom;
3. A criterion or standard.

The same Dictionary (p. 132) distinguishes three meanings of the word "axiom" (in Greek axioma =
authority):

1. A self-evident truth or a proposition whose truth is so evident at first sight that no process of
reasoning or demonstration can make it plainer; e.g., the whole is greater than a part;
2. An established principle in some art or science; a principle received without new proof;
3. A statement universally accepted as true; a maxim. We use the word "axiom" in the first and
the third sense.

The word "corollary" has also three meanings (Webster's Unabridged Dictionary 1983: p. 408):

1. A proposition which follows from another that has been proved;

2. An inference or deduction;
3. Anything that follows as a normal result; e.g., improved health is a corollary of slum clearance.

We use the word corollary in its second or third meaning. The usefulness of axioms and assumptions
in scientific and social inquiry and research has never been questioned, but scholars still debate the
concept and content of both axioms and assumptions. In order to understand axioms and assumptions as
used in modern scientific inquiry, one needs the notions of "fundamental" and "derivative" laws. Hempel
(1965) suggested that all law-like statements in any theory could be categorized as either fundamental or
derivative. The fundamental laws of a theory (e.g., Newton's laws of thermodynamics) are those that are
used to deduce other laws (e.g., Kepler's laws of planetary motion). Fundamental laws cannot themselves
be deduced from other laws in the same theory. The fundamental laws are the "axioms" of that theory
and derived laws are often "theorems."

The derivative laws of a theory are deduced from its axioms. Laws that are fundamental in one
theory may be derived (as theorems) in some other theory (e.g., Newton's laws of mechanics can be
derived from Einstein's Theory of Relativity). Hence, the fundamental versus derivative (axioms versus
theorems) categorization is theory-specific. Being law-like, axioms are "analytically" true, but they can
be empirically tested. Axioms are "assumed" to be true for strictly analytical purposes. That is, we
assume axioms to be true for the purpose of generating derivative laws (or moral rules in our case) and
other obligation-propositions. We assume axioms to be true for the purpose of constructing theory rather
than evaluating a theory [see Hunt 1991: 129-131 on which this concept of axioms and assumptions is
based].
26
 Given the formal language of deontological, teleological and distributive justice ethics, and some
fundamental axioms, we will "axiomatize" 9 or derive some fundamental statements or propositions that
will directly help us in assessing executive decisions and actions in general, and corporate outcomes and
strategies in particular.10 Theoretically, many statements may be generated, but one must select just a
few. Popper (1959: 71) provides four criteria for selecting appropriate fundamental statements
propositions:

1. They should be free from contradiction or internally consistent (i.e., mutually exclusive outcomes
or statements cannot be deduced from the fundamental statements);
2. They should be independent: no statement in the final set of fundamental statements can be
deducible from the other statements;
3. They should be sufficient: all statements which are part of the theory proper can be derived from
the set of fundamental statements; and
4. They should be necessary: there should be no superfluous statements; all the statements in the
fundamental set are used to derive other statements.

The process of formalization normally starts after the theory has been proposed. Any premature
formalization of a theory can actually inhibit scientific creativity. The complete formalization of a theory
is a very difficult (if not impossible task), and hence, few theories in any science have been fully
formalized.

Applying Deontological Theories and Moral Rules

Deontological theory does not deny the fact that many actions must be often judged teleologically by
“ends” or results. It denies, however, that this is generally the case. While teleology, and specifically
utilitarian teleology, is future-oriented in terms of assessing consequences, deontology examines the past
antecedents (such as "personal ethical inputs" and "corporate ethical inputs," see Figure 16.2) and the
present circumstances defining the act. Thus, it asserts that some actions must be judged by several
(non-consequential) "means" such as one's personal commitment and obligations, one's intentions or
motivations, one’s relationships between persons (e.g., customer loyalty, business affiliations, sanctity of
contracts) involved in the act, and the like, no matter what the future ends or consequences are. Given
technology, domestic and international competition, and other market forces, one could not always
foresee or control the future consequences of one's executive actions. But one can certainly control its
antecedents and concomitants, especially one's motives, goals and objectives. Corporations and

9
A theory goes through many stages before it is fully developed and accepted. It should first have some formal language - in our
case the language of ethics and ethical theories. Next, it should have some axioms or fundamental laws that are assumed to be
true for analytical purposes. Next, we need to combine axioms and the formal language by using certain "transformation rules"
to generate statements - a process called axiomatization. Lastly, the axiomatic formal language system becomes a fully
formalized theoretical system through a complete system of semantic rules of interpretation. Thus, a fully formalized theoretical
system consists of a formal language system that has been axiomatized and completely interpreted. The axiomatization of a
formal language requires the adoption of rules of transformation and the selection of appropriate fundamental statements or
axioms. Transformation rules detail how axioms and formal language can be combined to generate rules or propositions in the
system.
10 An axiomatic formal language system becomes a fully formalized theoretical system when a complete set of appropriate
semantic rules of interpretation of the terms in the formal language have been developed. Given that theories are used to explain,
predict and therefore control phenomena, the elements in a theory must somehow be linked to observable objects, their properties
and events in the real world. The semantic rules of interpretation that accomplish this linkage are referred to as operational
definitions or measures, correspondence rules or epistemic correlations [See Ernest Nagel (1961), The structure of Science, New
York, NY: Harcourt Brace Jovanovich, p. 93].

27
employers have special antecedent moral obligations to their employees and customers, independent of
the general consequences of their operations, products and services. Deontologists are convinced that
there are actions that, independent of any extenuating circumstances or positive net benefits, are morally
wrong if they violate certain rights of social units affected by the act.

In judging a corporate or executive "act," the following deontological axioms and rules may be
derived from our discussions under Part I:

Axiom 1:

1.1 An executive act is judged by its intentions.

1.2 Intentions are principles and/or motivations "informing" the act.
1.3 Intentions as principles could be true or false, particular, universal, or universalizable.
1.4 Intentions as motivations could be good or evil, right or wrong.
1.5 An executive act should be based on motivations every one can act on (Principle of
Universalizability), and on intentions that the executive would be willing to have all other
executives use, even as a basis to judge one's act or action (Principle of Reversibility).

Rule 1: This moral rule is based on the Kantian categorical imperative principles of universalizability
and reversibility.

R01: An executive act is moral if its underlying intentions, motivations, or grounding moral principles
are universalizable and reversible.
Axiom 2:

2.1 An executive act is also judged by the reasons that ground it.
2.2 Some reasons of the agent may be moral convictions.
2.3 An executive act should be based on moral reasons everyone can act on (Principle of
Universalizability), and on reasons that the executive would be willing to have all other
executives use, even as a basis to judge his or her action (Principle of Reversibility).

R02: An executive act is moral if one's underlying reasons or moral convictions for the act are
universalizable and reversible.

This moral rule is also based on Kant's categorical imperative principles of universalizability and
reversibility, according to which an act is also judged by the reasons that ground it. Some reasons of the
agent should be universal moral convictions. Application of rules R01 and R02 presupposes high levels
of executive's cognitive, moral, and personality development (see Figure 2.1). Since both rules are based
on "formal" principles of Universalizability and Reversibility, rarely realizable in actual practice, a
derived rule having a direct ethical content is suggested:

Axiom 3:

3.1 Every right has a corresponding duty.

3.2 Some rights/duties are personal - they belong to one as a human being or person.
3.3 Some rights/duties are social - they belong to one as a member of a given society.

R03: An executive act is ethical if it does not violate personal or social rights of any of its
stakeholders, especially the underprivileged. This act may not be necessarily moral since social
rights could be arbitrarily defined.

28
 Violating rights of stakeholders is a practice that cannot be universalized or reversed. An executive
act based on R03 may not be necessarily moral since social or positive rights could be arbitrarily defined.
Corporations and employers have special moral obligations to their employees and customers,
independent of the general consequences of their operations, products and services. Deontologists are
convinced that there are actions that, independent of any extenuating circumstances or positive net
benefits, are morally wrong if they violate certain rights of social units (e.g., stakeholders) affected by the
act.

R04: An executive act is moral if it upholds personal rights of the decision makers and/or actors
themselves.

There can be some situations when two or more rights or duties may conflict with each other. For
instance, one's duty of loyalty to the company may conflict with the duty of whistle blowing. Not all
rights and duties bind equally or universally. Rights of the underprivileged (poor, disabled, minorities,
employees, dependents) should prevail over those of the privileged, since the former are powerless to
defend themselves. When confronted with conflicting rights or duties, it is moral to act letting the
situation with all its circumstances define whose rights should prevail, however, after giving additional
protection to the rights of the marginalized and underprivileged.

Application Rules under Situationalism

There can be some situations when two or more rights or duties may conflict with each other. For
instance, one's duty of fidelity to the spouse may conflict with the duty of justice (e.g., the spouse is
unfaithful or incorrigibly addicted). Similarly, is one bound to be honest, even when such an action can
hurt a third party? For example, by honestly denouncing one's boss for wrongdoing, one may jeopardize
the trust that other subordinates have on the boss. In such cases one could follow situationalism; that is,
do the best under the unique situational circumstances.

In the early 1960s, Dr. Joseph Fletcher, Dean of St. Paul’s Cathedral in Cincinnati, Ohio, published a
book called Situation Ethics, in which he maintained that love was the only viable standard for
determining right from wrong. According to Situation Ethics, right or wrong is determined by the
situation, and love can justify anything (e.g., lying, cheating, and even murder). This pragmatic approach
appealed to many constituencies such as politicians, moralists, theologians, educationists, and especially,
the business world. The result is ethical chaos – everyone has one’s own standards that change from
situation to situation. This is ethics in reverse – whereas once our decisions were based on ethics, now
ethics are based on our decisions (Maxwell 2003: 8). If it is good for me, then it is good for all – this is
Egoism revisited.

Axiom 4:

4.1 Not all rights and duties bind equally or universally.

4.2 Rights of the underprivileged (poor, disabled, minorities, employees, dependents) should prevail
over those of the privileged.

R05: When confronted with conflicting rights or duties, it is moral to act letting the situation with all
its circumstances define whose rights should prevail, however, giving additional protection to
the rights of the underprivileged.

Applying Existentialism
29
 Existentialist morality consists in being responsible, that is, in "responding" to life's situations in one's
own way and accepting the consequences without blaming anyone else. Plausible as this system of
morality may seem, it is not always realistic, since in one's moral life one most often uses some moral
rules or general norms to assess the situations one confronts while acting. But Existentialism does
provide some useful direction to executive action.

Axiom 5:

5.1 In doubt, liberty (or act freely). [In dubio, libertas].

5.2 But act as if you are acting for all humanity (Kant).
5.3 They only can act for humanity who are known for their moral character (Hauerwas 1981).
5.4 Act first, and rightness will follow (Kant).

R06: If after serious investigation one still doubts which principles are right or which principles bind
more universally than others do, then one is morally permitted to act, as long as the agent owns
the consequences.

Applying Formalism, Legalism and Parenesis

Kant's formalist ethic in its original form is not practical. Psychologists maintain that pure altruism
does not exist, and hence, pure disinterestedness (Principles of Universalizability and Reversibility) is
more conceptual than real. Exceptionless absolute rules are theoretically possible but historically
non-existent (Fuchs 1984). Laws are made for humankind, but not vice versa. Rawls' (1971) version of
Kantian formalism attempts to found morality on an implied contract by which human persons agree to
protect each other’s rights. Frankena's (1980) version of Kantian ethic relies on the two principles of
beneficence and justice that all other moral rules can be reduced to.

Axiom 6:

6.1 Laws (e.g., Sabbath) are made for people, and not vice versa.
6.2 All legitimately promulgated laws bind.
6.3 Conscientious objection to binding laws is valid under certain circumstances.

R07: An executive act is legal if it does not violate relevant national, state, and local industry laws.

Such an act may not be necessarily ethical or moral since some laws may not have any ethical
content (e.g., zonal laws, traffic laws). Laws and duties are necessary, but what makes laws and duties
righteous or obligatory is "their helpfulness in guiding prudential decisions to successful goal
achievement" (Ashley and O'Rourke 1989: 161). Certain countries de-criminalize abortion or mercy-
killing or even make them lawful, but that does not make the laws or their subsequent applications ethical
or moral.

R08: An executive act is ethical if it does not violate any contractual duties that bind.

Such an act may not be necessarily ethical or moral. Most contracts bind under industry laws. A
contract between two or more parties is valid if all the parties have full knowledge of the terms of the
contract properly represented to them, if they enter the contract freely, and if the contract is not for an
unethical or immoral act. Human freedom is expanded by the recognition of contractual rights and duties
(Rawls 1971). A person has a duty to honor one's contracts, and thus treat the other contracting parties as
an end, and not as means to an end. Failing to honor one's contract is a practice that cannot be
universalized (Kant 1964).
30
 Axiom 7:

7.1 Corporate codes of conduct exhort - they are parenetic.

7.2 They signify, symbolize and represent corporate will.

R09: An executive act is ethical if it fulfills corporate code of conduct. It may not be necessarily
moral.

Applying Teleological Principles

Teleology in its popular version of Consequentialism states that all actions must be judged
exclusively by all their foreseeable consequences (Anscombe 1958; Knauer 1979). Consequences as
results or effects of deliberate (human) actions can be good or evil, harmful or safe, just or unjust, or fair
or unfair. Consequences can be personal or social, national or international.

An objective teleological assessment of an executive action would imply that one can:

a) Foresee all the major or critical, present and future consequences, even consequences of
consequences of the action.
b) Pre-estimate their impact on various people concerned: individuals, groups, society, organizations
and environment.
c) Ascertain that consequences are willed explicitly, and which implicitly built in.
d) Judge the net benefits of the willed action.
e) Look for other alternative actions that can do better.
f) Accordingly, judge the merits of this action.

All six steps call for serious research and objective reflection. There could be lingering doubts
whether all consequences have been foreseen, and if their impact on all actors concerned has been
pre-assessed. Lack of time and data, inadequate investigating skills and subjectivity, and lack of
monetary resources often make proper application of teleology very difficult, if not impossible. Given
technology, domestic and international competition, information-intensive and turbulent environments
(Glazer 1991; Glazer and Weiss 1993), one could not always foresee nor control the consequences of
one's executive actions. Hence teleology has spawned many versions (e.g., egoism, utilitarianism and
eudaimonism), each trying to render teleology more practical than the other.

Axiom 8:

8.1 Consequences are results or effects of deliberate (human) actions.

8.2 Consequences can be good/evil, harmful/safe, just/unjust, or fair/unfair.
8.3 Consequences can be personal or social, national or international.
8.4 Consequences can be satisfactory or dissatisfactory.

R10: An executive act is ethical if it generates satisfaction or gratification to the maximum number of
stakeholders (Hedonism of Jeremy Bentham).

R 10 may not be necessarily moral since "satisfaction" is subjective.

R11: An executive act is ethical if the sum total of its utilities is greater than the sum total of utilities
produced by any comparable or competing alternative act (utilitarianism).

31
 An act based on R11 may not be necessarily moral since "utility" is relative to each person.
However, the following corollaries are more practical and applicable versions of R11:

R11a: An executive act is ethical if it maximizes utility to the maximum number of stakeholders
(Utilitarianism of John Stewart Mill).
R11b: An executive act is ethical if it minimizes the harmful effects of its consequences to the maximum
number of stakeholders (Consequentialism of Elizabeth Anscombe).

Utilitarianism of the consequences is not always a safe rule to follow. Some things should (or cannot) be done
no matter what the consequences. At least we should minimize harm of the consequences to all innocent
stakeholders

Two Corollaries follow:

C 01: It is unethical to select an act that leads to an inefficient use of resources.

C 02: It is unethical to engage in an act that leads to personal gain at the expense of the society in
general (Ferrell and Gresham 1985).

R12: An executive act is ethical to the extent that it makes the greatest number happy or fulfilled.
(Eudemonism of Aristotle).

Such an act may not be necessarily moral since "happiness" is relative to people experiencing it.
However, much would depend upon the definition and content of happiness. As discussed earlier, if
happiness is blessedness or prosperity of all human beings, then it becomes more ethical and moral
(MacIntyre 1984: 148). Cooper (1985: 89), following Anscombe (1958), translated eudemonia using a
postmodernist term “human flourishing.” Human flourishing implies the possession, use and fulfillment
of one’s mature powers or natural capacities over a long period of time. It maintains that the highest
good or ultimate end of a human being is happiness, fulfillment, beatitude, and human actions must be
judged ethical and moral according to their relationship to this end. As long as the action is conducive to
happiness of all persons affected by it, it is ethical (J. S. Mill 1969: 36).

Rules derived from Applying Distributive Justice Principles

We act justly when we give a person what he or she deserves. Justice confers an entitlement - a claim
based on justice is an entitlement right. Injustice involves a wrong where one has been denied that to
which one is entitled. What persons are entitled to or can legitimately claim is based on certain morally
relevant properties they posses. Thus, one could claim a Ph.D. based on demonstrated academic
excellence, independent capacity for scholarly research and for advancing the field of knowledge. One
could deserve a promotion based on one's established track record of loyalty, productivity and
profitability in one’s company. One could claim federal welfare based on one's naturally disadvantaging
disabilities or cruel historical circumstances. Both fairness and entitlement (deserts) are central in the
understanding of justice (Beauchamp and Childers 1989).

Equally important is the notion of "equal treatment," though the relevant properties of an equal or
fair treatment are far from being established. The principle of need declares that a distribution based on
need is just, but does not specify what need is. The principle of need is often designated as a material
principle, as it provides material content or specification to the formal or more general principle of
distributive justice. Material principles specify relevant properties that one must possess in order to
qualify under a particular distributive principle. Thus, if one speaks only of fundamental needs, (those
needs which if not granted the person may be harmed or detrimentally affected in a fundamental way),
then, by the material principle of (fundamental) need, it is unjust, for instance, to deny food to the mal-
32
nutritioned, shelter to the destitute homeless, asylum to the refugees and economic migrants (see “Boat
People” under Case 1.2), health care to the critically ill, or education to the illiterate. The notions of
fundamental need and need for primary (basic) goods could serve as a valid starting point for a full theory
of distributive justice. By contrast, if one accepts only a principle of free-market distribution, then one
would be opposed to the use of a principle of need for developing public policy.

Principles of Distributive Justice

Some well-reasoned principles of rule distributive justice (e.g., Egalitarianism, Libertarianism,
Utilitarianism, and Fair Opportunism) have been advanced to determine how goods and services could be
justifiably distributed unequally. These principles help choosing between social arrangements that
determine a uniform or equitable distribution of rights and duties, benefits and burdens across all
members of the society. These principles "provide a way of assigning rights and duties in the basic
institutions of society and they define the appropriate distribution of the benefits and burdens of social
cooperation" (Rawls 1971: 4).

In Part I, we briefly reviewed some well-known principles, such as those of Aristotle (1985), Ryan
(1942), Rescher (1966), and Rawls (1971). There are problems associated with all modes or canons of
distribution. The acceptability of any theory of justice would depend upon the quality of its moral
argument that some one or more selected material criteria or distributive principles ought to be given
priority or exclusive consideration over others.

The following eight material principles of distributive justice are presumptively valid based on
entitlement and fairness (Ryan 1942; Rescher 1966):

Axiom 9: Distribute common good (e.g., jobs, electricity, drinking water, basic food groceries):

9.1 To each person according to one's equality - egalitarianism.

9.2 To each person according to one's need - socialist justice.
9.3 To each person according to one's merit - evaluative justice.
9.4 To each person according to one's ability - naturalist justice.
9.5 To each person according to one's effort - retributive or personalist justice.
9.6 To each person according to one's contribution - capitalist justice.
9.7 To each person according to one's social utility - social libertarianism.
9.8 To each person according to one's free-market value exchange - individual libertarianism.

Based on Axiom 9 and other considerations of distributive justice, the following rule is formulated:

R13: An executive action is ethical if it at least treats all equal stakeholders equally, and unequals
unequally (egalitarian justice).
This rule is based on the Canon of Equality that invokes the ethical distributive principle of
egalitarianism. Justice is a kind of equality (Aristotle 1985), but what sort of equality justice is, is still not
clear. Egalitarianism does not define what equality is. An extreme form of Egalitarianism advocates that
all people should be treated exactly alike.

R14: An executive action is ethical if it treats all stakeholders at least according to each one's need.
This moral rule is based on the Canon of Need that invokes the ethical principle of socialism. But
this canon does not specify what needs are, whether they are real, felt, or desired. Who decides one's
needs? Should society take care only of present needs or also of the immediate future? Or, if one speaks
only of fundamental needs, (those needs which if not granted, the person may be harmed or detrimentally
33
affected in a fundamental way), then by this canon it is unjust, for instance, to deny food to the mal-
nourished, asylum or shelter to the critically homeless, health care to the critically ill, or education to the
illiterate.

R15: An executive action is ethical if it at least treats all stakeholders according to each one's merit or
ability.
This moral rule based on the Canon of Ability or Merit invokes the Aristotelian principle of natural
aristocracy or naturalist justice. This canon does not define what abilities are. Thus, natural or innate
abilities are more gifts than one's merits. If natural ability or merit alone is a criterion, then this canon
may reward workers with great innate ability but who exert little effort, which violates the canon of effort.
Acquired or demonstrated abilities as determined by one's achievements may be merits, but if justice is
distributed according to one's demonstrated abilities or contribution, then this canon is reduced to that of
productivity.

R16: An executive action is ethical if it treats all stakeholders at least according to each one's effort.
This moral rule is based on the Canon of Effort that invokes the puritanical principle of work ethic:
one's assets and acquisitions should be in proportion to one's labors. This canon does not define what
efforts are, whether they are fruitful or futile efforts, well-directed or misguided efforts, planned or
unplanned efforts. Should efforts be rewarded regardless of their achievements? This may imply labor
disincentives. Should efforts be rewarded even though ill-willed or misguided? This fails to make a
distinction that makes a difference. The canon of effort may reward workers with less ability but who put
more efforts to make the same contribution as the more able, thus violating the canon of merit or ability.
What if one’s country or economy or job does not provide opportunity to stimulate one’s efforts, as it
often happens in the developing countries?

R17: An executive action is ethical if it treats all stakeholders at least according to each one's
contribution.
This moral rule based on the Canon of Productivity invokes the economic principle of free-enterprise
capitalism. This system rewards services rendered, capital advanced, risks run, and profits generated. As
with other canons discussed earlier, this canon also does not define what productive contributions are.
Thus, productive contributions could be a function of chance, serendipity, or even one's physical power.
For instance, two persons of differing physical strengths and stamina, but spending equal time on the
same job with the same technology, may produce variedly, one more than the other, and thus claim
differential rewards. The higher reward is owed to one's superior strength (which may be genetic and
undeserved), and not to one's level of productivity or personal efforts. What if disabled, aging, or
unskilled persons cannot produce? What if one is not given an opportunity (e.g., gainful or meaningful
employment) to produce?

R18: An executive action is ethical if it treats all stakeholders at least according to each one's
contribution to the common good.
This moral rule invokes the Canon of Social Utility (common good) that distributes surplus (e.g.,
wages, profits, jobs, land, welfare) according to one's value to society or the common good. Common
good may be either collective ("pro bono publico" or social utility) or individual (personal utility). This
canon does not define what common or individual social good is. Social good, even though common, is
relative: it changes with technology, the economy, consumer lifestyles, cultures and sub-cultures. The
primacy debate between individual and social good is far from settled: for instance, whether an individual
could be sacrificed for a public common good that one does not believe in, or has conscientious objection
to. On the other hand, should society be sacrificed for one individual's vision of common good as Adolf

34
Hitler did? Moreover, one's best prospects for advancing common good or public welfare may often be
circumstantial, situational, locational, inherited (aristocracy), or in general, undeserving.

R19: An executive action is ethical if it at least treats all stakeholders according to each one's market-
exchange value.
This rule is based on the Canon of Supply-Demand that distributes wealth according to the market
evaluation of one's socially useful contributions. This canon invokes the economic principle of
laissez-faire that defines (socially) useful contributions by the law of supply and demand. For example,
the market reward more scarce skills; more desirable skills (e.g., athletic or entertainment capacities) are
paid better as they respond to higher popular demand, and accordingly generate more profits. The reward
is not based on the intrinsic merit of the contribution, but upon the community (market forces) that
considers such contributions desirable, essential or necessary. Hayek (1960) argues that since we cannot
know enough about each person's situation to distribute to each according to one's (moral) merit, in a free
society one can arrive at a just distribution based on an objective market-exchange "value" of a person's
actions and services to others. But how stable and ethical are market-exchange values?

The U.S. has largely accepted the libertarian free-market rule for distributing regular health care
services and goods, thus accepting the material principle of one's ability to pay as its distributive theory of
justice. Taxing individuals and businesses to promote and protect public interest is equivalent to
extracting financial resources from one set of individuals to benefit another set of individuals. Thus,
non-uniform taxation violates libertarian justice. It is unjust for governments (especially in socialist
countries) to redistribute the wealth freely acquired by individuals in the free market. According to
Nozick's (1974) libertarian theory of entitlement, there is no pattern of just distribution other than that of
the free-market system based on three principles: acquisition, transfer, and rectification.

By Rule 19, an executive action is ethical if it treats all peoples (e.g., employees, suppliers, and
customers) according to free-market exchange (Libertarian Justice). This may not be necessarily moral.
By libertarian ethic, one should also distribute all vital primary economic goods and services (basic food,
basic health, and basic shelter) equally, unless an unequal distribution would work to everyone's
advantage (Beauchamp and Childers 1989). The acceptability of any theory of justice, however, would
depend upon the quality of its moral argument that some one or more selected material criteria or
distributive principles ought to be given priority, or exclusive consideration, over others.

R20: An executive action is ethical if it treats all stakeholders according to each one's legitimate
claims.
This rule is based on the Canon of Legitimate Claims (Rescher 1966). This canon may be useful
when different people put forth conflicting claims on society's benefits and burdens, and all claims cannot
be satisfied. Benefits such as jobs, food, health care, housing, income and wealth, are most often in (real
or forced) short supply, and burdens such as military service, taxes, community service, unpleasant or
risky tasks, most often command low demand. Distribution of these benefits and burdens equitably
across all members of a society is perhaps best achieved according to the canon of legitimate claims.
According to Rescher (1966), as long as the claims are legitimate, no matter what the source, the person
should be equitably rewarded. Distributive justice requires the establishment and accommodation to
legitimate claims of all people, regardless of any undeserving features such as race, color, sex, age,
nationality or religion. For instance, in setting wages, employers might award higher pay to workers with
better training and experience, and hence greater merit (talent), or to workers who apply themselves more
diligently (more effort), or who have a track record of high contributions to the firm, or to workers who
have large families to support (need).

35
 Rules 13 to 20 do not ensure morality ipso facto since the concept and measure of need, effort,
contribution and merit may not be universally accepted or binding. Following Rescher (1966), one could
use one, two or more justice principles in formulating one's corporate distributive justice strategy.

In the United States, unemployment compensation, welfare payments, and some health-care
subsidies (Medicare, Medicaid) are distributed on the basis of need. Sometimes unemployment
compensation is pegged on one's contribution (e.g., previous length of employment, one's last salary).
Jobs and promotions are awarded or distributed on the basis of demonstrated achievement or merit.
Corporate hierarchies and executive prerogatives are examples of distributive justice in practice (Ferrell
and Gresham 1985). The high salaries of top executives and celebrities (e.g., CEO’s of Fortune 500
companies, major sports stars) are justified (distributed) on the basis of free-market wage-exchanges or
contribution.

Affirmative action and equal employment opportunity laws (e.g. EEOC Guidelines) are based on
basic human equality regardless of gender, age, race, color, creed, or nationality. When rival material
principles of distributive justice conflict, one should give proper weight to each principle, given
circumstances of the case in question.

Rawls' Theory of Fair Opportunism

Rawls (1971) proposed two principles of distributive justice: 1) the Equality Principle: each person
engaged in an institution or affected by it has an equal right to the most extensive liberty compatible with
a like liberty for all; 2) the Difference Principle: inequalities as defined by the institutional structure or
fostered by it are arbitrary unless they work out to everyone's advantage, and provided that the positions
and offices are open to all. The first principle requires basic equal liberty for all. The second principle
admits existing inequalities and differences, a) if they work to the advantage of all, and b) if the social
system offers equal opportunity for all to combat or compensate for these differences.

R21: An executive action is ethical if it offers all stakeholders fair opportunity for benefits
(Libertarian Fair Opportunism).

The morality of this act will depend upon the correct choice of a basic structure of society that
defines and ensures its fundamental system of rights and duties. The basic structure includes the political
constitution and the principal economic and social institutions that together define peoples' rights, duties,
and liberties and that together affect people's life-prospects and expectations.

R22: An executive action is ethical if it seeks to nullify among firm's stakeholders the advantages
stemming from the accidents of biology, geography and history.

This is Rawls' (1971) Libertarian Egalitarianism. Rawls' central thesis is that a social arrangement
should be a communal effort to advance the good of all who are part of the society. Inequalities of birth,
sex, ethnicity, color, natural endowment, and other discriminating circumstances are "undeserved," they
cause naturally disadvantaged members of the society, and should be progressively eradicated. Those
who are naturally endowed with intelligence, skills, health, wealth or luck, and those who are born in
geographically more productive zones (such as Western Europe and North America), are the more
fortunate in our society, but they do not deserve these advantageous properties any more than the
disadvantaged deserve their misfortunes.

By libertarian ethic, one should distribute all vital primary economic goods and services (basic food,
health, shelter, employment) equally, unless an unequal distribution would work to everyone's advantage
36
(Beauchamp and Childers 1989). People born into a social system at different positions, in different
social classes, and with different natural attributes have varying life-prospects and expectations
determined by the system of rights, liberties and opportunities available in that social class. Equality of
opportunity does not entail equality of expectations - the latter are inevitable in a social structure.
Inequalities are just only if the social structure allowing or generating those works out for the advantage
of all engaged in it, especially the least advantaged.

A corporate executive action is ethical if it offers all stakeholders (e.g., creditors, employees,
suppliers, distributors, retailers, clients and customers) fair opportunity for benefits (Libertarian Fair
Opportunism). This may not be necessarily moral. An executive action is ethical if it treats all people
equally (Egalitarianism). This may be moral, even though ideal or impractical. An executive turnaround
action is ethical if it treats all stakeholders with an equal share of all goods (Strict Egalitarianism). This is
moral, even though ideal or impractical.

Nozick's Theory of Distributive Justice

Nozick (1974) rejects the canons of distribution of Ryan (1942) and Rescher (1966) as "patterned"
(on some artificial rule of distributive justice), and proposes an "unpatterned" principle based on his
theory of entitlement. He maintains that the term "distributive justice" is not a neutral concept. It
generally refers to a principle or criterion by which something is distributed in a given constituency. It
often connotes "re-distribution" if existing distribution is somewhat unjust. Distribution of welfare to the
needy or distribution of employment to the unemployed, are similar issues that need to be dealt by
distributive justice principles.

Following a libertarian theory of justice, Nozick (1974) offers an "unpatterned" principle of

distributive justice: from each as they choose, to each as they are chosen. Distributive justice should
have two components: from each (contribution) and to each (distribution), and the two component
principles are related. What society chooses to do for one may be a function of what one chooses to do
for society. Hence, there is no pattern of just distribution other than that of the unpatterned free-market
system based on three principles: acquisition, transfer, and rectification (Nozick 1974):

a) The principle of justice in acquisitions: it relates to original acquisition of holdings; it is the principle
and process whereby originally "unheld things" began to be appropriated in the first place.
b) The principle of justice in transfers: it relates to transfer of holdings; it is the principle and process
whereby people acquire and transfer holdings from one to another.
c) The principle of rectification in acquisitions: it relates to rectification of acquisitions and transfers if
the original principles and processes of acquisitions and transfers were unjust.

A person who acquires a holding in accordance with any of these three principles is entitled to that
holding. If principles (a) and (b) are just, then we have a just distribution of holdings; given (a) and (b),
the complete principle of distributive justice states that a distribution is just if all are entitled to the
holdings they possess under a given distribution. A distribution is just if it legitimately arises from
another just distribution.

R23: An executive action is ethical if it at least treats all stakeholders by the principle: from each as
they choose, and to each as they are chosen.
Nozick's principle differs from the socialist slogan: from each according to one's abilities (canon of
merit), and to each according to one's needs (canon of need). However, his principle seems equally
"patterned" as the canons of distribution. In a patterned society one ultimately is bound to choose, or is
37
chosen by, an existing pattern. Even the historical modes of existing distribution (acquisition, transfer,
and rectification) are patterned.

Applying the Principle of Non-Malfeasance

The principle of non-malfeasance states that an act should do no harm to anyone at any cost and at
any time. Non-malfeasance considers both the act itself as well as its consequences, judging whether the
act itself or its consequences are per se harmful, with an added emphasis on the just distribution of
rights/duties prior and during the act, and on the just distribution of costs/benefits after the act. The
principle of non-malfeasance relates to individual acts, and is an instance of non-comparative distributive
justice (see Table 16.1).

Axiom 10:

10.1 No one is duty-bound by the impossible.

10.2 All responsibility implies prior duty.
10.3 Duty may relate to commission or omission of an act.
10.4 Imputability accrues with breached duty.
10.5 Accountability accrues with harm caused by breached duty.

Corollary 03:

Whenever possible and feasible:

▪ It is the duty of an executive not to inflict any harm or evil;
▪ It is the duty of an executive to prevent all harm or evil;
▪ It is the duty of an executive to remove all harm or evil;
▪ It is a moral duty of an executive to promote or do good.

R24: An executive action is ethical as long as it does not inflict evil or harm on any one affected by that
action (Principle of Strict Liability). Such an act may not be necessarily moral.

To be ethically responsible for a violation of the duty of non-malfeasance, the following elements are
essential (Curd and May 1984): a) the executive must have a duty to the affected party; b) the executive
must breach that duty; c) the affected party must experience a harm, and d) this harm must be caused by
the breach of duty. When elements of the principle of non-malfeasance conflict, one may fall back upon a
utilitarian maxim such as: maximize good and minimize evil, or if harm occurs inevitably, then one could
invoke the compensatory justice principle: restore the injured party to the original position.

Corollary 04:

To be ethically responsible for a violation of the duty of non-malfeasance, the following elements are
essential (Curd and May 1984):

1. The executive must have a duty to the affected party.

2. The executive must breach that duty.
3. The affected party must experience some harm.
4. This harm must be caused by the breach of duty.

Condition 4 of causal connections may be difficult to establish. It may not be necessary when strict
liability justice (R 24) applies.

38
 R 25: An executive action is more ethical if, besides refraining from inflicting harm or evil, (Rule 24) it
also prevents evil or harm on any one affected by that action (Principle of Pre-emptive Justice).
Such an act may not be necessarily moral.

Duties of non-malfeasance include not only not inflicting actual harm, but also of not imposing "risks
of harm." By strict liability laws, it is not necessary to act maliciously or be even aware of or intending
the harm or risk of harm. The harm can be legally "recovered" when the duty of non-malfeasance is
violated. Such violation may involve commission or omission. Negligence is a failure to guard against
risks of harm to others. It fails below the "standards of due care" established by law and morality for the
protection of others from the careless or unreasonable imposition of risks (Prosser 1971). The actual
"standards of due care" should be determined by the principle of protective justice (Jonsen 1977).

R26: An executive action is more ethical if, besides refraining from (R24) and preventing (R25) all
harm and evil, the action also removes all evil or harm from anyone who may be affected by that
action (Principle of Protective Justice). Such an act may not be necessarily moral.

Corollary 5:

An executive action is ethical if it strives to serve the well-being of customers and all other stakeholders
by employing standards of due care, carefully assessing risk-benefits versus detriment-benefits of the act
(Jonsen 1977). Such an act may be moral when accompanied by wholesome intentions and motivations.

For executives, the legal and moral standards of due care include proper training, due diligence,
cognitive and moral skills. In designing and offering new products and services, corporate executives, by
their office and responsibility, create the customer expectation that they will observe the legally and
morally binding professional "standards of due care." If their conduct falls below these standards, they
act negligently.

In determining whether the executive has exercised the degree of skill, care and diligence that the law
requires, one must reckon the advanced state of the production, distribution and marketing of the
product/service in the state where the company operates. The due care requirements cannot eliminate all
mistakes or prevent all harms. They can only reduce the probability of causing harm in the production,
distribution, use and disposal of products and services.

In the application of Corollary 5, "detriments" should be distinguished from "risk of harm."

Detriments occur during the act, while risks are associated with harms that probably occur after the
action. For example, in amputating a limb, the detriment is losing the limb, and the risks are possible
infections that might occur if the limb is or is not amputated. In opting plant shut-downs, the detriment is
actual firing, joblessness and immediate deprivation of wages and insurance health benefits, while the
risks of harm are loss of customer good will, union litigations, union boycott, ghost towns and the like. In
the famous ethical case of Dalkon Shield (Steiner and Steiner 1991: 230-242), the detriment is the
insertion of foreign mechanical devices in the naturally sterilized area of the uterus, and the risks of harm
are "wicking" through the nylon filament infections and inflammations of the uterus, and possible higher
pregnancy rate than comparable competing contraceptive devices.

R27: An executive action is ethical if it at least sets up just procedures to treat all people fairly
(Procedural Justice). Such an action may not be necessarily moral.

If just procedures prevent or remove all harm, then such procedures ensure both pre-emptive and
protective justice. Rule 27 supports Rules 21 (Rawl’s Equality Principle) and Rule 22 (Rawl’s Difference
39
Principle). Pre-emptive and protective justices are subsets of procedural Justice. The latter is a subset of
corrective justice, and corrective justice is a subset of distributive justice. Corrective justice seeks to
rectify past and present, structured and unstructured forms of injustices (e.g., global poverty and
inequality, global inequality of resources, ills and damages of genocide, ethnic cleansing, or neo-Nazism
movements). Most comprehensive measures of corrective justice can be ethical and moral (Mascarenhas,
Kesavan, and Bernacchi 2008).

Such an action may not be necessarily moral. In business situations such as performance appraisal,
promotional awards, and sex discrimination suits, there are most often only imperfect procedural justice
systems where the right outcome is not guaranteed by the procedure. But an imperfect procedure is better
than a pure procedural justice system that conditions rightness of the outcome on the procedure itself.
Often, there are independent standards of decision-making, but there is no procedure to guarantee that
decisions or outcomes will match those standards. A right outcome is often ensured as long as the
imperfect procedure at least safeguards the principle of non-malfeasance.

Can a procedure guarantee a right or just outcome? John Rawls (1971: 85-86) analyzed three
possible relations between procedures and outcomes. In perfect procedural justice, there is independent
standard of a right outcome, and it is possible to devise a procedure to guarantee that outcome (e.g., state
lottery; open public bidding; Dutch auctions). In imperfect procedural justice, there is an independent
standard of a right outcome (e.g., convict the guilty and only the guilty), but the actual procedure is
imperfect to ensure the right outcome always. In the pure procedural justice case, any outcome of the
procedure is right as long as the correct procedure is followed, but the outcome is totally dependent upon
the procedure; e.g., in gambling it does not matter who wins as long as the game is fair.

In illustrating perfect procedural justice Rawls (1971: 85-86) cites the example of a birthday cake
distribution at a children's party: the standard of a right outcome is equal shares, and it is possible to
guarantee a right outcome by telling the child designated to cut the cake, and that the distributor must take
the last piece after all the other children have chosen theirs.

R28: An executive action is moral if, besides observing rules R24 to R27, it strives to serve the well
being of customers and employees by actively striving to promote good among them (Beneficent
Justice).

Whenever possible, it is an executive's ethical duty a) not to inflict any harm or evil, b) to prevent all
harm or evil, c) to remove all harm or evil, and d) it is a moral duty to promote or do good.

As stated earlier, Frankena (1973: 47) has serially ordered the implications of the principle of non-
malfeasance as applied to any act: the act should a) not inflict evil or harm, b) should prevent evil or
harm, c) should remove evil or harm, and d) should do or promote good. Other things being equal, (a)
takes moral precedence over (b), (b) over (c), and (c) over (d). The principle of non-malfeasance is an
over-riding principle, but not an absolute principle. Sometimes, one may have to cause harm (e.g., in the
form of painful surgery) to avoid greater harm such as serious disease or death [this topic is dealt in a
separate section under Proportionalism and the Theory of Double Effect in Chapter 06]. Chapter derived
two rules (Rule A and Rule B) from the theory of Double Effect and Proportionalism. The principle of
non-malfeasance obliges one, while the principle of beneficence may be more hortatory or "parenetic"
than normative - hence a moral duty. When elements of the principle of non-malfeasance conflict, one
may fall back upon a utilitarian maxim such as: maximize good and minimize evil, or if harm occurs
inevitably then one can invoke the compensatory justice principle: restore the injured party to his/her
original position.

40
 As an illustration, and following Case 16.3, Table 16.5 assesses the morality of India’s Superrich
wealth maximization outcomes by applying moral rules based on distributive justice ethical theories. As
argued in Table 16.5, wealth maximization is ethically and morally justified as long as it does not violate
any of the distributive justice rules (R13 to R28). Table 16.5 is a general argument for or against wealth
maximization. More specific argument can be made based on the particulars of individual superrich
mentioned in Case 16.3.

Synthesis of All Rules: Equity versus Equality Justice Rules

Justice is both outcome-related - to bring about a just distribution of what is being distributed, and
process-related - a just process assures just outcomes. The following characterization of justice rules is
defensible:
Exhibit 16.2: Classifying Moral Rules by their Primary Domain of Action
Theory of Justice Process-related Outcome-related
Rules Rules
Deontological Justice R01 to R04, R09 R05 to R08
Teleological Justice R10 to R12
Distributive Justice R13, R21 to R23, R28 R14 to R20, R24, RA and RB
Corrective Justice R25- R27 R25 to R27

According to Deutsch (1985), distributive justice concerns not only the distribution of economic
goods, but also with the distribution of conditions and goods that affect human well-being in all its
individual and social aspects. While Rules 14 to 20 primarily relate to the distribution of economic
goods, all other moral rules relate to antecedent conditions that bring about a just distribution of goods
and services.

In general, distributive justice rules fall into two categories: equity and equality (Deutsch 1985;
Meindl 1989). Equity distributes economic goods or rewards (e.g., salesperson wages, executive salaries,
cost-savings, trade commissions, sales bonuses, profits) among stakeholders according to each one's
inputs or contributions (Rawls 1958, 1971; Rescher 1966; Ryan 1942) judged by one's need (R14), one’s
natural ability (R15), one’s effort (R16), one’s productivity or contribution (R17), social utility or
common good (R18), demand or market-value (R19), legitimate claims (R20), or entitlement (R23).
Other equity considerations are based on law (R07), contracts (R08), business executive rights (R04),
stakeholder rights (R03) and duties (R01 and R02).

Summary and Concluding Remarks

Executive moral reasoning studies the relationship between the executive who acts, the action
performed in a given corporate or social or political context, the consequences of the act, the people
affected by the consequences, and others who observe and respond to the action. Moral reasoning thus
implies an ongoing and constant interaction between human persons in which, thought, emotion, action
and responses are creatively (or destructively) intertwined. Moral reasoning presupposes, therefore, a
sufficiently high level of shared knowledge and behaviors, individual and social experiences with
sufficiently high level of shared metaphors of moral concepts, values, judgments, activities, behaviors and
cultures. All these shared aspects of moral reasoning fundamentally flow from the fact that the people
engaged in moral reasoning are human persons endowed with immanence and transcendence,
individuality and sociality, intellection and volition, freewill and freedom. Reason, reasoning, action and
interaction often imply some mutual control between actors via judgment and attribution, accountability
and responsibility, reward and punishment, and recompense or vindication.
41
 Moral reasoning does not exclude or condemn fierce competition (e.g., price wars, predatory pricing,
and market entry barriers) or profits (e.g., bottom line management, shareholder wealth creation,
maximizing dividends or retained earnings). These are challenges or the maker and citizen metaphors of
moral executive reasoning. Corporate ethics can incorporate competition and profits as parts of one’s
social capital (Maiti 2009). But moral reasoning must look at the consequences of, say, wealth
maximization in the hands of the few (e.g., wealth concentration, income inequality, money laundering)
and the consequences of consequences (e.g., poverty, crime, social violence, destruction, revolution) of
wealth maximization. Moral reasoning and judgment review the act retrospectively (e.g., how wealth
maximization occurred) and prospectively (the direct and indirect effects of wealth concentration in the
future).

When executives wish to evaluate ethically their policies, decisions, and strategies primarily from the
view of intentions, motivations, rights and duties, laws and contracts, then Rules 01 to 09 apply. If
executives want to assess ethically their concrete actions and strategies primarily from the view of their
costs and benefits to all stakeholders concerned, Rules 10 to 12 apply. Finally, if executives wish to
ethically examine their entire system of corporate planning, corporate policies, strategic decisions and
actions, from the view of their potentiality for, and actuality of, equitably distributing rights and duties,
costs and benefits, across all affected stakeholders, then Rules 13 to 28 apply. These Rules judge the
morality of the executive act, but do not assess its attributional or appropriational responsibility. That is,
the Rules judge the executive act, but not the executive actor.

The eight canons (Rules 13-20) of distributive justice (Ryan 1942; Rescher 1966), individually or
collectively, do not ensure morality ipso facto since the concept and measure of equality, need, merit or
ability, effort, contribution or productivity, common good or social utility, market-exchange value, and
legitimate claims, may not be universally accepted or binding. One could use as many canons in
formulating one's corporate distributive justice strategy, provided Rules 03, 08, 17-18, and 20 are
safeguarded. In the United States, unemployment compensation, welfare payments, and some health-care
subsidies (Medicare, Medicaid) are distributed on the basis of need. Sometimes, unemployment
compensation is pegged on one's contribution (e.g., previous length of employment, one's last salary).
Jobs and promotions are awarded or distributed on the basis of demonstrated achievement or merit.
Corporate hierarchies and executive prerogatives are examples of distributive justice in practice (Ferrell
and Gresham 1985). The high salaries of top executives are justified only on the basis of their free
market-exchange value. When rival material principles of distributive justice conflict, one should give
proper weight to each principle, given circumstances of the case in question.

The taxonomic approach proposed here makes no fixed assumptions regarding the organizational
design or structure (Galbraith 1977) of the corporation the executive functions in. In the post-industrial
corporate world of information-intensive (Glazer 1991) and turbulent (Emery and Trist 1965; Glazer and
Weiss 1993) environments, the structure of the executive moral decision-act will basically remain the
same in terms of its antecedents, process and consequences. To the extent that executives react to,
interact with, and are determined by situational and environmental factors in their decisions and actions,
and to the extent that they act after much consultation and partnership with their superiors and fellow
executives, the responsibility of unethical decisions may be considerably exonerated (Mascarenhas 1995;
2007).

Equality is a more complex concept, and historically has taken three major forms (Aristotle 1985;
Bedau 1971; Nielsen 1979, 1985; Vlastos 1962): a) equal treatment for equals (R13); b) fundamental
equality that states that all human beings are equal or of equal worth, and hence should be treated
universalizably and reversibly (R01), equally (R02), or should share all goods equally (R22); c) social
42
equality which states that within a democratic set up by social consensus all are politically equal
regardless of age, gender, race, color, nationality, and religion, and hence should be given basic social
rights, especially when naturally disadvantaged (R05), should be given equal opportunity (R21), and
should be treated in such a way that undeserved differences are nullified (R22).

Equity and equality, even though opposites at the extreme ends, can be conceived as a continuum
(Deutsch 1985; Kabanoff 1991). When a blend of equity and equality considerations is used as a basis of
judgment, then distributive justice prescribes that nobody should be harmed (R24; R29 and R30), and
hence, everybody should have basic needs met (R14), be prevented (R25) and protected (R26) from all
harm by proper structures and procedures (R27), and if harmed, should be adequately compensated.
More positively, one should do and promote good unto all (R28), by maximizing happiness of the greatest
number (R12), maximizing utility of the maximum number (R11), or by maximizing satisfaction of the
most (R10).

Today, most management theorists and ethicists believe that corporate powers are held in trust not only
for the shareholders the corporation deals with, but also for the community the corporation operates in
(Donaldson 1992; Goodpaster 1991). All 30 rules imply equity-based moral obligations to shareholders and
stakeholders; they also imply moral obligations but to larger groups of stakeholders such as communities,
community nonprofit institutions, and public facilities (e.g., universities, libraries, parks, museums).
Corporations have a moral obligation to put back into the community what they got from the community
they operate in (Goodpaster 1991). Moral justification Rules 01-30 are moral obligations, and not just good
deeds that a corporations or turnaround executives may or may not do. Long-term loyalty relationships with
all stakeholders are generated more by observing equality than equity rules. This Chapter summons all
executives to go beyond equity to equality, and despite being market-driven, to be socially oriented towards
all their stakeholders and communities.

43
 Figure 16.1: Internal, Transactional and Contextual Relationships
That Trigger Executive Decisions+

Global
Labor Skills, Global
Global Markets & Banks and
Suppliers Unions Money
Markets

Cost

Global Global
Markets Compe- The Govern- Govern
and Trade tition Firm ments -ments
Regions

Customers

Global Global Global

Distributors Communities, Stockholders
and Retailers Cultures and and
Civilizations Investors

+ The innermost circle constitutes the internal environment of the firm. The four small circles around the firm with
their respective technology form the transactional environment, and the outermost eight larger squares pose as the
global contextual environment.

44
 Figure 16.2: The Anatomy of Business Executive Action and the
Application of Ethical Principles

Distributive Justice Principles:

Ethics of Distributive and Corrective Justice

INPUTS: PROCESS: OUTPUTS:

Personal and Business Business
Corporate Inputs Management& Consequences
Corporate Governance
Processes:
Executive Reasoning,
Decisions & Strategies

Teleological
Principles:
Deontological Principles: Ethics of Costs and
Ethics of Rights and Duties Benefits

Ethics of Responsibility
Ethics of Human Personhood; Ethics of Virtue; Ethics of Trust;
Ethics of Moral Worth; Ethics of Moral Reasoning

45
 Figure 16.3: Modeling the Business Executive Decision-Act:
Ethical Inputs, Process, Outputs and Consequences

Business Executive Act: Business Business

Deontology Consequences: Responsibility:
Teleology Justice

Personal Corporate Corporate Corporate Corporate

Ethical Ethical Ethical Ethical Social
Inputs Inputs Process Outputs Responsi-
bility

Executive’s Corporate Corporate Corporate Corporate

Development: Development: Planning: Outputs: Responsibility:
Cognitive: Cognitive: Cognitive: Cognitive: Cognitive:
Conceptual Technology Ends, goals, Brand Image Causal,
Reasoning Management Objectives, Brand Quality Agent,
Skills Skills Ideologies, Brand Value
Principles and Satisfaction Attributional,
Emotional
Priorities Brand Delight Appropriational
intelligence
Moral:
Moral:
Will power Moral:
Moral: Moral: Rights Upheld
Willingness Teleological,
Corporate Rights-Duties Duties Fulfilled
Commitment Deontological
Conscience Costs-benefits Justice Realized
Corporate Justice-injustice Distributive
Morale Justice
Personality:
Personality:
Ego-Strengths@ Personality:
Personality: Personality: Corporate Growth
Field- Corporate Social
Organizational Decisions Corporate Renown
Dependencies@ Responsibility,
Design, Roles# Strategies Corporate Success
Opportunity# Implementation Proactive
Responsibility

Distributive & Corrective Justice Principles; Ethics of Responsibility; Ethics of Moral Worth;
Ethics of Moral Reasoning; Ethics of Virtue; Ethics of Trust.

Bi-directional arrows indicate feedback and interdependence of environment and decision components.
* For details, see Kohlberg's (1969) Theory of Moral Development.
@ For details, see Trevino (1986).
# For details, see Ferrell and Gresham (1985).

46
 Table 16.1: A Taxonomy of Ethical-Moral Theories
Applicable to Assessing Corporate Executive Strategies

Morality of the Major Ethical Ethical Further Ethical Theory

corporate Theory Sub-theories Developments
Executive Act
Judged by:
Neither the Individual Nihilism
Logical Emotivism Absolute relativism
Act or the Group Emotivism Consensualism
Positivism
Consequences Emotivism Social Emotivism Postmodernism
National Emotivism
Act Deontology Situationalism Existence precedes essence; Life precedes law;
Existentialism Life defines nature
Formalism Essence precedes and defines existence;
Only the Act Rule Deontology Contractualism Nature defines life
Legalism
Only the Act Teleology Egoism Hedonism: Pleasure defines acts
Consequences Rule Teleology Enlightened Egoism Utilitarianism: Cost/benefit ratio defines acts
Eudemonism: Happiness defines acts
Act Distributive Intuitionism Intuitions define acts
Justice Situationism Situations define acts
Retributive Justice
Non-Comparative Compensatory Justice
Justice Non-malfeasance
Strict Liability
Formalist Justice
Egalitarian Justice
Both the Rule Distributive Socialist Justice
Justice Naturalist Justice
Act and the
Capitalist Justice
Consequences Fair Opportunity Justice
Comparative Justice Libertarian Justice
Preventive Justice
Protective Justice
Procedural Justice
Corrective justice
Beneficent Justice

47
 Table 16.2: A Taxonomy of Distributive Justice Principles

First Basic Second Basic Basic Underlying Ethical Judgment by

Division Division: Principle Examples
Sub theories of
Justice
Retributive or Quid pro quo: principle of Punitive damages; Capital
punitive justice retaliation punishment
Compensatory justice Restore the harmed person to one’s Compensatory damages in product
original status liability judgments
Commutative Justice Distribute to each one by one’s Distribution of jobs, wages,
deserves healthcare, or welfare
Rights/Duty or Distribute to each one by one’s Distribution as human beings, good
deontological rights and fulfilled duties citizens
Justice
Individual Entitlement Justice Nozick’s Principle: distribute to Distribution by one’s merits, efforts,
each one by one’s original position performance
Justice or entitlement
(Corrective Cost-benefit or Distribute such that benefits exceed Distribution by net growth, net
Justice) Utilitarian Justice costs for each one benefits
Egoism Primacy of self over society Despotism, autocracy
Ethical Egoism First seek self; others via self. Greed, amassing wealth

Enlightened Egoism Society may deserve primacy over Socialism, communism

self
Nihilistic Justice No deserves, no rights: distribute Command economies
randomly
Liability Justice Distribute such that all harm is Hippocratic oath; product liabilities
avoided
Protective Justice Distribution should protect all Law and order; traffic laws
people from current harm
Preemptive Justice Distribution should prevent all EPA, OSHA, SAFE, Vaccines
people from future harm
Corrective Justice Rectify unjust structures Lack of due process under
Homeland Security; Changing
regimes of Sovereign Nations
Social Procedural Justice Distribution set up procedures to Due process; just laws and
avoid all harm ordinances
Justice Egalitarian Justice Distribution should be equal for all Basic clean air, water, shelter,
(Corrective healthcare, education and
Justice) employment
Aristotle’s Minimum Distribute equally among equals Equal wages among peers; different
Justice but unequally among unequals among non-peers
Rawls First Principle Distribution should not merit Distribution by color, lineage,
of Egalitarian Justice undeserved advantages of people ethnicity, religion, native brilliance,
social inheritance
Rawls Second Distribution should nullify Nullify economic disadvantages of
Principle of undeserved disadvantages of people race, color, creed, gender,
Egalitarian Justice nationality, and geography
Beneficent Justice Distribution should promote good Golden rule; be good to all; promote
of all people good among all.

48
 Table 16.3: A Synthesis of Moral Rules Based on the Taxonomy of
Deontological and Teleological Ethical Theories

Moral Rule Ethical Theory Morality of the Moral Rule

corporate Executive Applicable to the
Act based on: Corporate Executive
Deontological Rules

R01 Kantian Formalism Principles of Universalizability Act inasmuch as your act is

and Reversibility motivated by a law that can
apply to all.
R02 Kantian Formalism Principles of Universalizability Act inasmuch as your act is
and Reversibility grounded on moral reasons
that convince all.
R03 Deontological Justice Deontological rights of all Act inasmuch as your act
stakeholders, especially the poor. safeguards personal and
social rights of all
stakeholders.
R04 Deontological Justice Deontological rights of corporate Act inasmuch as your act
Executives upholds the rights and duties
of corporate executives
R05 Situationalism (J. P. When rights/duties conflict, the When rights/duties conflict,
Sartre) actual situation should act freely but own
determine the response-act. responsibility for the
consequences
R06 Existentialism (R. When right or wrong, truth or Act amidst uncertainty, risk
Niebuhr; D. falsehood, and good or evil are and ambiguity, but own the
Bonhoeffer) not clearly distinguishable, act in consequences.
the midst of doubt.
R07 Legalism Legitimacy of government laws Obey legitimate laws and
and industry ordinances ordinances
R08 Contractualism Binding capacity of freely agreed Honor mutually agreed upon
on contracts. contracts.
R09 Parenesis: A Code of Credibility and validity of Comply with agreed upon
ethics that counsels industry and corporate ethical codes of conduct. The
and exhorts action. code of conduct obligation is hortatory.
Teleological Rules

R10 Hedonism (Jeremy Satisfaction of the majority Maximize satisfaction of all.

Bentham)
R11a Utilitarianism (J. S. Utility of the maximum Maximize net benefits to all.
Mill)
R11b Consequentialism (E. Utility of the Consequences. Minimize harm of the
Anscombe 1920-2001) Some things should (or cannot) consequences to all innocent
be done no matter what the stakeholders
consequences.
R12 Eudemonism Happiness of the maximum Maximize happiness of all.
(Aristotle)

49
 Table 16.4: A Synthesis of Moral Rules Based on the Taxonomy of
Distributive Justice Ethical Theories

Distributive Ethical Theory Morality of the corporate Moral Rule for the
Justice Executive Act based on: corporate Executive - Act
Rules in as much as you can
treat everyone by:

R13 Formal Justice: Aristotle’s Canon of Equality One’s level of equality

Egalitarianism
R14 Socialist Justice The Canon of Need One’s level of need

R15 Naturalist Justice The Canon of Natural Ability One’s level of innate merit or
ability
R16 Retributive Justice The Canon of Effort One’s level of effort

R17 Capitalist Justice The Canon of Productivity One’s level of contribution

R18 Libertarian Justice The Canon of Social Utility One’s level of social value

R19 Libertarian Justice The Canon of Supply-demand One’s level of market-

exchange value

R20 Individual Justice Rescher’s Canon of Legitimate One’s level of legitimate claims
Claims

R21 Fair Opportunist Rawls’ Equality Principle Offering equal opportunity

Justice

R22 Libertarian Egalitarian Rawls’ Difference Principle Nullifying undeserved

Justice advantages along all
stakeholders

R23 Libertarian Justice Nozick’s Principle of One’s level of original

Distributive Justice entitlements

R24 Non-malfeasance Principle of Strict Liability Doing no harm or evil

Justice
R25 Preemptive Justice Principle of Preventive Justice Preventing all evil

R26 Protective Justice Principle of Protective Justice Protecting all from evil

R27 Procedural Justice; Principle of Procedural Justice Setting up just procedures for
Corrective Justice and Corrective Justice equitable distribution of
benefits or correcting current
structured injustice systems

R28 Beneficent Justice Principle of Beneficent Justice Doing and promoting good

50
 Assurance of Learning (AOL 6):
Table 16.5: Assessing the Morality of India’s Superrich Wealth Maximization Outcomes
[See Case 16.3: India’s Superrich]
Table 16.5A: Applying Deontological Justice Rules to Justifying Wealth Maximization by the Superrich
Justice Ethical Theory of Ethical Rule based on the Ethical Theory of Deontological Justice:
Rules Deontological Justice Did the National or International Did Wealth Maximization Outcomes of
Markets treat India’s Superrich by: India’s Superrich treat others by:

R01 Kantian Formalism: Act
inasmuch as your act is
motivated by a law that can
apply to all.
R02 Kantian Formalism: Act
inasmuch as your act is
grounded on moral reasons
that convince all.
R03 Principle of Deontological
Justice: Safeguard economic
and social rights and duties
of the marginalized
R04 Prince of Deontological
Justice: Also safeguard
rights and duties of
corporate executives
R05 Situationanism: When
rights/duties conflict, the
actual situation should
determine the decision ad
judgment but one must own
the act and its consequences.
R06 Existentialism: When
amidst uncertainty, risk and
ambiguity, right or wrong,
truth or falsehood, and good
or evil cannot be clearly
distinguished, then act in the
midst of doubt.
R07 Legalism: Legitimacy of
government laws and
industry ordinances
R08 Contractualism: Binding
capacity of freely agreed on
contracts.
R09 Parenesis: A Code of ethics
that counsels and exhorts
action. The obligation is
parenetic or hortatory.
Principles of Universalizability? YES:
As long as maximization or
aggregation of wealth as a moral
principle, decision and strategy can be
universalized.
Principles of Reversibility? YES: As
long as maximization or aggregation
of wealth as a moral principle,
decision and strategy can be reverse
verified among all.
Principle of Deontological Justice
among the marginalized? NO:
Maximization of wealth does not
safeguard the deontological rights of
all stakeholders, especially the poor.
Principle of Deontological Justice
among the corporate executives: YES,
to the extent maximization of wealth
safeguards wealth aggregation rights
of corporate Executives.
Principle of Existential Situationism:
YES: If maximization of wealth is
mostly situational despite conflicts of
rights and duties conflict, and if the
superrich take responsibility for the
consequences of wealth maximization.
Principle of Existentialism: YES:
since most wealth maximization
occurs because of the risk, uncertainty
and ambiguity of markets that the
superrich creatively and innovatively
combat.
Compliance to legitimately
promulgated and enforced
government laws and industry
ordinances? YES, as long wealth
maximization was within legal
observances.
Compliance to freely agreed on
contracts? YES: if wealth
maximization includes freely agreed
upon contract to use wealth for the
benefit of all.
Is wealth maximization ruled by
credible and valid industry and
corporate ethical codes of conduct?
NO: Most of wealth maximization
occurs despite such codes of conduct.
Principles of Universalizability? NO:
Maximization or aggregation of wealth as a
moral principle, decision and strategy are not
universalized among the non-superrich,
special the marginalized.
Principles of Universalizability? NO:
Maximization or aggregation of wealth as a
moral principle, decision and strategy are not
yet reverse verified and justified among the
non-superrich, special the marginalized.
Principle of Deontological Justice among the
marginalized? NO: Maximization of wealth
does not safeguard the deontological rights of
all other stakeholders in the system.
Principle of Deontological Justice among all
the corporate executives: NO, to the extent
maximization of wealth safeguards wealth
aggregation rights of just a few superrich
connected corporate Executives
Principle of Existential Situationism: NO: If
maximization of wealth is deliberately
fraudulent and situation-exploitative, and
particularly, when the superrich do not
willingly own responsibility for the
consequences of wealth maximization.
Principle of Existentialism: NO: if most
wealth maximization that occurs because of
the risk, uncertainty and ambiguity of
markets that the superrich creatively and
innovatively combat, does not own the
consequences, nor use wealth to life the poor.
Compliance to legitimately promulgated
and enforced government laws and industry
ordinances? NO, if wealth maximization
occurs by lobbying and prevaricating law.
Good laws should include wee-being of all
stakeholders.
Compliance to freely agreed on contracts to
help the non-superrich? N O: very few
wealth-maximizers include freely agreed
upon contracts to deploy their wealth for the
benefit of all, especially the disadvantaged.
Compliance to agreed upon codes of conduct?
NO: Unless wealth maximization includes a
social contract with the country to circulate
wealth for the development of more jobs,
wealth and prosperity to all.

51
 Table 16.5B: Applying Teleological Justice Rules to Justifying Wealth
Maximization by the Superrich
Justice Ethical Theory of Ethical Rule based on the Ethical Theory of Teleological Justice:
Rules Teleological Justice Did the National or
International Markets treat
India’s Superrich by:
R10 Hedonism: Satisfaction Principle of Universal Hedonism:
and Pleasure of all Did wealth maximization promote
(Jeremy Bentham) happiness and satisfaction of all?
NO: Most facts prove the
contrary.
R11a Utilitarianism (J. S. Principle of utility-maximization
Mill): Maximize utility of of the greatest number fulfilled?
all NO: Most facts prove the
contrary. Wealth maximizations
has created in India enclaves of
luxury and extravagance
surrounded by slums and squalor.
R11b Consequentialism (E. Maximize Utility of good
Anscombe 1920-2001): Consequences to all? NO: unless
Maximally reduce wealth maximization occurs in
harmful consequences to tandem with reduction of harm of
all. all. Some things should (or
cannot) be done no matter what
the consequences.
R12 Eudemonism (Aristotle): Principle of happiness of the
Principle of happiness of maximum fulfilled? NO: Unless
the maximum wealth maximization of the
superrich automatically is geared
for promoting happiness of the
maximum
52
Did Wealth Maximization Outcomes
of India’s Superrich treat others by:
Principle of Universal Hedonism: Did
wealth maximization promote happiness
and satisfaction of all others, especially
the poor and disadvantaged? NO:
Wealth maximization often occurs at the
dissatisfaction and losses of the others,
especially the uninformed and Most facts
prove the contrary. Universal hedonism
seeks to maximize satisfaction of all.
Principle of utility-maximization of the
greatest number fulfilled? NO: However,
wealth maximization can be encouraged
for the service and emancipation of all,
especially the powerless and the
disadvantaged.
Did wealth-maximization of the
superrich minimize harmful
consequences to all innocent
stakeholders? NO: But wealth-
maximization of the superrich can at
least strive to eradicate poverty, disease
and illiteracy in India.
Principle of happiness of the maximum
fulfilled? NO: But wealth maximization
of the superrich can automatically be
streamlined to promote happiness of the
maximum in India.
 Table 16.5C: Assessing the Morality of India’s Superrich Wealth Maximization Outcomes
by Applying Moral Rules Based on Distributive Justice Ethical Theories
[See Case 16.3: India’s Superrich]

Distri- Ethical Ethical Rule based on the Ethical Theory of Distributive Justice:
butive Theory of Did the National or International markets Did Wealth Maximization Outcomes of
Justice Distributive treat India’s Superrich by: India’s Superrich treat others by:
Rules Justice (DJ)
R13 Formal Justice: Aristotle’s Canon of Equality: The level of equality The level of equality among the others (i.e., non
Egalitarianism among the superrich? YES. superrich? NO: Not as long inequality continues.
R14 Socialist Justice The Canon of Need: The level of need among the Their level of need? No, as poverty (or non-
superrich? Yes, and much beyond need. fulfillment of basic needs) is unabated in India.
R15 Naturalist The Canon of Natural Ability: The level of innate merit Their level of innate merit or ability? No: Merit and
Justice or ability among the superrich? YES. ability of the most are not yet fully challenged or
rewarded by maximized wealth.
R16 Retributive The Canon of Effort: The level of effort of among the Their level of effort? No: Despite or because of
Justice superrich? YES. Wealth maximization could be wealth maximization, most efforts of others go
matching their efforts. unrecognized or under-rewarded.
R17 Capitalist The Canon of Productivity: The level of contribution of The level of contribution of the non-superrich?
Justice the superrich? Yes, and far beyond. NO: Until wealth maximization stimulates the
contribution of others
R18 Libertarian The Canon of Social Utility: The level of social value of Their level of social value? No, until maximized
Justice the superrich? YES. wealth raises the social value of others.

R19 Libertarian The Canon of Supply-demand: The level of market- Their level of market-exchange value? NO: Unless
Justice exchange value of the superrich? YES. maximized wealth of the few leverages the market-
exchange value of others.
R20 Individual Rescher’s Canon of Legitimate Claims: The level of The level of legitimate claims of the non-superrich?
Justice legitimate claims of the superrich? Yes, and far beyond. NO: Until wealth maximization of the few increases
the level of legitimate claims of all others.
R21 Fair Rawls’ Equality Principle: Did wealth-maximization of Did wealth maximization of the superrich offer
Opportunist the few offer equal opportunity to all? No. equal opportunity to all? No, until wealth
Justice maximization of the few offers equal opportunity
for all.
R22 Libertarian Rawls’ Difference Principle: Did wealth maximization Nullifying undeserved advantages among all
Egalitarian of the superrich nullify undeserved advantages among stakeholders? No, until maximized wealth can
Justice all stakeholders? NO. Most of the superrich seemingly nullify undeserved disadvantages among all others.
had undeserved advantages for wealth maximization.
R23 Libertarian Nozick’s Principle of Distributive Justice: By the level One’s level of original entitlements? NO: Most
Justice of original entitlements of the superrich? YES. “others” in India have their original level of
entitlements progressively diminished because of
wealth maximization of the few.
R24 Non- Principle of Strict Liability: Doing no harm or evil to Doing no harm or evil to others? Yes, as long
malfeasance the Superrich? YES. maximized wealth among the few does not harm
Justice others.
R25 Preemptive Principle of Preventive Justice: Preventing all evil to the Preventing all evil to the non-superrich? Yes, as
Justice super rich? YES. long maximized wealth among the few prevented
harm to all others.
R26 Protective Principle of Protective Justice: Protecting the superrich Protecting the non-superrich from evil? Yes, as
Justice from evil? YES. long maximized wealth among the few protected the
non-superrich from harm.
R27 Procedural Principle of Procedural Justice and Corrective Justice: Did wealth maximization of the few set up just
Justice; Was wealth maximization of the few possible because of procedures for wealth maximization for the others
Corrective just procedures for correcting current structured in India? NO, unless maximized wealth dismantles
injustice systems? YES. Possibly, despite unjust current structured injustice systems.
Justice
systems.
R28 Beneficent Principle of Beneficent Justice: Enabling the superrich Did maximized wealth of the few empower others to
Justice in doing or promoting good to others? Yes, if they do or promote good in India? Yes, if maximized
willed to do so. wealth was invested in developmental projects in
India.

53
Chapter 17A: Appropriating Individual, Joint and Corporate
Moral Responsibility for Market Turbulent Losses

Ozzie Mascarenhas SJ
JRD Tata Chair Professor of Business Ethics
November 12, 2019
Abstract:
There has been over half a century of raging debate regarding the nature, domain, scope and assigning of
moral responsibility to corporate executives either as individual corporates or as corporations or as joint bodies
of executives and corporations. The debate has been mostly focused on the necessary and sufficient conditions
for moral responsibility to be assigned to individual corporate executives or to corporations as business entities
or jointly to corporation composed of human and non-human resources. Necessary or sufficient conditions
have been argued from philosophy (such as metaphysical notions of individualism versus collectivism) as also
from the complex nature of corporate decisions, policies and processes. Often, conditions derived have been
strong and over-determining that moral responsibility was unduly exonerated, or so underdetermining that
moral blame, guilt and costly forms of responsibility were freely imposed. After reviewing this debate, we
redefine the notions of executive, corporate and joint rationality (R), intentionality (I), causality (C , and
accountability (A) and revise the domains of legal, ethical, moral, spiritual, ecological and cosmic sustainability
responsibilities, such that responsibility can be more practically understood and assigned to corporate
individual, corporations and joint business organizations. Limitations are discussed and areas of future
research are indicated [200 words].

[Key words: legal, ethical, moral, spiritual, ecological and cosmic sustainability responsibilities;
allocating responsibility to individuals, corporations and joint bodies].

Introduction
When and why should a corporation as a group of top executives (e.g., the Board of Governors, or the
group of its CXOs) take responsibility (legal, ethical, moral and spiritual) for its actions, both
individually and/or collectively, when the actions result in serious physical and/or social harm to any
of its stakeholders? That is, under what necessary and/or sufficient conditions is a corporation morally
obliged to accept and fulfil its moral responsibility for its group plans and strategies, decisions and
activities that result in foreseen or unforeseen malfeasance?

Since business ethics is a part of philosophical ethics generally, we expect and find that its divisions
correspond to the divisions most frequently made in philosophical ethics, namely, descriptive ethics,
normative ethics and analytical ethics (sometimes called meta-ethics).

• Descriptive Ethics: For instance, it is possible to describe the values and moral obligations that business
persons or business organizations subscribe to, or accept and seek to foster, as part of a neutral portrait
of their beliefs and attitudes. The portrait is neutral because it does not itself favor or oppose the moral
beliefs and attitudes it describes. It merely states a company or its executives have these beliefs or
attitudes.
• Normative Ethics: concerns itself not with describing values and obligations as perceived in the business
world, but with prescribing and defending values and obligations, sometimes in very general terms,
sometimes in very specific terms. Unlike descriptive business ethics, which neither favors nor opposes
the moral beliefs and attitudes it describes, normative business ethics is not morally neutral.
• Analytical Ethics deals with questions of meaning and justification, the use of moral discourse in the
business environment, the appropriateness of applying moral categories to institutional actors as
individuals and corporate and the problems presented by moral dis agreement both within and
between different societies.

1
The concept, domain and context of corporate moral responsibility is primarily normative and analytical
and secondarily descriptive. (Goodpaster 1983:5).

What is Responsibility?
We may distinguish among three uses of the term 'responsible' as it is used without the modifier 'moral'.
Goodpaster (1983) refers to those uses of the term as causal, rule-following, and decision making,
respectively. In the causal sense a certain action or event was brought about by the individual in
question, wholly or in part; for example, we might ask who was responsible for a broken window; we
speak of 'holding' persons responsible, and we are concerned with determining such matters as intent,
free will, degree of participation, as well as reward and/or punishment.

We also speak of an individual's 'responsibilities' as a parent or as a citizen or in other roles. This use
of the term reflects the rule-following sense, not the causal sense. Here the focus is not on determining
who or what brought about a certain action or event, but on the socially expected behavior associated
with certain roles. Parents have responsibilities for their children, doctors for their patients, lawyers for
their clients, and citizens for their country. To speak of a person as responsible in such contexts is
essentially to commend him or her for following the rules or meeting the expectations of his or her
station.

The third use of the word 'responsible' relates to the way in which an individual thinks about and
responds to situations, we can call it the decision making sense of the word. When we say of Bill Jones
that he is a responsible person, we convey that he is reliable and trustworthy, that he can be depended
upon to interpret situations and take actions that manifest both integrity and concern for those affected
by them. The emphasis is not on Bill Jones as the agent who brought about a certain result (the causal
sense), or on his following rules or role-expectations (the rule-following sense) but on his independent
judgment and the ingredients that go into that judgment. This third sense of 'responsibility' will be of
primary concern for us.

What is Moral Responsibility?

The second distinction relates not to the senses or uses of 'responsibility' so much as to the function of
the modifier 'moral'. When we speak of an individual as 'morally responsible' we contrast moral
responsibility with other possible interpretations of responsibility. Most frequently, the contrast is with
'legal responsibility'. We acknowledge a difference in the causal sense when we distinguish between
individuals being legally responsible ("liable") for an event and their being morally responsible for it.
Similarly, we understand the difference (rule-following sense) between a person's legal responsibilities
and his or her moral responsibilities in a certain role. The latter are often said to include but go 'beyond'
the former. For example, the legal responsibilities of parents to their children are part of their moral
responsibilities, but their moral responsibilities do not stop at the boundary of the law. It is not illegal
for a parent to criticize a child to the point where the child loses any sense of self- worth, but a parent
who did this would act in a morally irresponsible manner.

Manuel Velasquez (1983; 2003) distinguishes three meanings of responsibility: First, the terms are
sometimes used to describe a person as having the character trait of dependability or integrity as in "He
is a very responsible person," or "He acted with great responsibility." We can call this the virtue sense
of responsibility. Second, the terms can be used to mean "obligation" or "duty" as in "The social
responsibility of business is to serve its stakeholders," or "Business is responsible for serving its
stakeholders." We can call this the deontic sense of responsibility. In its deontic sense, responsibility is
about what ought to be done but might not yet have been done. Third, the terms can be used to denote
who or what is to blame for something that happened, as in "The storm is responsible for the damage,"
or "The ultimate responsibility for World War II belongs to Hitler." We can call this the causal sense
of responsibility.

2
The notion of responsibility that Velasquez (2003:33) discusses is a form of this third or causal sense
of responsibility. In this causal sense responsibility looks toward the past, toward some act or event that
someone or something has already caused. The responsible party in this sense is the party (or parties)
that is identified as the (or one of the) primary, or most salient, or most significant, cause of the past act
or event. But there are two kinds of causal responsibility. The first is what I am going to call natural
responsibility. Natural causal responsibility is the kind of responsibility that we attribute to natural or
non-intentional agents. Hurricanes, avalanches, tornadoes, and earthquakes are examples of natural
agents, and obviously they can be responsible for inflicting damage on the world. The actions of natural
agents, however, are not intentional. The second kind of causal responsibility is what we ordinarily call
moral responsibility. Moral responsibility is the kind of causal responsibility that we attribute to an
agent when the agent acts intentionally. We can call such agents intentional agents. While natural
agents, like hurricanes, avalanches, tornadoes, and earthquakes, cannot be morally responsible for the
injuries they cause, intentional agents like human beings often are. Moral responsibility, then, is the
kind of causal responsibility that we attribute to intentional agents like human beings when they caused
(or helped to cause) some past event and did so intentionally.

The concept and cognates of moral responsibility are still ambiguous and there exists no standard
terminology (Braham and Hees 2012: 604). Much of the literature speaks about moral responsibility
as blameworthiness for bad outcomes; it is retrospective. That is, moral responsibility is primarily for
harmful social outcomes that have already happened. Taking blame or responsibility for prevention of
harm or violation of one’s duties towards others is prospective responsibility, also called “substantive
responsibility” or “accountability” (Watson 2004), or “attributive responsibility” (Scanlon 1998). This
type of responsibility does not get the attention it deserves.

The problem of Moral Responsibility:

The debate whether corporate individuals as executives or as corporation collectives should be held
morally responsible for the armful consequences of their choices and actions has been raging for more
than seven decades in Theoretical and Applied Ethics under three aspects:

• Individual corporate Moral Responsibility but not collective moral responsibility (e.g., Virginia Held
(1970); Searle (1980), Velasquz (1983, 1985, 2003), Goodpaster1983), Goodpaster and Matthews
(1982); John Ladd (1984); Sherker (2014);

• Collective Moral Responsibility and no individual responsibility: ( Stanley Bates (1971); Peter French
(1975, 1982, 1984), Thomas Donaldson (1980; 1982), Ladd (1970); Larry May (1987), Larry May and
Stacey Hoffman (1991) Michael Keeley (1979), Ozar David (1979), Patricia Werhane (1985), Robert
Rafalko 1989) Jeffrey Nesteruk (1992), Michael Philips 1992, 1995a, 1995b); William (1998);Walt and
Laufer (1991) Christopher McMahon (1995); Mark Seabright and Lance B. Kurke (1997);

• Individual and Corporate Moral Responsibility: Arnold (2006), Frankena (1980), Goodpaster (1983;
Goodpaster and Matthews (1982), Soares (2000), Surber (1983); Werhane (1985).

What is Individual Moral Responsibility?

Peter French (1979) in a seminal article identified what he believed to be two necessary and sufficient
conditions for moral responsibility: (1) causation - that a potential subject of moral responsibility
be capable of acting so as to be the cause of an event and (2) intentionality - that "the action in question
was intended by the subject or that the event was the direct result of an intentional act of the subject
(French 1979, p. 211)." Because all corporations have institutional decision-making procedures such
as corporate internal decision (CID) structures (French 1979, p. 211) concluded that corporations can
both cause events and act intentionally. Because of the CID structures and the level of involvement
they involve, French claimed that this was sufficient to show not only that corporations are proper
subjects of moral responsibility, but also that they are "full-fledged moral persons and have whatever

3
privileges, rights and duties as are, in the normal course of affairs, accorded to moral persons (French
1979, p. 207)."

Velasquez (1983: 7) argued the opposite: that a corporation cannot act intentionally unless through its
executives, who alone can be attributed with moral responsibility for their decisions and actions: moral
responsibility for an act can be “attributed only to that agent who originated the act in his own body,
that is, in the movements of a body over which he has direct control. In corporate agency, action does
not originate in a body belonging to the corporation to whom the act is attributed, but in bodies
belonging to those human beings whose direct movements constituted or brought about the act that is
then attributed to the corporation. Consequently, whether considered as a fictional legal entity or as a
real organization, corporations do not originate acts in a manner required by attributions of moral
responsibility- namely, by directly moving one's own body.”

Michael Keely (1979: 149) also argued that corporations cannot be moral persons because
"organizations have no intentions or goals at all." Keely contended that although an organization's CID
structure "may serve to identify organizational behavior, it does not ordinarily establish the
organizational intent of that behavior or that it has any real organizational intent at all (Keely 1979, p.
151)." That is, organizations may act such that actions produce effects (good or bad); but it does not
follow that organizations intended that effect. Only corporate executives do, and hence can incur moral
responsibility (Ibid. 152). Similarly, John Ladd argued that formal organizations such as corporations
are capable of only means-end rationality; that given a pre-determined goal, corporations can make
empirical judgments about the best means to achieve it, but contended that corporations have no
mechanism by which they can process or evaluate normative propositions. Consequently, corporations
cannot produce moral intentions to act rightly or wrongly in a moral sense (Ladd 1970).

Thomas Donaldson argued that being an intentional causal agent is not sufficient for moral personhood,
and hence, that French (1979) had not shown that corporations were full moral persons. (Donaldson
1982, p. 22). Werhane (1985: 57) similarly claimed that French's argument could not establish
corporate moral personhood because "although [corporations] indeed have some of the characteristics
of persons, they lack the autonomy necessary to perform primary actions, one of the conditions
necessary to be ascribed full personhood." In addition, Donaldson (1982) contended that there were
good reasons to believe that corporations cannot be moral persons. French’s (1979; 207) argument
implied that corporations "have whatever privileges, rights and duties as are, in the normal course of
affairs, accorded to moral persons." But Donaldson (1982: 22-23) claimed that this is either undesirable
- do we really want corporations as “moral persons” to have the right to vote, worship, be sentenced to
prison or the right to pursue happiness (Donaldson 1982, pp. 22-23).

Yet despite their criticism of French, both Donaldson and Werhane argued that corporations can bear
moral responsibility. This is because full moral personhood is not necessary for moral responsibility-
although all moral persons are morally responsible, subjects that do not satisfy all the requirements of
moral personhood can nevertheless be morally responsible agents. To demonstrate this, both Donaldson
(1982) and Werhane (1985) supplied their own set of conditions for moral agency. According to
Donaldson, to qualify as a moral agent, a corporation need only "embody a process of moral decision-
making (Donaldson 1982, p. 30)." This requires (1) the capacity “to use moral reasons in decision-
making," and (2) "the capacity of the decision-making process to control not only overt corporate acts,
but also the structure of policies and rules (Donaldson 1982, p. 30)." Donaldson claimed that many, if
not most, corporations meet these two requirements. While admitting that corporations "are unable to
think as humans," he argued that corporations can be morally accountable in the sense that "with the
proper internal structure, corporations, like humans, can be liable to give an account of their behaviour
where the account stipulates which moral reasons prompted their behavior (Donaldson 1982, p. 30)."
Further, there is no reason why a corporation's internal decisions procedures cannot be applied self-
referentially so that it is the corporation itself that controls the creation and "maintenance of the
corporation's decision-making machinery (Donaldson 1982, p. 30)." Hence, although not moral persons,
corporations can nevertheless be morally responsible agents.

4
Patricia Werhane's conditions for moral agency were essentially the same as French's conditions for
moral personhood: (1) the capacity to act, and (2) the ability to form intentions (Werhane 1985, pp. 57-
59). Werhane contended that corporations have the capacity to act because they can undertake
secondary actions - actions taken by individual corporate agents who are authorized to act on behalf of
the corporation by the corporate charter and by-laws as interpreted and amended by the board of
directors, corporate management, and market forces (Werhane 1985, pp. 52-56). These are true
corporate actions because they "cannot be re-described in terms of the actions of constituents (Werhane
1985, p. 56)." Further, Werhane agreed with French that the corporate structure incorporates the
intentions of individual human beings. She also argued that a corporate intentional system combines
the sum of the decision-making procedures carried out by boards of directors, stockholders at Annual
General Body Meetings (AGBM), management, foremen, and other employees, with the advice of
outside agents such as lawyers, accountants, and public relations persons, which together form
collective "corporate" "intentions" that are exhibit "corporate decision-making,” corporate "action,"
and organizational goals (Werhane 1985, p. 56).

Thus, although corporations are not moral persons, they "like persons, are and should be, held morally
responsible for actions within their control (Werhane 1985, p. 59)." However, all these considerations
still do not prove that corporations have intentions or act with full rationality and intentionality (Danley
1990: 204). While individuals within the corporation can intend, greed, combat with malice, and so
forth, the corporation cannot (Danley1990, p. 203). In the same vein, Velasquez argued that
corporations do not possess the integration of body and mind required for intentional action because an
act is intentional only if it is the carrying out of an intention formed in the mind of the agent whose
bodily movements bring about the act. The underlying reason for corporate policies and procedures
being unable to generate intentional action is that the concept of intentional action ... is rooted in the
concept of an agent with a certain mental and bodily unity that corporations do not have (Velasquez
1983: 8).

Later, Peter French possibly influenced by Thomas Doanldson (1982) and Patricia Werhane (1985),
revised his position: corporations are not full moral persons; but to be morally responsible, one need
only be a moral "actor” (French 1995, p. 10). Accordingly, French’s (1995) new necessary and sufficient
conditions to be a moral actor are: (1) the ability to act intentionally, that is, having "purposes, plans,
goals, and interests” that motivate behaviour; (2) the ability to make rational decisions and consider
rational arguments regarding their intentions (French 1995, p. 12), and (3) "the facility to respond
to events and ethical criticism by altering intentions and patterns of behavior that are harmful to others
or detrimental to their own· interests” (French 1995, pp. 10-12). However, French contended
“because corporations possessed CID structures, they satisfy each of these conditions” (Ibid. 12).

We might argue, for instance, that corporate strategic plans include market scanning, searching for
various market opportunities and alternatives (e.g., new product plans and designs, new market
territories, new brands, new mergers and acquisitions, new joint ventures and alliances), discernment
and evaluation, deliberation and final selection of competitive choices, strategic implementation,
strategic exclusions of other choices – all these CID stages require high levels of rationality,
intentionality, causality, commitment, dedication and accountability, indirectly of the corporation but
directly of its corporate members, and for which both can appropriate moral responsibility (see also
French 1996: 145-52). But Velasquez (2003) rejects French’s (1995) argument about corporate
intentions: French's CID structures simply could not do the work required to transform individual
intentions into corporate intentions. "The fact that we attribute intentional qualities to groups - including
corporate organizations - that are not attributable to their members, then, does not imply that those
groups have real intentions. The intentions that we attribute to groups are metaphorical, based on
analogies to the literal intentions we attribute to humans ...” (Velasquez 2003, pp. 545-546).

Arnold (2006: 286) asserted that corporate plans or commitments may consist of true
shared intentions. Shared intentions consist of the mutual intentions of individual parties
to engage in a joint activity, the meshing sub -plans of the intentions of the parties, and
the common knowledge of the parties of corporate goals and objectives Pettit (2007:

5
175) introduced his own version of the necessary and sufficient conditions for moral
responsibility: (1) value relevance - the subject "is an autonomous agent and faces a
value relevant choice involving the possibility of doing something good or bad or right
or wrong," (2) value judgment - the subject "has the understanding and access to
evidence required for being able to make judgments about the relative value of such
options," and (3) value sensitivity - the subject "has the control necessary for being
able to choose between options on the basis of judgments about their value .”

Pettit argued that corporations satisfy the first condition because they can (1) qualify as agents, and (2)
act autonomously. Corporations qualify as agents "when members act on the shared intention that
together they should realize the conditions that ensure agency (Pettit 2007, p. 179)," which they do by
acting in accordance with a constitution "whereby the members of a group might each be assigned roles
in the generation of an action-suited body of desire and belief and in the performance of the actions that
it supports (Pettit 2007, p. 179)." Further, corporations can act autonomously because the corporation's
judgment cannot be reduced to the judgment of the individuals who comprise it. Thus, "autonomy is
intuitively guaranteed by the fact that on one or more issues the judgment of the group will have to
be functionally independent of the corresponding member judgments, so that its intentional attitudes
as a whole are most saliently unified by being, precisely, the attitudes of the group (Pettit 2007, p. 184)."
Pettit claimed that corporations satisfy the second and third conditions as well. They can form value
judgments "over a certain proposition when the proposition is presented for consideration and the group
takes whatever steps are prescribed in the constitution for endorsing it (Pettit 2007, p. 186)."

According to (Braham and Hees 2012) at least three conditions should be fulfilled for moral
responsibility:

1. Agency Condition (AC): The person is an autonomous agent who performed his or her action
intentionally,
2. Causal Relevancy Condition (CRC): There should be a causal relation between the action of
the agent and the resultant state of affairs;
3. Avoidance Opportunity Condition (AOC): The agent should have had a reasonable opportunity
to have done otherwise.

AC is a necessary condition for moral responsibility because we may do many things that effect
outcomes but do not bear the mark of 'authorship', where such authorship is a requirement for blame or
praise to be justified or appropriated. Similarly, CRC is a necessary condition for moral responsibility
because we cannot say that an outcome bears the stamp of 'authorship' of a person if the person played
no causal role in bringing it about. Whereas the two conditions are necessary, they are not yet sufficient
for a judgement about a person's praise - or blameworthiness. The question is, then, what additional
necessary condition is needed? A common line of thought is that some form of control other than
being a causal factor is required. In Watson's (2004, p. 280) view, because blaming responses
potentially affect the interests of those blamed, moral responsibility is closely related to the issue
of avoidability. Hence, AOC is needed as a necessary or a sufficient condition. If an agent knew,
could have known, or should have known, that a certain action of hers could lead to a particular
outcome, then we shall assess her responsibility for the outcome differently than if she could not
possibly have known, or not known, or need not have known, that the outcome would have resulted.
To avoid these circumstances we could assume the agents had “full information” and hence, ignorance
cannot excuse (Braham and Hees 2012: 608). But even with full knowledge, one may not have the
freedom to avoid it (Benn and Weinstein 1971; Sugden 1998), or is the avoidable opportunity “eligible”
for affecting executive freedom (Braham and Hees 2012: 618)? What is eligibility and to what extent
can it be fully ascertained before the action?

Despite all the three necessary or sufficient conditions being fulfilled, does it automatically or logically
follow that a corporation should realize these predicates before being attributed moral responsibility,
with or without being recognized as a moral person? These three conditions may fulfil moral agency,

6
but are they necessary and sufficient for moral personhood? Further, by asking for states of full willing,
causation and avoidance, are we “over-determining” to exonerate responsibility (Braham and Hees
2012: 607) or underdetermining it so that individuals an corporates can be easily blamed or held morally
responsible? Moreover, can the corporation be held morally (and not only legally) responsible, even
though legally it may not be a moral agent or a moral person? For instance, if majority vote decided
the choice, execution of an action that produced harmful consequences, and any individual abstaining
from vote would not have changed this choice, then seeking to verify all three conditions from each
corporate agent for unilaterally controlled outcomes is too strong a condition of over-determination? In
which case, we are far better off by attributing “joint moral responsibility” to all the “co-authors” of
“crime,” rather than victimize and chastise each to full causality? This was a suggestion independently
arrived by McKenna (1997), Wyma (1997), and Otsuka (1998). Even if a given executive acted
autonomously under non-autonomous conditions, we can still assign some “joint responsibility” to that
individual. Alternately, even if an autonomous agent acted non-autonomously under certain
circumstances, we can still ascribe “joint responsibility” to that person on the grounds he was part of
the team that decided the action.

In the narrative of the Tragedy of the Commons, it is difficult to assign moral responsibility for a
common outcome arising from several actors such as corporations and corporates (e.g., Global Climate
Change, Depletion of common resources such as forests, deep sea mining, deep sea fishing) where no
individual or corporation has direct control over the outcome in the form of actions that are necessary
or sufficient conditions for such an outcome to occur. In such cases it is not obvious who is to be
assigned responsibility for the outcome. But we can all take joint responsibility to prevent further
damage to the Commons.

Even though a corporation is a fluid institution with regularly changing CXOs, BODs, even with
changing vision, mission and identity, is that stable enough to accept and own moral responsibility?
Or, regardless of the three conditions verified or not verified in the corporation, can we be satisfied that
the corporation is legally held liable for its harmful effects, while its corporate members might be held
additionally moral responsible for the harmful effects of the corporation they belong to? Or, can we
consider both attributions to corporation and to corporates just as metaphorical or “as-if” propositions
without necessarily reifying them or vilifying them?

Table 17A.1: summarizes Individual and Corporate Moral Responsibility from Thought to Action

What is Collectivity and when Morally Responsible?

According to Soares (2003: 145) ,corporate moral agency enables the possibility of describing
an event in two ways: First, the intentional action of the individuals, and second, the intentional
action of the corporation for which the individuals work. This means that intentionality is
not only confined to the level of the individual, but also to the collective corporate. Often, the two
vectors of individual and collective intentionalities may clash and overpower such that individual
intentionalities may be overruled or suppressed by the collective thus minimizing individual moral
responsibility; and often the vice versa may be true when individual rationality and intentionality may
supress the collective, thus reducing corporate moral responsibility. But more often than not, the two
vectors of wills and rationalities may complement each other. This is tantamount what French (1996:
41) calls the internal decision structures (CID) of corporations where by policies, rules, codes,
procedures and decisions are jointly made, and hence, form the basis for attributing moral agency to
them. It is even possible for the CID structure to be so tightly construed that individual
responsibility and freedom no longer makes sense. However, French ( 1 9 9 7 ) argues that, in
practice, it makes sense to talk about actions, which are informed by the corporation's plans,
aims and interests beyond those of the individuals who work inside the company

Assigning individuals with moral responsibility for collective action is relatively easy if the collective
action is merely the aggregate of identical individual actions (e.g., gang rape, group riot, team

7
conspiracy). While there might be some mitigation related to group psychology (e.g. in a riot),
assessments of culpability would likely not be too different from a case in which a person performed
the contributory action alone.

A "goal-oriented collective" is a loosely-organized ad hoc group oriented toward accomplishing a

commonly held goal, such as a group of picnickers, and an "organization" is a formally organized, long
lasting group often characterized by hierarchy and well-defined roles occupied by rotating personnel.
Commonly-held goals are not always universally present in organizations but are in goal-oriented
collectives (Isaacs 2011). Assessment of contributory actions is harder for collective actions irreducible
to members' identical component actions, composed as they are of different types of actions (some of
them marginal, indifferent or counter-productive to the collective action), linked together by a corporate
intention imposed through orders or role specifications, with few if any members knowing the full scope
of the collective action they advance. The challenge is to see which if any of the vectors of individual
moral agency can connect to collective action in a way tainting or ennobling group members'
contributory actions according to the collective action's character. Something analogous to a human
intention guiding collective action can be present in organizations irreducible to the intentions of all its
members. (Sherker 2014: 11).

Collective intentionality, rationality, causality and hence collective accountability, are complex
organizational realities that entail several discrete, sequential, and connected strategies such as group
intention, group planning cells, group understanding of goals and objectives, group action projects,
group prediction of outcomes, group willing of outcomes, and group culpability and blame for bad
outcomes, and group achievement and praise for good outcomes. Lack of active and willed participation
in some of these group activities may reduce culpability, individual or collective.

Synthesizing Necessary or Sufficient Conditions for

Attributing Mora Responsibility
Table 17A.2 describes the usual content, domain and scope of rationality (R), intentionality (I), causality
(C), and accountability (A), at both individual and collective levels of an organization. R, I, C, and A
can serve as rewarding or inculpating conditions for collective action. What is needed for assigning
moral responsibility to corporate individuals, and to corporation as a business entity? Exhibit 17A.1 is
one such characterization.

However, apportioning moral responsibility to individuals in "corporate groups" or "organizations" can

be problematic. For instance, Miller (2001: 174-6) argues that participants in "joint mechanisms" are
individually responsible for their contributory actions. A joint mechanism is a set of interlocking
behaviors like a company's decision-making procedures used to coordinate actions and bring about
certain types of outcomes. The "corporate actions" produced by mechanisms are irreducible to
individuals' contributing actions because the joint mechanism allows for outcomes contrary to some of
the participants' preferences (Miller 2001 p 174).

For instance, consider the following combination of R + I + C + A in Table 17A.2:

A. As a promoter & member of the governing board I voted against certain action of the corporation
and the BOD (-I-C) [i.e., did not intend it (-I) nor voted for it (-C)], and lobbied heavily against it
(-R) [i.e. reasoned and argued against it].
B. As a member of the governing board I voted against (-I-C) this action but did not lobby against it
as I should (+R) [i.e., silence is consent (+R)].
C. As a CEO of the same company at a pre-BOD meeting I voted for this action (+I+C) and lobbied
heavily for it (+R).
D. As a shareholder at the annual general body meeting (AGBM) I voted against it (-I-C).

8
 Exhibit 17A.1: Characterizing Legal and Moral Responsibilities of Various actors by
Behavioral Stages

Possible Legal Liability Moral Responsibility to Concerned Stakeholders

Behavioral to Concerned Individual Corporate Joint
Stages Stakeholders
Sole Physical NC NC NC NC
Causality
Joint Causality SC SC SC SC
Moral Rationality NA NC NC NC
Action: Physical- NC NC NC NC
Avoidability
Action: Moral- NA SC SC SC
Avoidability
Moral Intentionality NA SC SC SC
Moral Discernment NA SC SC SC
Moral Deliberation NA SC SC SC
Moral NA NC+SC NC+SC NC+SC
Accountability
Moral Personhood NA NC NA NC

Legend: NA = Not applicable; NC = Necessary condition; SC = Sufficient condition

What is the accountability (or its correlative, culpability) of each person in the final outcome that turned
to be socially harmful? Just based on the allocation of ± R, I, C and A, one rank of descending culpability
would be C, B, D and A. But if this allocation is weighted by the hierarchical importance of the person
involved in the action, the rank of descending culpability would be C, B, A and D; [i.e., accountability
for the promoter still remains despite her voting and lobbying against it; perhaps, she could have
deployed other promoter resources against the corporate action.

But, what is the moral responsibility of each person in the final outcome that turned to be socially
harmful? Again, just based on the allocation of ± R, I, C and A, one rank of descending moral
responsibility would be C, B, D and A. Now, assume that moral responsibility is proportional to the
duration of involvement and level of control that you had before the action and the extent you used both
for stopping this action. Further, if this allocation is weighted by the hierarchical importance of the
person involved in the action, the rank order of descending moral responsibility would be C, B, A, and
D.

Thus far, in the allocation of accountability or moral responsibility as done above, the persons A, B, C
and D and their actions and responsibilities are considered independently. But as Miller (2001) argues,
being fully, individually responsible for their contributory actions such as votes, participants in joint
mechanisms are "jointly responsible" for the relevant corporate action, meaning that each member is
morally responsible, but this responsibility is dependent on the other members' being equally
responsible. Miller argues that even those whose preferences are not reflected in the joint mechanism's
outcome, such as those on the losing side of a committee vote, are still morally responsible for the
outcome. This follows because they committed themselves to abide by the mechanism's outcome and
thereby, in a sense, connected their own conscious agency with the power of the group. Here; even the
opponent to a proposal is responsible for the associated action when the majority of her peers bring it
about through a joint mechanism (Miller 2001: 241).

But Sherker (2014: 212) questions Miller: how can an individual participant be held morally responsible
for actions she cannot control, such as the joint actions of the corporation? Unless one follows a
prudential rule: one should avoid situations where one is responsible for bad actions—usually situations
where one performs, endorses, or supports bad actions causing unmerited harm and deserving
punishment. But how could one predict the future bad outcome and stay away from it? In practice this
would mean avoid joining corporations where such bad outcomes could happen. This is difficult to

9
provide, unless one knows the bad track record of certain companies prone to fraud and corruption.
Then, of course, one is prudentially bound to avoid joining such corporations, and may face
unemployment.

The framework of Table 17A.2 suggests alternatives. One could join any company where she can offer
and control her rationality, intentionality, causality and accountability and thus foresee contingencies
of moral hazard or adverse selection. Accountability and moral responsibility are more prospective than
prescriptive, and descriptive more than meta-analytic. We join corporations where basic moral
principles and convictions (e.g. personal conscience, family conscience, neighbourhood conscience,
city conscience and national conscience) are not compromised or jeopardized. One is bound by
prescriptions and not by descriptions; the latter can be arbitrary and hence, rationally accepted or
refused. One can always choose one’s values and the companies that live by them.

Should the executive abstain from the vote or not? If an organization member whose presence is
necessary for a quorum desires collective action X, she stands to help accomplishing X if she wins the
vote, but risks enabling~X if she participates in the vote and loses. If she prevents the vote from
occurring by refusing to participate, she prevents~X from occurring, but also forfeits the chance that
the organization accomplishes X. Further, she forfeits the chance of lobbying her peers to vote for X if
she is replaced because of her non-participation (Wolgast 1992 p 90).

But asks Sherker (2014 213): should I abstain from the vote or not? If an organization member whose
presence is necessary for a quorum desires collective action X, she stands to help accomplishing X if
she wins the vote, but risks enabling X if she participates in the vote and loses. If she prevents the vote
from occurring by refusing to participate, she prevents X from occurring, but also forfeits the chance
that the organization accomplishes X. Further, she forfeits the chance of lobbying her peers to vote for
X if she is replaced because of her non-participation (Wolgast 1992 p 90).

Also, much would depend upon what is voted: a fair outcome or a policy Y or a defective product Z,
and if one has a duty to vote, or if not voting would amount to subversion... “If the "outcome of a fair
procedure" is construed as the dissident's end instead of "policy X," so that her end is met no matter
what the procedure's outcome, then there is a much stronger case to say the participant who intentionally
and knowingly participated in the procedure is culpable for its outcome” added. In general, participants
in joint mechanisms ought to have as an end the mechanisms' fair outcomes, and act accordingly
(Sherker 2014: 213-214). While increased knowledge ® and causal efficacy (C) will increase one's
individual responsibility all group members are responsible for the group's actions once they join the
group (Ibid. 215). Kutz focuses on the subjective meaning agents ascribe to their acts—the reasons
they have for acting—in part because an exclusive focus on causality would exonerate malicious actors
whose contributions to bad joint projects were marginal or ineffectual or when their contributions made
no individual difference to over-determined collective actions (Kutz 2000: 140). Mitigating
circumstances reducing accountability include the difficulty of learning information contextualizing the
agent's action and the lack of alternatives forcing the agent's hand (Kutz 2000 p 161). One is
accountable for harm if one chose to enter an organization that ended up doing harm (Sherker 2014:
216).

Can Corporations Act Morally or Immorally?

This question, innocuous as it may sound, assumes the following: a) that corporations may be said “to
act;” b) that corporations can be “subjects” of actions; c) that besides being “subjects,” corporations can
be “moral agents” who can act rightly or wrongly, morally or immorally; d) morality can be applied
univocally to these “acts” and “subjects;” and hence e) a corporation that acts wrongly can be a proper
object of moral disdain and criticism, one from whom others (e.g., possible investors, shareholders,
bondholders, or consumers) ought to disassociate themselves. (Sandbu 2012: 99-100). These
assumptions can be defended (e.g., Sandbu 2010, 2011). For the present let us assume that moral

10
responsibility is preceded by and is equivalent to everyday words such as “moral liability,” “moral
imputability,” “moral culpability,” “moral implication,” “moral tainting” or “moral complicity.”

In this connection, Sandbu (2014) seeks to assess moral responsibility of stakeholders such as
shareholder and bondholders for investing in companies that eventually turn out bad outcomes. His
assessment is premised on three investing activities: enabling, financing, and complicity. All three
activities may not be necessary inculpating conditions since much of the time shareholders and
bondholders may not full represent the companies by their investments. Moreover, as investors they
may not know (ignorance) what the company is doing in terms of generating bad outcomes, and not
being (impotence) in doing anything about it. However, shareholders and bondholders can incur some
moral responsibility to the extent their enabling, financing or complicity activities are big enough to
influence corporate behaviour; the latter are mitigating or exonerating circumstances.

Organizations Do Not Enjoy Moral Immunity

In general the modifier 'moral' is used to signal a broad context in which the notion of responsibility is
to be situated, a context that validates attributions of responsibility to individuals according to criteria
distinct from, e.g., law, religion, etiquette, and custom. The third distinction has to do with the force of
attributions like "She is morally responsible in her decision-making".

That is, once we are clear about which sense of 'responsible' is at issue (in this case, the decision-making
sense), and once we recognize that it is moral responsibility rather than, say, legal responsibility that is
meant, the question arises: In saying that an individual is morally responsible, are we merely describing
certain of his or her cognitive, emotional or decision-making characteristics or are we instead (or also)
commending and recommending them? Put another way, is the concept of moral responsibility, as we
are pursuing it, a normative concept or a descriptive concept or some mixture of the two? The last is
true. In any case, we may distinguish attributing moral responsibility to the person who acts (in the
causal or rule-following or decision making senses) or to the action of the person (in the same three
senses). To say that individuals are morally responsible, e.g., in the decision-making sense, is to say
something about them, about the cognitive and emotional processes that precede and accompany their
actions; it is not to issue a verdict about the rightness and wrongness of their actions in every case. Some
philosophers would characterize this feature of the concept of moral responsibility by saying that it
refers to 'subjective' rightness (or in the case of irresponsibility, wrongness) while 'objective' rightness
and wrongness are the central concerns of ethics. But this would be too hasty. For the fact is that though
moral responsibility may be a virtue insufficient to insure complete moral rectitude in what one does, it
is clearly to be thought of as an essential, even dominant, component. Actions that are taken without it
might in some cases be 'objectively' right, but more frequently they will not be. And actions that are
taken with it might in some cases be 'objectively' wrong, but more frequently they will not be.

William K. Frankena, a leading American moral philosopher, poses this question: whom should a moral
spectator rank higher, a person who does the right thing from bad motives or one who acts from good
motives but does the wrong thing? Which person should we regard as morally better? (1980:5).

Our first observation, writes Goodpaster (1983:7) is that the concept of moral responsibility is
normative with respect to the virtues of individual decision-making more than with respect to the
rightness or wrongness of specific actions or behavior. It is what we might call a process-concept. The
second observation supplements the first: Attributions of moral responsibility are not only process-
oriented rather than aimed directly at the content of behavior, they are also generic. That is, the cognitive
and emotional processes associated with moral responsibility are less specific than those associated with
the principles usually discussed in normative ethics. To attribute the normative-cum-descriptive concept
of moral responsibility to an individual, then, is to allude to certain generic decision making traits
(cognitive and emotional dispositions) of the individual. It is not to pass judgment directly on the
rightness or wrongness of the individual's acts, nor is it to impute a specific normative ethical principle
to the individual's reasoning.

11
Is our concept of corporate moral responsibility based on excess “moralizing” of organizational
conduct?

Arguably, Kenneth Goodpaster (1983:3) started the discussion of corporate moral responsibility in the
context of the then famous Ford Pinto Case, and said “Ford Motor Company confronted a long series
of difficult policy questions, starting with competitive response to foreign imports and including
engineering safety, product liability, and public relations. Issues of corporate responsibility therefore,
are of larger scope than the issues at stake in personal executive choices. Individuals make corporate
policy decisions, of course, but these decisions are not merely personal; they are choices made for and
in the name of the corporation. The notion of corporate responsibility finds its home in this larger
context. At the same time, issues of corporate responsibility are of smaller scope than the ethical
foundations of capitalism, since they presuppose to a great extent the fundamental legitimacy of
capitalism, private property, for example, and free enterprise.”

“Corporate moral responsibility, like its analogue in the individual, argues Goodpaster (1983:19),
requires management: management of people and resources, but most importantly what we might call
self-management. The modern challenge for the professional manager lies not with the growing number
of tasks associated with the growing complexity of the role. Though formidable, the quantitative
dimensions of the challenge can be met by more sophisticated approaches to control, production, and
organizational structure. The most dramatic challenge lies in the qualitative domain, the domain in
which management must exercise judgment and self-understanding. The competitive and strategic
rationality that has for so long been the hallmark of managerial competence must be joined to a more
'disinterested', community-centered rationality. Gamesmanship must be supplemented with moral
leadership.”

“Armchair reflections about business ethics are no longer sufficient (they never were) for those who are
serious about the central issues. The complexities of corporate decision-making generate corresponding
complexities for responsible corporate decision-making. Without the understanding of such
complexities that comes from case study research, the quest for moral understanding in modern business
life is empty. But without a philosophical framework and a set of norms reflectively reached, the study
of cases is blind (ibid. 20).

Following, Goodpaster (1983), we could conceive moral responsibility as a function of several

sequential stages such as moral perception, moral reasoning, moral coordination, moral projection and
moral implementation. Table 17A.3 spells out these stages for both corporate individuals as well as
corporate collectives.

On the other hand, Velasquez (2003) visualize moral responsibility as a function of several components
such as rationality and intentionality, and therefore causality and accountability. Table 17A.3 details
this approach in relation to both individual and corporate moral responsibilities. Velasquez (1983,
2003) argues that corporations as a group do not have “intrinsic” rationality and intentionality, other
than those of its corporate members, and hence cannot be attributed any causality or moral responsibility
other than metaphorically. Citing John Searle (1980), he describes intentionality of corporations as “as
if” or extrinsic, and not intrinsic. Intentionality is the necessary condition of moral responsibility, and
since corporations do not exhibit intrinsic intentionality they cannot held morally responsible. But in
the real world of today corporations “perform” by making certain (often risky) choices backed by
appropriate strategies (e.g., new product design and development, purchases, mergers and acquisitions,
strategic alliances, divestitures, and joint ventures).

Some of these have good processes (e.g. research, rationality, intentions) and good outcomes (revenues,
profits, dividends, growth), while other choices are riddled with bad processes (e.g., fraud, corruption,
bribery, misleading, deception, cheating, obfuscation) and bad outcomes (e.g., money-laundering,
embezzlement, losses in reputation, equity and market capitalization, that lead to insolvency and/or
bankruptcy). Corporations as individual executives or collective groups can assess bad processes (such

12
as policies, procedures, routines, and rituals) and avoid them and thus minimize bad outcomes. This is
their individual and collective, causal and moral, agency and responsibility. Even if it is “as-if”
rationality and intentionality, corporations cannot be totally exonerated from moral and agent,
accountability and responsibility (see Mascarenhas 1995). Neither should responsibility of corporate
executives be exaggerated since they clearly exhibit intrinsic rationality, intentionality, causality and
accountability. Individuals and corporate collectives can both exhibit enough of rationality,
intentionality, causality and accountability to be attributed causal and moral responsibility for certain
outcomes they initiate, process and cause.

Even Velasquez (2003: 547-48)) admits: “When we attribute intentionality to a collection of people that
cannot be attributed to the individual members of the collection, then, we generally do so because the
actions of the collection meet certain conditions: they exhibit a pattern that we think is sufficiently
analogous to the actions of intentional humans to merit de- scribing them in that way…. The law, for
example, attributes to sellers certain so-called "implied" promises of usability. Such laws are not saying
that sellers have actually made such promises, nor that sellers behave as if they are making such
promises. Instead, the law is simply declaring that sellers are to be treated as if they have made such
promises. Prescriptive attributions are also the pre-legal basis of a certain legal device that I noted
earlier: the device of declaring that some entity is to be treated as if it had characteristics that it does not
in reality have.” “Intentional characteristics are not the only kinds of features that can be prescriptively
attributed to persons, groups, or objects. We can prescriptively attribute to persons, groups, or objects
virtually anything at all, including actions, functions, emotions, rights, obligations, liabilities,
relationships, and so on. In adoptions, for example, the law prescriptively attributes to certain
individuals the relationships (along with its attendant rights, obligations, and liabilities) of father,
mother, son, or daughter. In certain cases, the law of torts prescriptively attributes to a parent the actions
of his or her child, along with their attendant legal consequences. The law can attribute to corporate
groups the status of personhood (along with its attendant legal rights and obligations), and it attributes
to that fictitious legal entity we call a "corporation," the actions of its officers” (Velasquez, footnote 45,
p. 559).

Limitations and Directions for Future Research

All three tables (17A.1, 17A.2 and 17A.3) need more work on content clarification and justification. In
particular, notions such as Moral Perception, Moral Reasoning, Moral Coordination, Moral Projection
and Moral Implementation of Table 17A.1, Rationality, Intentionality, Causality an Accountability of
Table 17A.2, and the concepts of individual, corporation, and joint moral responsibility need more
dialog until we have a better intersubjective consensus.

Responsibility, whether legal, ethical, moral, spiritual, ecological or sustainability, is market contextual.
We need to restudy the scandals or tragic events in terms of their randomness or Black Swan content
so that we might be better equipped to explain, predict, detect, prevent, monitor and control such events
far before they get slammed on their victims. In this connection the theoretical discussions by Nassim
Nicholas Taleb in Fooled by Randomness (2001, 2004) and The Black San: The Impact of the Highly
Improbable (2007, 2010) are very valuable, and offered as directions for future research.

Concluding Remarks
No matter how elaborate or simplified the processes of identifying the domain, scope and allocation of
moral responsibility, the final critical point is how willing we are to appropriate legal, ethical, moral ,
spiritual, planetary ecological, and cosmic sustainability as individuals, corporations or joint corporate
organization and members. What is taken back from the society in the form of greed, fraud, corruption,
money-laundering, safety violations, system breakdown, outsourcing, relocation, plant closure,
insolvency and bankruptcy must be restored to the society as its due and entitlement and not as charity.
The world and its corporations will have a better future, and mankind better peace and posterity, if all

13
the agents involved in a given scandal or tragic or Black Swan events event take full responsibility for
their role, actions and consequences..

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15
Table 17A.1: Individual and Corporate Moral Responsibility from Thought to Action
Variable Corporate Individual
Components
Scanning the environment
Selectivity in scanning, testing,
Moral Perception research, analysis, inference, consumer
satisfaction, consumer welfare, worker
safety and welfare,
Individual rationality and intelligence
of selecting, storing, analyzing relevant
information, facts, figures, ethical
theories, moral principles in relation
subjects, objects, properties and events
(SOPE);
Moral and non-moral criteria in
Moral Reasoning reasoning;
Moral judgment calls;
Moral judgment justification;
Moral ignorance and weakness;
Moral law compliance & abidance;
Industry law compliance or defiance;
Individual moral competence;
Moral intelligibility;
Personal corporate goals/ objectives;
Individual motivation and autonomy;
Individual efforts to corporate
Moral Coordination congruence and accord;
Coordination in creativity, discovery,
invention and innovation;
Coordination in explanation,
prediction, monitoring, control;
Moral projection from thought to
action, individual to team and groups,
microcosms to macrocosms;
Moral Conscience; moral intentions;
Employee entitlements;
Consumer entitlements;
Moral Projection Local community rights and duties and
entitlements;
National rights, duties & entitlements;
Global community right, duties,
Global ecology and sustainability;
Cosmic ecology and sustainability.
Personal commitment/promise to
worker/consumer safety and welfare;
Passionate commitment to corporate
implementation of moral
responsibility;
Individual commitment to creativity,
Moral Implementation discovery, invention and innovation;
Commitment to enhancing corporate,
brand, identity, and mission;
Commitment to global harmony, peace
and solidarity;
Background/foreground Individual Executive Moral
for: Responsibility
16
Corporate Collective
Scanning the corporate environment
Selectivity of data: test data, test procedures,
worker safety, worker rights and duties;
consumer health, consumer rights and duties;
consumer ecology, cosmic sustainability consumer
feedback,
Organizational tacit knowledge and routines,
skills and procedure: Corporate collective (e.g.,
Board of Directors) rationality of gathering,
sorting, selecting, storing, archiving, retrieving,
analyzing relevant information, facts, figures,
customs, mores, traditions, ethical theories,
corporate policies, corporate moral principles and
the like regarding a given case or litigation;
Moral reasoning can be refined and enhanced by
top management and BOD, consultors and
corporate lawyers;
Moral ignorance/compliance of regulations;
Corporate moral congruence and convergence;
Organizational moral competence;
Shared plans and intentions;
Shared goals and objectives;
Corporate motivation and autonomy;
Corporate strategies for corporate congruence
and accord;
Corporate ambitions and aspirations;
Shared corporate vision, mission and identity;
Corporate moral agreement/disagreement;
Corporate moral journey;
Corporate moral governance philosophy;
Organizational conscience;
Corporate moral purpose and passion;
Corporate conscience for local communities;
Organizational moral climate;
Corporate social responsibility;
Corporate philanthropy;
Corporate outreach;
Global community right, duties;
Global justice, harmony and solidarity;
Global human equality& eradication of poverty;
Global ecology and sustainability;
Cosmic ecology and sustainability;
Corporate contribution to employment &welfare;
Corporate influence on industry, nation and the
global community;
Institutionalizing worker/consumer safety and
prosperity;
Responding to employee & customer complaints;
Handling short-term vs. long-term objectives;
Handling competitive pressures;
Handling litigation pressures and actions;
Sustainable competitive advantage (SCA);
Avoiding trade-offs via seeking newer
alternatives;
Corporate trade-offs for growth and survival;
Corporate returns to shareholders (ROE, EPS,
P/E; TSR)
Corporate Collective Moral Responsibility
 Table 17A.2: Composition of Individual and Collective Moral
Responsibility
Responsibility Individual Executive
Components
Rationality ( R) Individual perception, market scanning,
selection of events, gathering information,
description, analysis, explanation,
rationalization, justification, prediction,
monitoring;
Problem solving, seeking alternatives,
evaluating alternatives and histories;
Individual learning, skills, expertise,
intellectual properties and patents.
Intentionality (I) Individual intent and intentionality
marked by personal preferences, purpose,
beliefs, values, family upbringing and
traditions, personal desires, dreams,
ambitions, loyalties/disloyalties;
Personal expectations, standards;
Individual levels of commitment,
dedication, and promises;
Individual challenges of being good;
Individual civility, integrity and
citizenship.
Causality ( C) Individual action composed of individual
choices, intentions, selections, actions, and
foreseen and unforeseen consequences
insight, intuition, hindsight, efforts,
abilities, skills, contributions, initiations,
creativity, invention, discovery, innovation,
ventures, adventures, expeditions;
Understanding and handing risk,
uncertainty, chaos;
Individual rights, duties, entitlement,
compensation, salaries, wages, perks,
shares, bonuses, commissions;
Accountability (A) Personal accountability, answerability;
Personal attributions, appropriations,
Individual expectations, obligations,
duties, rights, entitlements, social justice;
Good (socially benefitting) outcomes –
individual attribution/appropriation of
praise/reward;
Bad (socially harmful) outcomes -
individual attribution/appropriation of
liability, guilt, blame/punishment;
Causal agency R + C = Individual causal agency;
Moral agency I + R + C = individual moral agency;
Responsibility I + C + A = Individual responsibility;
Causal R + C + A = Individual causal
responsibility responsibility;
Moral I + R + C + A = Individual moral
Responsibility responsibility;
Note: R, I, C, A as defined in this column
17
Collective Corporate
Collective rationality represented by collective
perceptions, joint market opportunity scanning,
collective selections of opportunities via
gathering information, restricted
agreement/disagreement and
convergence/divergence;
Collective description, analysis, explanation,
prediction, control of good or bad events;
Collective organizational learning and routines,
tacit and overt knowledge, skills, intellectual
property rights, patents and technologies.
Collective intent and intentionality
characterized by group preferences, corporate
conduct, corporate vision, mission, identity,
corporate loyalties/disloyalties;
corporate expectations, standards;
Corporate codes, industrial codes, mores,
customs, conventions, injunctions;
Corporate commitment, thrust, dedication,
contribution, promises;
Corporate challenges and difficulties of being
good and contributing;
Corporate civility, integrity, transparency and
citizenship.
Collective action marked by group decision-
making via corporate choices, options,
intentions, selection, elections, commissions,
omissions, strategies, implementation and
control;
Corporate command and mandates via common
policies and procedures, shared planning, goals
and objectives, commonly enforced standards,
norms and expectations;
Collective combatting of competitive pressures
and environments;
Sustainable competitive advantage (SCA);
Corporate rights, duties, entitlements,
Collective accountability & answerability,
Corporate attributions, appropriations,
Corporate expectations, obligations, duties,
rights, entitlements, compensations, social
justice, corporate justice;
Good (socially benefitting) outcomes – corporate
attribution/appropriation of praise/awards;
Bad (socially harmful) outcomes - corporate
attribution/appropriation of collective liability,
guilt, blame/punishment;
R + C = Corporate causal agency;
I + R + C = Corporate moral agency;
I + C + A = Corporate responsibility;
R + C + A = Corporate causal responsibility;
I + R + C + A = Corporate moral responsibility;
R, I, C, A as defined in this column
 Table 17A.3: Domain and Scope of Individual, Joint and Corporate Moral
Responsibility
Dimensions of Domain, Scope and Mandate of Responsibility
Responsibility Individual
(Executive)
Executive Law Awareness;
Executive Law Compliance;
Executive Law Abidance;
Legal Executive unjust Law Defiance;
Responsibility Executive non-malfeasance;
Executive Legal blameworthiness;
Executive Legal liability.
Individual executives must:
Do the right thing;
Avoid any wrong thing;
Prevent people from all harm;
Ethical Protect people from all harm;
Execute teleological justice;
Responsibility Execute deontological justice;
Foster distributive justice;
Support corrective Justice;
Reduce buyer-seller information
asymmetry (BSIA).
Executives are full moral persons;
Hence, they must:
Do the right thing rightly;
Deserve moral praiseworthiness;
Moral Respect human dignity of all;
Live the cardinal virtues of
Responsibility prudence, justice, temperance and
fortitude;
Have moral intent and intentions;
Have moral vision and mission;
Internalize categorical imperatives.
As moral persons, individuals must
do the right thing rightly & for the
right reasons;
Spiritual Cultivate interpersonal trust;
Responsibility Live immanence & transcendence;
Live personal honesty & integrity;
Live national & global citizenship;
Restore human equality of all.
As individual corporate executives
they must:
Be aware of ecological concerns;
Fulfil ecological obligations;
Responsibility Seek partnership with Nature;
Restore and recreate Nature;
for Develop and transform Nature;
Planetary Eradicate or alleviate poverty;
Combatting pandemic disease;
Ecology Assure housing, nutrition and
healthcare skills for all workers;
Assure legacy of renewed nature to
posterity.
As cosmic citizens all corporate
executives must:
Responsibility Engage in cosmic conservation;
for Fight cosmic anthropomorphism;
Cosmic (the universe is for man);
Foster cosmic spirituality;
Sustainability Nurture cosmic partnership;
Promote cosmic harmony & peace;
Respect cosmic fulfilment &
happiness.
Corporate
(Organizational)
Corporate Law Awareness;
Corporate Law Compliance;
Corporate Law Abidance;
Corporate Unjust Law Defiance ;
Corporate non-malfeasance;
Corporate legal blameworthiness;
Corporate legal liability.
Corporations must:
Do the right thing;
Avoid any wrong thing;
Prevent all harm to society;
Protect people from all harm;
Fulfil teleological justice;
Execute deontological justice;
Work towards distributive justice;
Support corrective Justice;
Collectively reduce BSIA.
Corporations must:
Do the right thing rightly;
Deserve moral praiseworthiness;
Respect human dignity;
Foster cardinal virtues;
Restore human equality;
Uphold moral plans & intentions;
Promote moral vision and mission;
Nurture moral brand identity;
Institutionalize categorical
corporate moral imperatives.
As quasi moral Person, the
corporation must:
Do the right thing rightly and for
the right reasons;
Cultivate interpersonal trust;
Live corporate transcendence;
Value integrity and honesty;
Uphold corporate citizenship;
Restore human equality;
As a global citizen, the corporation
must:
Respond to ecological concerns;
Fulfil all ecological obligations;
Nurture partnership with Nature;
Restore and recreate Nature;
Develop and transform Nature;
Eradicate poverty under all forms;
Combat pandemic disease;
Assure housing, nutrition and
healthcare skills for all workers;
Ensure legacy of restored nature to
posterity.
As a cosmic citizen the corporation
must:
Engage in cosmic conservation;
Fight cosmic anthropomorphism;
Foster cosmic spirituality;
Seek cosmic partnership;
Promote cosmic harmony & peace;
Respect cosmic fulfilment &
happiness.
18
Joint
(Executive/Corporate)
Shared Law Awareness;
Shared Law Compliance;
Shared Law Abidance;
Unjust Law shared Defiance;
Joint non-malfeasance;
Joint legal blameworthiness;
Joint legal liability.
Corporations & its Executives must:
Do the right thing;
Jointly avoid any wrong thing;
Jointly prevent all harm;;
Protect people from all harm;
Fulfil teleological justice;
Bring about deontological justice;
Promote distributive justice;
Support corrective Justice;
Be transparent and reduce BSIA.
Corporations & its Executives must as
moral institutions :
Do the right thing rightly;
Jointly deserve moral praiseworthiness;
Promote equal human dignity of all;
Jointly nurture cardinal virtues;
Jointly restore human equality;
Share corporate moral plans & goals;
Foster moral vision and mission;
Nurture moral brand identity;
Share categorical imperatives
Corporations & its Executives must as
moral institutions :
Do the right thing rightly and for the
right reasons;
Nurture corporate Interpersonal trust;
Share Corporate transcendence;
Witness integrity and honesty;
Value corporate citizenship;
Uphold human equality.
Corporations & its Executives must as
moral institutions:
Address ecological concerns;
Fulfil ecological obligations;
Strive Partnership with Nature;
Restore and recreate Nature;
Develop and transform Nature;
Eradicate poverty as social violence;
Combat pandemic disease;
Assure housing, nutrition and healthcare
skills or all workers;
Ensure legacy of restored and
transformed nature to posterity.
Corporations & its Executives must as
moral institutions must:
Engage in cosmic conservation;
Fight cosmic anthropomorphism;
Foster cosmic spirituality;
Ensure cosmic partnership;
Promote cosmic harmony & peace;
Respect cosmic fulfilment & happiness.
19
 The Ethics of Corporate Trusting Relationships
1. Organizational and brand identity: Research within this third
theme has generally been an extension of the second (i.e., self-
presentation) and, to a lesser extent, the first (i.e., self-
concept), to entities other than individuals, namely,
organizations and their brands. Scholars within this theme
frequently draw on the theoretical foundations in both classical
philosophy and impression management as well as the work in
the first two themes outlined above.
Here, research does not fall quite as cleanly into distinct
streams; however, in general, studies focus on either the
identity of an organization or of a brand.
First, some research has focused on the authenticity of
organizations. In defining organizational authenticity, scholars
tend to draw explicit links to the theoretical foundations in
classical philosophy as well as work from psychology within the
self-concept theme. For example, Carroll and Wheaton suggest
that “...by analogy, an organization would be authentic to the
extent that it embodies the chosen values of its founders,
owners or members...” The emphasis in
such definitions is on organizational values (i.e., the
backstage), but, at the same time, most empirical studies tend
to focus on audience perceptions of organizational action (i.e.,
the front stage). Audiences have been shown to make
authenticity attributions on the basis of observed
production processes, product names, adver-
tising campaigns, ownership struc-
ture, the extent to ́which it is “local”, and even CEO
portraits. Such attributions of authenticity tend to translate
into audience appeal for the organization and its products and
services. In addition, audiences have been shown to evaluate
the authenticity of an organization on the specific basis of its
corporate social responsibility programs and the manner in
which such programs are publicized or not. Although
most research has focused on audience perceptions of the
front stage, some have considered how orga-
nizational members collectively understand and even construct
the backstage, often via an agentic use
of its own history; such considerations have also extended
beyond the boundaries of the organization to communities and
other collective identities. In sum, this
collection of research may seem disparate at first blush, but the
common thread is an interest in organizational authenticity,
conceived as the consistency between the organization’s values
and its actions.
NIKE as an example for Org Trust:
Several universities, unified by the Worker Rights Consortium,
organized a national hunger strike in protest of their school
using Nike products for athletics. Feminist groups mobilized
boycotts of Nike products after learning of the unfair conditions
for the primarily female workers. In the early 1990s, when Nike
began a push to increase advertising for female athletic gear,
these groups created a campaign called "Just Don’t Do It" to
bring attention to the poor factory conditions where women
create Nike products.
Nike began to monitor working conditions in factories that
produce their products.[17] During the 1990s, Nike installed a
code of conduct for their factories. This code is called SHAPE:
Safety, Health, Attitude, People, and Environment.[12] The
company spends around $10 million a year to follow the code,
adhering to regulations for fire safety, air quality, minimum
wage, and overtime limits. In 1998, Nike introduced a program
to replace its petroleum-based solvents with less dangerous
water-based solvents.[18] A year later, an independent
expert[who?] stated that Nike had, "substituted less harmful
chemicals in its production, installed local exhaust ventilation
systems, and trained key personnel on occupational health and
safety issues."[dead link][19] The study was conducted in a
factory in Vietnam.
Between 2002 and 2004, Nike audited its factories
approximately 600 times, giving each factory a score on a scale
of 1 to 100, which is then associated with a letter grade. Most
factories received a B, indicating some problems, or C,
indicating serious issues aren't being corrected fast enough.
When a factory receives a grade of D, Nike threatens to stop
producing in that factory unless the conditions are rapidly
improved. Nike had plans to expand their monitoring process
to include environmental and health issues beginning in 2004.

Second, other research has focused on the authenticity of

brands. Here, too, scholars tend to emphasize the backstage in
conceptual definitions of authenticity but focus on the front
stage in empirical examinations of it. As Holt put it: “To be
authentic, brands must be disinterested; they must
be perceived as invented and disseminated by parties
without an instrumental economic agenda, by people
who are intrinsically motivated by their inherent value.”
Drawing on this early work, others have similarly em-
phasized notions of “faithfulness” and “truth”,
“consistency”, “sincerity” and “trust”. Several studies have
shown how audiences, and consumers in particular, make
authenticity attributions on the basis of emotional branding
tactics, such as storytelling. Others have shown the impact of
such factors as craft production methods and the perception of
value alignment between the brand and its employees or
consumers. Brand authenticity tends to engender such positive
responses as brand identification and attachment, product
adoption and sales.
Does brand trust matter to brand equity?
Elena Delgado‐Ballester, José Luis Munuera‐Alemán , Journal of
Product & Brand Management, ISSN: 1061-0421,Publication
date: 1 May 2005
The most recent literature on competitive advantage views
brand equity as a relational market‐based asset because it
arises from the relationships that consumers have with brands.
Given the fact that trust is viewed as the corner‐stone, as well
as one of the most desirable qualities in any relationship, the
objective of this study is to analyze the importance of brand
trust in the development of brand equity. Specifically, the
paper examines the relationships network in which brand trust
is embedded.
The findings reveal that brand trust is rooted in the result of
past experience with the brand, and it is also positively
associated with brand loyalty, which in turn maintains a
positive relationship with brand equity. From a practical point
of view, companies must build brand trust in order to enjoy the
substantial competitive and economic advantages provided by
brand equity as a relational, market‐based asset.

J&J is a good example for Brand trust. In his interview for

Lasting Leadership, Burke also spoke about trust. “Trust has
been an operative word in my life. [It] embodies almost
everything you can strive for that will help you to succeed. You
tell me any human relationship that works without trust,
whether it is a marriage or a friendship or a social interaction;
in the long run, the same thing is true about business.”
Years earlier, as Lasting Leadership noted, other companies had
demonstrated what came to be seen as poor judgment in the
way they handled defective product incidents. For example,
Coca-Cola had mismanaged the “contaminated can” incident in
 Europe in 1999; Intel had initially failed to respond quickly to
the calculation errors embedded in its Pentium chip in 1994,
and Firestone had initially refused to accept responsibility for
SUV roll-overs caused by poorly manufactured tires in 2000.
Burke’s actions were the opposite. According to media reports
at the time, the Tylenol crisis led the news every night on every
station for six weeks. Burke, however, met the challenge head
on, contacting the chief of each network’s news divisions in
order to keep them informed. He also met with the directors of
the FBI and the FDA. “There were many people in the company
who felt there was no possible way to save the brand, that it
was the end of Tylenol,” Burke said. “But the fact is, I had
confidence in J&J and its reputation, and also confidence in the
public to respond to what was right. It helped turn Tylenol into
a billion-dollar business.”

The person who placed the cyanide in the Tylenol capsules was
never found.

2. Social Media, Celebrity Endorsers and Effect on Purchasing

Intentions of Young Adults--Kaitlin M. Davis

The results also indicated the three variables’ tolerance levels

for expertise, trustworthiness and attractiveness where all
lower than 0.64 (1-R2) - trustworthiness was at 0.38, expertise
0.41 and attractiveness 0.46. Results for this study show that all
three characteristics were highly correlated and were therefore
being viewed as dependent on each other through the eyes
of Millennials. The reason this may have occurred can be
attributed to the halo effect and the cognitive consistency
theory.
 But, according to Nisbett and Wilson (1977), the halo effect it is
now described as “the influence of a global evaluation on
evaluations of individual attributes of a person,” (p.250). Simply
put, if we like a person, or in the case of this study a celebrity,
we often assume that people we perceive as nice or attractive
have all favorable attributes, and those we perceive as less nice
have less favorable attributes. In addition, the cognitive
consistency theory ties in with the halo effect. The theory
states that people are more comfortable when all their
judgments about a person or product go together or are all
positive or negative ( Good example—Cadbury worm and
Amitabh Bachan and Sahara Parivar Ambassador and Amitabh
Bachan)
Cadbury India, the country’s largest chocolate major, has
roped in superstar Amitabh Bachchan to endorse its brand and
announced a new packaging for its flagship Cadbury Dairy Milk
(CDM) in an attempt to regain consumer confidence following
last year’s disastrous worm infestation controversy. Bharat
Puri, managing director of Cadbury India, told MarkETing the
new packaging will reduce the company’s dependency on
external storage conditions.
“Amitabh Bachchan has a universal appeal and his
endorsement of CDM will help our objective of increasing
chocolate consumption among all ages,� he said. Amitabh
Bachchan will endorse and promote Cadbury for two years.

3. AN INVESTIGATION OF CROSS-GENERATIONAL PERCEPTIONS

OF CORPORATE SOCIAL RESPONSIBILITY By ANISHA A.
CHANDRA, BSc, University of Toronto, 2009
Does it make sense for organizations to continue to finance CSR
initiatives in these difficult times? There seems to be much
support stating that the continued implementation of CSR
initiatives in the workplace is more important now than ever
before. For example, Collier and Esteban (2007) identified two
main reasons for the continued support of CSR in the workplace:
(a) employees are attracted to socially responsible organizations
and (b) an ongoing commitment to CSR can help organizations
preserve trust among their consumers and employees in a time
when the global recession can produce a loss of loyalty and trust
for organizations.
Baby Boomers: The generation of individuals born in Canada
between 1947 and 1966 (Statistics Canada, 2008). Many North
American baby boomers grew up embracing the psychology of
entitlement, expecting the best from life. Many individuals born in
this time period were profoundly affected by the class of the
Kennedys, the civil rights riots, Martin Luther King, the
assassinations of King and the Kennedys, the lunar landings, and
Woodstock.
Kapoor and Solomon (2011), stated that members of this
generation tend to be idealistic and are willing to sacrifice
personally and professionally in order to achieve success. Baby
boomers tend to respect authority and hierarchy in the workplace
and are considered to be workaholics. They are strong-willed
employees, who are concerned with work content and material
gain; they value promotional opportunities, titles, corner offices,
reserved parking spaces; and they spend rather than save. Baby
boomers’ values in the workplace are centered on affiliation, and
they advocate for teamwork, teambuilding, and participative
management. They prefer work where there is a lot of room for
relationships
Generation X: The generation of individuals born in Canada
between 1967 and 1979 (Statistics Canada, 2008). North American
members of Generation X (or Generation Xers) formed their views
of the world during the 1970s, an age of fallen heroes, a struggling
economy, and soaring divorce rates. Many Generation Xers have
grown up as latchkey kids. The concept of latchkey is attributed to
Generation Xers because a large number of them experienced
arriving home from school to empty houses while both parents
earned an income outside the home. Generation Xers were
exposed to financial, family, and societal insecurities; rapid
change; great diversity; and a lack of tradition. As a result of their
social influences, Generation Xers are self-reliant, independent,
and somewhat skeptical of authority (Kapoor & Solomon, 2011).
Although they prefer working alone, as opposed to working in a
team like their predecessors, they are competent with
multitasking. They also are considered to be quite resourceful and
entrepreneurial, performing optimally in workplace settings that
give them a lot to do and flexibility in how they approach their
work . Generation Xers are unlikely to sacrifice their personal life
for the company and place a high level of importance on work–life
balance.
Millennials: The generation of individuals born in Canada between
1980 and 1995 (Statistics Canada, 2008). Many North American
Millennials, also known as Generation Y (as they had their
formative teen years around the turn of the century) or echo
boomers (as they are children of the baby boomers), embrace
technology because they were brought up around it.
Millennials have characteristics of both baby boomers and
Generation Xers. According to Hammill (2005), Millennials prefer a
participative approach to work and work well in teams, but they
prioritize their need for a balance between work and family life
(Haynes, 2011). Millennials are optimistic and demanding of the
work environment but are not very concerned about job security
in the workplace. Millennials are very mobile, and they come into
the workforce with diverse backgrounds. They are not as
concerned with switching jobs as earlier generations were,
meaning they can easily switch jobs. In addition to being “wired
in” through various social networking mediums, Millennials,
similar to Generation Xers, have a multitasking approach to the
work they do and are quite productive when given the
organizational flexibility they desire.
According to Bannon et al. (2011), 88% of Millennials seek
employers with social responsibility values that reflect their own.
In addition, 70% of Millennials believe they should receive paid
time off or sabbaticals so that they can volunteer on behalf of
their company, with 86% indicating they would leave an employer
whose social responsibility values no longer reflected their own.
Data also have shown that beyond marriage and family, helping
people who are in need represents a top priority for 21% of
Millennials. Millennials expect leaders who espouse social
awareness and support for worthwhile causes to demonstrate
those values on a daily basis.
Viswesvaran, Deshpande, and Milman (1998) found that CSR
increased the perceived trustworthiness of an organization for a
job seeker who was lacking any previous interaction with the
organization. Many researchers have based this link on social
identity theory (SIT).
Although current literature has provided evidence of all three
generations feeling some interest in CSR and the importance of
civic duty in work, the literature that ties CSR to generations
focuses much more heavily on Millennials as opposed to baby
boomers and Generation X. A study reported in McGlone, Spain, &
McGlone (2011), showed that 61% of Millennials felt personally
responsible for making a difference in the world. Individuals of
this civic-minded generation believe not only that it is their
responsibility to make the world a better place but a majority of
 them also believe the companies have responsibility to join them
in this effort. The majority (79%) of Millennials want to work for a
company that cares about how it contributes to society, and 69%
of Millennials would refuse to work for a company that is not
socially responsible. (The Reliance Group and its Corporate Social
Responsibility or the Adani Group).
4. The 2008 sub-prime scandal—A subversion of Trust by
Institutions
In the instance of subprime mortgage woes, there was no single
entity or individual to point the finger at. Instead, this mess was the
collective creation of the world's central banks, homeowners,
lenders, credit rating agencies, underwriters, and investors.
The Crime: The economy was at risk of a deep recession after the
dotcom bubble burst in early 2000. This situation was compounded
by the September 11 terrorist attacks in 2001. In response, central
banks around the world tried to stimulate the economy. They
created capital liquidity through a reduction in interest rates. In turn,
investors sought higher returns through riskier investments. (Greed
and Chicanery) Lenders took on greater risks too and approved
subprime mortgage loans to borrowers with poor credit.(The ethical
leaders of the banks flouted all rules and norms of prudent banking.)
In this regard, some key figures worth mentioning are:
• In the US, the Fed Funds Rate was cut from 6.25% to 1.75% in
2001.
• The rate was then cut further and was held at 1% until mid
2004.
• The real Fed Funds Rate was negative for two-and-a-half years
in the period 2002-2004.
• A Taylor Rule (the monetary-policy rule that stipulates how
much the central bank should change the nominal interest rate
 in response to divergences of actual inflation rates from target
inflation rates) would have led to a Fed Funds Rate of between
2% and 5% during the period 2001-2005.
Consumer demand drove the housing bubble to all-time highs in the
summer of 2005, which ultimately collapsed the following summer.
Most of the blame is on at the mortgage originators (lenders) for
creating these problems. It was the lenders who ultimately lent funds
to people with poor credit and a high risk of default. In defense of
the lenders, there was an increased demand for mortgages, and
housing prices were increasing because interest rates had dropped
substantially. At the time, lenders probably saw subprime mortgages
as less of a risk than they really were: rates were low, the economy
was healthy and people were making their payments.
We should also mention the homebuyers who were definitely not
completely innocent. Many were playing an extremely risky game by
buying houses they could barely afford. They were able to make
these purchases with non-traditional mortgages (such as 2/28 and
interest-only mortgages) offering low introductory rates and minimal
initial costs, such as "no down payment." Their hope lay in price
appreciation, which would have allowed them to refinance at lower
rates and take the equity out of the home for use in another
spending. However, instead of continued appreciation, the housing
bubble burst, and prices dropped rapidly.
As a result, when their mortgages reset, many homeowners were
unable to refinance their mortgages to lower rates, as there was no
equity being created as housing prices fell. They were, therefore,
forced to reset their mortgages at higher rates they couldn't afford,
and many of them defaulted. Foreclosures continued to increase
through 2006 and 2007.
The increased use of the secondary mortgage market by lenders
added to the number of subprime loans lenders could originate.
Instead of holding the originated mortgages on their books, lenders
were able to simply sell off the mortgages in the secondary market
and collect the originating fees. This freed up more capital for even
more lending, which increased liquidity even more, and the snowball
began to build.
A lot of the demand for these mortgages came from the creation of
assets pooling mortgages together into a security, such as a
collateralized debt obligation (CDO). In this process, investment
banks would buy the mortgages from lenders and securitize them
into bonds, which were sold to investors through CDOs.
A lot of criticism has been directed at the rating agencies and
underwriters of the CDOs and other mortgage-backed securities that
included subprime loans in their mortgage pools. Some argue the
rating agencies should have foreseen the high default rates for
subprime borrowers, and they should have given these CDOs much
lower ratings than the "AAA" rating given to the higher quality
tranches. If the ratings had been more accurate, fewer investors
would have bought into these securities, and the losses may not
have been as bad.
Moreover, some have pointed to the conflict of interest of rating
agencies, which receive fees from a security's creator, and their
ability to give an unbiased assessment of risk. The argument is rating
agencies were enticed to give better ratings to continue receiving
service fees, or they ran the risk of the underwriter going to a
different agency. (Example of HR manager and his Secretary-Conflict
of Interest, if not moral depravity)
Another party added to the mess was the hedge fund industry. It
aggravated the problem not only by pushing rates lower but also by
fueling the market volatility that caused investor losses. The failures
of a few investment managers also contributed to the problem.
To illustrate, there is a hedge fund strategy best described as "credit
arbitrage." It involves purchasing subprime bonds on credit and
hedging the positions with credit default swaps. This amplified
demand for CDOs; by using leverage, a fund could purchase a lot
more CDOs and bonds than it could with existing capital alone,
pushing subprime interest rates lower and further fueling the
problem. Moreover, because leverage was involved, this set the
stage for a spike in volatility, which is exactly what happened as soon
as investors realized the true, lesser quality of subprime CDOs.
Because hedge funds use a significant amount of leverage, losses
were amplified and many hedge funds shut down operations as they
ran out of money in the face of margin calls.

Ethical Issues involved in the Subprime crisis:

A. The Crash of 2008 – the Relationship with Ethical Issues, Philip
Booth, Dans Finance & Bien Commun 2010/1 (No 36), pages
39 à 53
The common perception regarding the causes of the financial crash
of 2008 is that unregulated laissez-faire capitalism was allowed to let
rip and the greed of bankers, motivated by bonus packages, led to an
unprecedented degree of risk taking.
Bailouts and moral hazard: Firstly, on both sides of the Atlantic, we
have deposit insurance schemes. These are not industry-run schemes
or schemes which involve the charging of proper risk-related
premiums. In reality, they involve compensation by others for bad
decision-making on behalf of banks and their customers. Indeed,
most banks paid no premiums into the US scheme in the run up to
the crash.
Fannie Mae and Freddie Mac guaranteed payments on mortgage-
backed securities and investors believed - as can be seen from the
pricing of its capital - that if Fannie Mae and Freddie Mac failed, they
would be bailed out. Fannie Mae and Freddie Mac had only 1.2%
equity capital at the end of 2007. Personal bankruptcy law in the US
is also weak and it is often difficult for a lender to have recourse to
other assets when a borrower defaults on a mortgage. (So private
homeowners also took the risk coz only the asset that was pledged
would be lost and not other assets owned by them).
First of all, it has been suggested that the crash, at its root, was an
ethical failure. Whilst there were, no doubt, ethical failings, it is
difficult to conclude that these caused the crash, as such. Ethical
failings were widespread and not just confined to highly-paid
workers in large banks. Mortgage applicants lied about their income;
bank branch managers ‘over-sold’ loans; traders created new
products that did not provide long-term value for shareholders;
senior managers did not monitor junior managers; directors did not
properly manage senior managers on behalf of shareholders; and so
on.
Furthermore, as Sam Gregg has noted (Booth, 2010), we use the
phrase moral hazard and not simply risk hazard to describe the
situation where the financial decisions of one individual are
underwritten more widely by society. This is because people face
incentives to act less prudently - in a way that is intrinsically
unethical - if we underwrite their actions. Indeed, the financial
system is more likely to attract unethical people to work in it if
ethical behaviour is not seen to be beneficial.
B. The Financial Crisis and the Collapse of Ethical Behavior by
Gregory Curtis, Chairman of Greycourt & Co., Inc. December
4, 2008 9:58am, White Paper No. 44

In our view, poor risk controls, massive leverage, and the

blind eye were really symptoms of a much worse disease: the
root cause of the crisis was the gradual but ultimately
 complete collapse of ethical behavior across the financial
industry. Once the financial industry came unmoored from its
ethical base, financial firms were free to behave in ways that
were in their – and especially their top executives’ – short-
term interest without any concern about the longer term
impact on the industry’s customers, on the broader American
economy, or even on the firms’ own employees.

We think it likely that there is a special circle in hell reserved

for subprime lending banks like Countrywide Financial, which
were at the epicenter of the subprime collapse, and at the
epicenter of the ethical collapse. Looking back, it’s clear that
the main raison d’être of the subprime banks was to sell
mortgage loans to people who couldn’t afford them.
Screaming ads were created to dupe people into applying for
these mortgages, and new, highly misleading mortgage
products were developed (teaser rates, Alt-A, etc.) to ramp up
volume. Mortgage brokers were paid big fees to lure a steady
stream of suckers into the scheme. There was a time when
this would have been seen for what it was: predatory
lending.
5. The Big Data Impending Scandal (FB and Cambridge Analytica,
Google, Youtube, Airtel etc)
Warren’s announcement is one of the clearest signs yet of just
how toxic tech companies have become in some quarters of the
Democratic Party. Democratic candidates in 2020 have tried to
steer clear of large donations from Big Oil and Big Pharma
executives, and Warren — now her party’s frontrunner for the
nomination — is comparing tech companies like Facebook and
Google to those industries’ giants.
The candidate said she would not accept contributions to her
campaign of more than $200 from “executives at big tech
companies, big banks, private equity firms, or hedge funds.” That
adds to a previous pledge, adopted by much of the 2020 field, to
not accept money from pharmaceutical and fossil fuel officers.
Things changed on October 1, when the Verge published
comments from an internal Facebook meeting during which CEO
Mark Zuckerberg said it would “suck for us” if Warren was elected
and pursued an antitrust case against the company, describing it
as an “existential” problem. Since then Warren has aimed directly
at Facebook — often using Twitter to do so:

Elizabeth Warren@ewarren What would really “suck” is if we

don’t fix a corrupt system that lets giant companies like Facebook
engage in illegal anticompetitive practices, stomp on consumer
privacy rights, and repeatedly fumble their responsibility to
protect our democracy.
Facebook changed their ads policy to allow politicians to run ads
with known lies—explicitly turning the platform into a
disinformation-for-profit machine. This week, we decided to see
just how far it goes. We intentionally made a Facebook ad with
false claims and submitted it to Facebook’s ad platform to see if
it’d be approved. It got approved quickly and the ad is now
running on Facebook. Take a look:
The Cambridge Analytica Story: The illicit harvesting of personal
data by Cambridge Analytica was first reported in December 2015
by Harry Davies, a journalist for The Guardian. He reported that
Cambridge Analytica was working for United States Senator Ted
Cruz using data harvested from millions of people's Facebook
accounts without their consent. Facebook refused to comment on
the story other than to say it was investigating. Further reports
 followed in the Swiss publication Das Magazin by Hannes
Grasseger and Mikael Krogerus (December 2016), (later translated
and published by Vice), Carole Cadwalladr in The Guardian
(starting in February 2017) and Mattathias Schwartz in The
Intercept (March 2017). Facebook refused to comment on the
claims in any of the articles.
The scandal finally erupted in March 2018 with the emergence of a
whistle-blower, an ex-Cambridge Analytica employee Christopher
Wylie. He had been an anonymous source for an article in 2017 in
The Observer by Cadwalladr, headlined "The Great British Brexit
Robbery". This article went viral but was disbelieved in some
quarters, prompting skeptical responses in The New York Times
among others. Cadwalladr worked with Wylie for a year to coax him
to come forward as a whistleblower. She later brought in Channel 4
News in the UK and The New York Times due to legal threats against
The Guardian and The Observer by Cambridge Analytica. The three
news organisations published simultaneously on March 17, 2018,
and caused a huge public outcry. More than $100 billion was
knocked off Facebook's market capitalization in days and politicians
in the US and UK demanded answer from Facebook CEO Mark
Zuckerberg. The scandal eventually led to him agreeing to testify in
front of the United States Congress.
Since in Obama’s case, direct users knew they were handing over
their data to a political campaign" whereas with Cambridge Analytica
users thought they were only taking a personality quiz for academic
purposes, and while the Obama campaign used the data "to have
their supporters contact their most persuadable friends, Cambridge
Analytica targeted users, friends and lookalikes directly with digital
ads."
Facebook director Mark Zuckerberg first apologized for the situation
with Cambridge Analytica on CNN, calling it an "issue", a "mistake"
and a "breach of trust"; in effect, he reminded them of their Right of
access to personal data. Other Facebook officials argued against
calling it a "data breach", arguing those who took the personality
quiz originally consented to give away their information. Zuckerberg
pledged to make changes and reforms in Facebook policy to prevent
similar breaches. On March 25, 2018, Zuckerberg published a
personal letter in various newspapers apologizing on behalf of
Facebook.[26] In April they decided to implement the EU's General
Data Protection Regulation in all areas of operation and not just the
EU.
The governments of India and Brazil demanded that Cambridge
Analytica report how anyone used data from the breach in political
campaigning, and various regional governments in the United States
have lawsuits in their court systems from citizens affected by the
data breach.
In March 2019, a court filing by the U.S. Attorney General for the
District of Columbia alleged that Facebook knew of Cambridge
Analytica's "improper data-gathering practices" months before they
were first publicly reported in December 2015. In July 2019, the
Federal Trade Commission voted to approve fining Facebook around
$5 billion to finally settle the investigation to the scandal, with a 3-2
vote.
acebook has been paying users as young as 13 for access to their
personal data in another effort to monitor social trends and
capitalise on them according to a report on TechCrunch.

The social network has been paying volunteers money each month
to install an app on their phone called Facebook Research according.
This application watches and records activity and actions on a phone
and sends that information back to Facebook.
The app offers people between the ages of 13 to 25 up to $20 per
month for almost complete access to their phone’s data. Specifically,
the app installs a custom root certificate which granted Facebook the
direct ability to see users’ private messages, e-mails, Web searches,
and browsing activity – while also requesting users to take
screenshots of their Amazon order history and send it back to
Facebook for review.

Facebook was originally collecting an amount of this data through

Onavo Protect, a VPN service that it acquired back in 2013. It is
suggested that the data Facebook collected through these methods
helped it to spot current or future competitors, which then allows
them to acquire or clone them.

Facebook Research app was removed from the App Store about six
months ago after Apple complained about it violating its guidelines
on data collection.

Apple has revoked a developer license from the social media giant,
effectively shutting down any iOS apps that haven’t already been
approved for the App Store.

Without the developer certificate, Facebook’s internal iOS apps,

which likely include beta versions of its consumer apps as well as
company-specific resources, will no longer work. Apple hasn’t
indicated whether this is a temporary ban or how it will monitor
Facebook’s activities in the future.
Facebook and Apple are two of the biggest companies in the world,
but they need each other to survive. If this fight ever reached the
point where Apple removed Facebook from the App Store, both
companies would feel the effects, so there’s a certain amount of
gamesmanship being played here. However, Apple’s reputation is far
more at risk than Facebook’s at this point, so this likely amounts to
the final warning.
While the merits of the programme can be debated, the method of
delivery cannot. Apple clearly states that participants in its Enterprise
Developer Program cannot distribute apps outside of the company:
“We designed our Enterprise Developer Program solely for the
internal distribution of apps within an organisation,” an Apple
spokesperson said. “Facebook has been using their membership to
distribute a data-collecting app to consumers, which is a clear breach
of their agreement with Apple. Any developer using their enterprise
certificates to distribute apps to consumers will have their
certificates revoked, which is what we did in this case to protect our
users and their data.”
To circumvent Apple’s sandbox, Facebook used beta testing services
other than Apple’s own TestFlight, including Applause, BetaBound,
and uTest to hide the app’s true identity. The app’s primary function
is similar to the Onavo VPN that Apple removed from the App Store
in August for heavy-handed data gathering.
But Facebook isn’t only company using iPhone users to collect data.
A follow-up report from TechCrunch claims that Google is running a
similar program using an app called Screenwise Meter that also uses
the Enterprise Developer Program to surreptitiously collect data
from iPhone users. TechCrunch says the app has been running since
2012 and, like Facebook Research, also offers payment in exchange
for data sharing. Google quickly issued a statement apologising for
the app and calling it ‘a mistake’ while also saying it had been
disabling. Apple has not yet publicly responded to the report.
But while Apple is certainly playing hard ball, it’s also giving Facebook
something of a pass. While revocation of the license will cause a
temporary headache for Facebook and its employees, Apple will still
allow Facebook to distribute its apps through the App Store. It also
isn’t addressing the root of the issue, which is that Facebook was
able to run its Research App undetected for more than two years
despite Apple’s claims that “What happens on your iPhone stays on
your iPhone”. It’s basically a firm slap on the wrist.
For its part, Facebook admits to running the app, but is challenging
the media’s assessment of the story. In a statement, the social media
giant said “there was nothing ‘secret’ about the app” and
participants “went through a clear on-boarding process asking for
their (or their parents’) permission and were paid to participate”.
Facebook says it shut down the app on iOS on its own accord, though
it still continues to operate on Android phones.
But as far as Apple is concerned, the case is cut and dried: Facebook
violated its terms of service in a big way. Not only does it skip Apple’s
review process, but it collects a staggering amount of data. To get its
hands on such a treasure trove, Facebook Research required the
installation of a new profile on the user’s iPhone as well as root
certificate access, which could open up the iPhone to malware in
addition to the open portal to Facebook.
 The Ethics of Corporate Virtues

A. The Western Ethical Traditions

1. Origins in the Codes of Hamurabi and the Edicts of
Nebuchadnasser. It is alleged that the Jewish and subsequently,
Christian Ten Commandments were a filtration from the above
codes and edicts. (Show pictures of the Codes and Edicts). All
attempts to civilize social and personal behaviour and
relationships. Divine Command Theory—good or bad does not
depend upon human perceptions, cultures or conventions, but
on God’s commandments, as revealed to holy prophets and
blessed human beings or enunciated by avatars of Gods,
visiting earth. The fundamental tenets of the Jewish, Christian,
Islamic and Hindu religions are based on this tradition.
2. The Greek Philosophers and Virtue Ethics—Socrates, Plato and
Aristotle- all in the plain of the secular and the rational.
Socrates eulogised knowledge as the chief virtue, without
which no other virtues can exist. Plato underscored four
cardinal virtues that defined ethical behaviour-Prudence,
fortitude, temperance and justice. Aristotle endorsed Plato’s
four cardinal virtues and believed that virtues are imbibed
through conscious practice and habit-formation and gave the
world Virtue Ethics. (Show pictures of Socrates, Plato and
Aristotle). According to Aristotle, every human being seeks an
ultimate good and other seekings are a means to achieve the
chief good. Eudaimonia or Happiness, according to Aristotle is
the Chief Good. All other goods are intermediate goods or
means to achieve the chief good, like health, wealth, pleasure,
honour, beauty, friendship love and power.
To achieve this chief good, one must cultivate certain virtues.
These virtues are not naturally present in man, but needs to be
 cultivated through habit. If these virtues are imbibed into your
character, then you will be well-ordered, rational and in
control.
Aristotle expounded the concept of the “intermediate virtue”.
That is virtue is a mean between two vices.. Fear—Courage—
Fool-hardiness; Miserliness—Generosity—Spend-thriftiness;
Small-mindedness—Honour—Conceitedness. This is not a
concept of moderation, as Kant accused Aristotle of, but a
concept of achieving an equilibrium, like a pair of scales.
Aristotle says that emotions are natural, like anger, it is how it
is directed and controlled that makes it a virtue or a vice.
3. Ethical Relativism and the Sophists: They questioned the very
existence of the Platonian absolute or cardinal virtues. For
them, virtues were born out of social convention, what the
society put value on and hence was relative to the beliefs of
particular societies. Thrasymachus went one step further. He
said the virtue of justice meant obedience to the laws of the
society you lived in and these laws were promulgated by those
in power, to serve their interests. Therefore, justice was
nothing but the interest of the strongest group. Can justify
“ethnocentrism” and even “genocide” or the “white man’s
burden” through this philosophy. (Show pictures of Protogoras,
Antiphon and Thracymachus)
4. Ethical Egoism: Thomas Hobbes- “To maximise net benefit and
minimise net harm to oneself is ethical”. This is the essence of
ethical egoism. Hobbes believed that a person’s voluntary acts
were aimed at pleasure or self-preservation. Nothing was good
in itself, unless it gives pleasure to oneself. Hedonism. (Give
examples of weed and sex). What happens when two people
want the same object of pleasure? Then life would be “solitary,
poor, nasty and brutish”, unless they can enter into a “social
contract”, that can be enforced by a sovereign power
(Leviathan). (Show pics of Thomas Hobbes)
5. The Moral Sense School: In Hobbes, self-centredness was the
main character of human beings. But others disagreed. There is
an in-built ‘moral sense’ in humans that produce virtues like
benevolence, sympathy, empathy, gratitude and so on that
creates a balance between virtue and self-interest. Selfishness
is not the only human passion. David Hume believed that
ethical behaviour was the ‘slave of passions’. Reason can at
best point out what is right and wrong, but what action a
person will take is purely based on the intensity of his feelings
towards or against the subject. Night vigil for rape victims or
Greta Thunberg. Gilligan and Noddings’ “Ethics of Care”—Give
300 bucks to a begger or take your only kid for children’s
movie? (Show pics of David Hume, Gilligan and Nel Noddings)
6. Utilitarianism: Human beings placed by nature under two
masters- Pleasure and Pain. Any action that gives you pleasure
is right; any action that gives you pain is wrong. Maximising the
net pleasure and minimising the net pain is ethical—Jeremy
Bentham. How do you assess this outcome? Through the
consequences of the act and not in the act itself. So dropping
an atom bomb each on Hiroshima and Nagasaki is not unethical
in itself, if the consequences of that act stopped further
suffering. Bentham also took into consideration the intensity,
the duration, fecundity and propinquity of the act. All this was
calculated through a cumbersome and inaccurate hedonistic
calculus. J.S. Mill, the other famous utilitarian philosopher, did
away with this hedonistic calculus and said that one can assess
the consequences of an act by measuring its consequences by
well-established and accepted rules of society. Therefore, his
utilitarianism was called Rule Utilitarianism and that of
Bentham, Act Utilitarianism. Only when there is a clash
between accepted principles\moral laws, you can fall back on
the hedonistic calculus. Maximising shareholder wealth and the
 very foundation of capitalism is based on utilitarianism. More
respectable version of Ethical Egoism.
7. Deontology and Emanuel Kant: In his ethics, the act itself can
be ethical or unethical and not just the consequences. The
deontological insight is that there are moral laws that are
embedded in human nature and these laws can be subjected to
the test of reason and are universally applicable. You don’t
have to refer to God to feel the presence of these laws. He
believed in ‘categorical imperatives’, like the Golden Rule: “Do
unto others what you would want others to do unto you” or
“Treat others as an end in themselves and not as a means to
achieve an end”. Dropping those atom bombs were unethical
according to deontology, because you can’t kill 100000
Japanese (a means) to end further suffering (the end objective).
Kantian ethics comes up with difficulties and is seen as too
rigid, when faced with ethical dilemmas. Stealing food to feed
your starving children during a severe famine? Ethically wrong,
according to deontology. No room for attenuating
circumstances. Lying to save a person’s life, during a hostage
situation. Lying is unethical-no room for exceptions. Kantian
ethics does not bother about consequences.
8. Moral Rights Theory: Utilitarianism to judge any moral issues
had no rival from the mid-19th century to the mid-20th century.
But to define justice as that that only satisfies the maximum
numbers was not satisfactory to many moral philosophers. So
came John Rawls in 1970 with his “Theory of Justice”, which
was a comprehensive treatment of the issue of justice and
therefore to the normative question of “what is right and what
is wrong”. According to Rawls, a balanced person of good
character will seek the maximum benefit for the least privileged
segment of the people, while ensuring something came to him
and his group. The Maximin Principle. And if the maximum
benefit must first go to the better-off people to produce
 greater benefit to the lesser off people in future, then this too
would be just and ethical. The whole focus turned to moral
rights and justice of segments of people from what is right and
wrong.. from ontological meta-ethics to normative ethics to
applied or practical ethics. How can ethics give solutions to real
and pressing problems like inequality of income within and
among nations, poverty, racial discrimination, gender issues,
animal rights.
9. Ethics in the 21st Century: The major concerns of this century
are terrorism, climate change, disruptive technological
advances like AI and Human Enhancement—Euthanasia,
Abortion, Surrogate Motherhood, Cloning, Full-Body
Replacement (Cyborgs), Autonomous Moral Agents (Humanoid
Robots). There is a revolution in the making, which will be in
full flow in the next 30 years. All these concerns need answers
from the discipline of ethics. In fact, meta-ethics, normative-
ethics and applied-ethics has once again regained its
paramount importance in the affairs of homo sapiens.

B. Indian Ethics
Dharma, or the righteous way to live our lives, is the Indian
version of ethics. Lord Krishna, in the Bhagwat Gita, elaborates
the concept of Dharma: “Every organism is born to serve a
purpose. Understanding the purpose and living accordingly is
Dharma.” In this definition, it is ethical to wage a just war, if
that is your purpose and as long as you are not seeking to gain
personal prestige or wealth or power—you can even kill your
cousins, if required. Vyasa, in the Mahabharat, expands on the
concept of Dharma— “To actively help those in need as well as
passively not harming others and being fair and just in one’s
judgements.” There are elements of Dharmashastra in Virtue
Ethics, Utilitarianism and Moral Rights Theory, except in
Deontology, which is a philosophy of absolutes—war is wrong,
 even if it’s a just war; killing is wrong, even in self-defense;
stealing is wrong, even if to feed a dying person; lying is wrong,
even if that saves the life of an innocent person. Find other
ways other than war, killing, stealing and lying. Ethics is today
incorporated fully into the law of the land and it is western law
that most countries have adopted, with the exception of some
countries that follow the Shariat Law, which is based on the
Islamic version of the Divine Command Theory.

C. South-East Asian Ethics

Ethical principles in this part of the world is taken from
Buddhism, Confucianism and various variants of Taoism.
Confucious, in the 6th century BC, expounded a set of ethical
principles, like Hamurabi’s Codes, for Chinese society to live in
peace and harmony. These principles include love for one’s
fellows, filial piety, decorum, virtue and the ideal of the
superior man—this last principle was the justification for the
various kingly dynasties that existed in China till Mao-ze Tung’s
Communist revolution.
Lao-tzu, the legendary founder of Taoism and the traditional
author of the Tao-te-Ching, expounded the concept of Tao,
which is the balance in nature, the Yin and Yang and therefore
man must live in harmony with the forces of nature to be
balanced and well-ordered in one’s own life. All ethical
principles in Taoism follow from this alignment. There is no
concept of the Confucian Superior man here.

D.Ethical Issues from the Corporate World

How would you characterize today’s global political world?
Very ethical, moderately ethical or fully corrupt? How would
you characterize Indian bureaucracy? Very ethical, moderately
ethical or totally corrupt? How would you characterize the
 global corporate world? Moderately ethical or totally corrupt?
Let’s take some examples and analyse these cases from the
ethical traditions you just heard:
i. The Great American Streetcar Scandal
• Back in the 1920s, most American city-dwellers took public
transportation to work every day. There were 17,000 miles of
streetcar lines across the country, running through virtually
every major American city. That included cities we don't think
of as hubs for mass transit today: Atlanta, Raleigh, and Los
Angeles. Nowadays, by contrast, just 5 percent or so of workers
commute via public transit, and they're disproportionately
clustered in a handful of dense cities like New York, Boston, and
Chicago. Just a handful of cities still have extensive streetcar
systems — and several others are now spending millions trying
to build new, smaller ones.
• Running streetcars was a very profitable business in the late
1880’s. Cities expanded, and people who found themselves
living too far from work to walk depended on them. (Some real-
estate developers built nearby suburbs around streetcar lines.)
Over time, the businessmen who ran the streetcars, called
"traction magnates," consolidated ownership of multiple lines,
establishing powerful, oftentimes corrupt monopolies in many
cities.
• In the early-to-middle 20th century a consortium of automotive
interests (led by General Motors) bought up streetcar lines in a
number of cities and converted them to bus routes. He then
states that this group was ultimately found guilty in federal
court of "conspiracy to monopolize mass transit."
• By the 1950s, virtually all streetcar companies were in terrible
shape. Between 1938 and 1950, one company purchased and
took over the transit systems of more than 25 American cities.
Their name, National City Lines, sounded innocuous enough,
but the list of their investors included General Motors, the
 Firestone Tire and Rubber Company, Standard Oil of California,
Phillips Petroleum, Mack Trucks, and other companies who
stood to benefit much more from a future running on gasoline
and rubber than on electricity and rails. National City Lines
acquired the Los Angeles Railway in 1945, and within 20 years
diesel buses – or indeed private automobiles – would carry all
the yellow cars’ former passengers. Does that strike you as a
coincidence?
• “It’s easy to blame car companies because they’re the logical
economic beneficiary of this car-oriented system. But the
reality is more complex, and if there’s any conspiracy here, it’s
on the part of local officials who kept approving sprawling
subdivisions that have led to the present inefficient land use
patterns.”
• While it's true that National City continued ripping up lines and
replacing them with buses — and that, long-term, GM
benefited from the decline of mass transit — it's very hard to
argue that National City killed the streetcar on its own.
Streetcar systems went bankrupt and were dismantled in
virtually every metro area in the United States, and National
City was only involved in about 10 percent of cases.
• In Bradford Snell's words: “General Motors' destruction of
electric transit systems across the county left millions of urban
residents without an attractive alternative to automotive
travel”.
• The strongest rebuttal came from transit scholar George Hilton
(on whose work Snell had ironically relied) in his own 1974
Senate testimony (p. 2204): “I would argue that these [Snell's]
interpretations are not correct, and, further, that they couldn't
possibly be correct, because major conversions in society of
this character — from rail to free wheel urban transportation,
and from steam to diesel railroad propulsion — are the sort of
conversions which could come about only as a result of public
 preferences, technological change, the relative abundance of
natural resources, and other impersonal phenomena or
influence, rather than the machinations of a monopolist”.
• But the basics of the shift are well-covered in a review
published by Cliff Slater in a 1997 issue of Transportation
Quarterly: "GM simply took advantage of an economic trend
that was already well along in the process — one that was
going to continue with or without GM's help," concludes Slater.
ii. The Enron Scandal
Enron was formed in 1985 by Kenneth Lay after merging Houston
Natural Gas and InterNorth. Several years later, when Jeffrey Skilling
was hired, he developed a staff of executives that – by the use of
accounting loopholes, special purpose entities, and poor financial
reporting – were able to hide billions of dollars in debt from failed
deals and projects. Chief Financial Officer Andrew Fastow and other
executives not only misled Enron's Board of Directors and Audit
Committee on high-risk accounting practices, but also pressured
Arthur Andersen to ignore the issues.
Enron shareholders filed a $40 billion lawsuit after the company's
stock price, which achieved a high of US$90.75 per share in mid-
2000, plummeted to less than $1 by the end of November 2001. The
U.S. Securities and Exchange Commission (SEC) began an
investigation, and rival Houston competitor Dynegy offered to
purchase the company at a very low price. The deal failed, and on
December 2, 2001, Enron filed for bankruptcy under Chapter 11 of
the United States Bankruptcy Code.
Many executives at Enron were indicted for a variety of charges and
some were later sentenced to prison. Andersen was found guilty of
illegally destroying documents relevant to the SEC investigation,
which voided its license to audit public companies and effectively
closed the firm. By the time the ruling was overturned at the U.S.
Supreme Court, the company had lost the majority of its customers
and had ceased operating. Enron employees and shareholders
received limited returns in lawsuits, despite losing billions in
pensions and stock prices.
In an attempt to achieve further growth, Enron pursued a
diversification strategy. The company owned and operated a variety
of assets including gas pipelines, electricity plants, pulp and paper
plants, water plants, and broadband services across the globe. The
corporation also gained additional revenue by trading contracts for
the same array of products and services with which it was involved.
This included setting up power generation plants in developing
countries and emerging markets including The Philippines (Subic
Bay), Indonesia and India (Dabhol). Enron was rated the most
innovative large company in America in Fortune's Most Admired
Companies survey.
Skilling constantly focused on meeting Wall Street expectations,
advocated the use of mark-to-market accounting (accounting based
on market value, which was then inflated) and pressured Enron
executives to find new ways to hide its debt. Fastow and other
executives "created off-balance-sheet vehicles, complex financing
structures, and deals so bewildering that few people could
understand them.
Although trading companies such as Goldman Sachs and Merrill
Lynch used the conventional "agent model" for reporting revenue
(where only the trading or brokerage fee would be reported as
revenue), Enron instead elected to report the entire value of each of
its trades as revenue. This "merchant model" was considered much
more aggressive in the accounting interpretation than the agent
model. Enron justified this method because they were accepting the
entire risk of the transaction.
Between 1996 and 2000, Enron's revenues increased by more than
750%, rising from $13.3 billion in 1996 to $100.8 billion in 2000. This
expansion of 65% per year was unprecedented in any industry,
including the energy industry, which typically considered growth of
2–3% per year to be respectable. For just the first nine months of
2001, Enron reported $138.7 billion in revenues, placing the
company at the sixth position on the Fortune Global 500.
Enron also used creative accounting tricks and purposefully mis-
classified loan transactions as sales close to quarterly reporting
deadlines. In Enron's case, Merrill Lynch bought Nigerian barges with
a buyback guarantee by Enron shortly before the earnings deadline,
which effectively meant that Lynch had given Enron a bridge loan for
guaranteeing the buy-back that must be paid back when actually
buying the barges. Enron mis-reported the bridge loan as a true sale,
then bought back the barges a few months later. Merril Lynch
executives were later tried and convicted for aiding Enron in its
fraudulent accounting activities.
In Enron's natural gas business, the accounting had been fairly
straightforward: in each time period, the company listed actual costs
of supplying the gas and actual revenues received from selling it.
However, when Skilling joined the company, he demanded that the
trading business adopt mark-to-market accounting, claiming that it
would represent "true economic value."[11]:39–42 Enron became
the first nonfinancial company to use the method to account for its
complex long-term contracts. Mark-to-market accounting requires
that once a long-term contract has been signed, income is estimated
as the present value of net future cash flow. Often, the viability of
these contracts and their related costs were difficult to estimate.
Owing to the large discrepancies between reported profits and cash,
investors were typically given false or misleading reports. Under this
method, income from projects could be recorded, although the firm
might never have received the money, with this income increasing
financial earnings on the books. However, because in future years
the profits could not be included, new and additional income had to
be included from more projects to develop additional growth to
appease investors. As one Enron competitor stated, "If you
accelerate your income, then you have to keep doing more and more
deals to show the same or rising income."[15] Despite potential
pitfalls, the U.S. Securities and Exchange Commission (SEC) approved
the accounting method for Enron in its trading of natural gas futures
contracts on January 30, 1992. However, Enron later expanded its
use to other areas in the company to help it meet Wall Street
projections.
For one contract, in July 2000, Enron and Blockbuster Video signed a
20-year agreement to introduce on-demand entertainment to
various U.S. cities by year's end. After several pilot projects, Enron
claimed estimated profits of more than $110 million from the deal,
even though analysts questioned the technical viability and market
demand of the service. When the network failed to work,
Blockbuster withdrew from the contract. Enron continued to claim
future profits, even though the deal resulted in a loss.
Enron used special purpose entities—limited partnerships or
companies created to fulfil a temporary or specific purpose to fund
or manage risks associated with specific assets. The company elected
to disclose minimal details on its use of "special purpose entities".
These shell companies were created by a sponsor, but funded by
independent equity investors and debt financing. For financial
reporting purposes, a series of rules dictate whether a special
purpose entity is a separate entity from the sponsor. In total, by
2001, Enron had used hundreds of special purpose entities to hide its
debt.
Corporate governance
On paper, Enron had a model board of directors comprising
predominantly outsiders with significant ownership stakes and a
talented audit committee. In its 2000 review of best corporate
boards, Chief Executive included Enron among its five best boards.
Even with its complex corporate governance and network of
intermediaries, Enron was still able to "attract large sums of capital
to fund a questionable business model, conceal its true performance
through a series of accounting and financing manoeuvers, and hype
its stock to unsustainable levels.
Although Enron's compensation and performance management
system was designed to retain and reward its most valuable
employees, the system contributed to a dysfunctional corporate
culture that became obsessed with short-term earnings to maximize
bonuses. Employees constantly tried to start deals, often
disregarding the quality of cash flow or profits, in order to get a
better rating for their performance review. Additionally, accounting
results were recorded as soon as possible to keep up with the
company's stock price. This practice helped ensure deal-makers and
executives received large cash bonuses and stock options.
Before its scandal, Enron was lauded for its sophisticated financial
risk management tools.[26] Risk management was crucial to Enron
not only because of its regulatory environment, but also because of
its business plan. Enron established long-term fixed commitments
which needed to be hedged to prepare for the invariable fluctuation
of future energy prices.[27] Enron's bankruptcy downfall was
attributed to its reckless use of derivatives and special purpose
entities. By hedging its risks with special purpose entities which it
owned, Enron retained the risks associated with the transactions.
This arrangement had Enron implementing hedges with itself.[28]

Enron's aggressive accounting practices were not hidden from the

board of directors, as later learned by a Senate subcommittee. The
board was informed of the rationale for using the Whitewing, LJM,
and Raptor transactions, and after approving them, received status
updates on the entities' operations. Although not all of Enron's
widespread improper accounting practices were revealed to the
board, the practices were dependent on board decisions. Even
though Enron extensively relied on derivatives for its business, the
company's Finance Committee and board did not have enough
experience with derivatives to understand what they were being
told. The Senate subcommittee argued that had there been a
detailed understanding of how the derivatives were organized, the
board would have prevented their use.
Enron's auditor firm, Arthur Andersen, was accused of applying
reckless standards in its audits because of a conflict of interest over
the significant consulting fees generated by Enron. During 2000,
Arthur Andersen earned $25 million in audit fees and $27 million in
consulting fees (this amount accounted for roughly 27% of the audit
fees of public clients for Arthur Andersen's Houston office). The
auditor's methods were questioned as either being completed solely
to receive its annual fees or for its lack of expertise in properly
reviewing Enron's revenue recognition, special entities, derivatives,
and other accounting practices.
Andersen's auditors were pressured by Enron's management to
defer recognizing the charges from the special purpose entities as its
credit risks became known. Since the entities would never return a
profit, accounting guidelines required that Enron should take a write-
off, where the value of the entity was removed from the balance
sheet at a loss. To pressure Andersen into meeting Enron's earnings
expectations, Enron would occasionally allow accounting companies
Ernst & Young or PricewaterhouseCoopers to complete accounting
tasks to create the illusion of hiring a new company to replace
Andersen.[11]:148 Although Andersen was equipped with internal
controls to protect against conflicted incentives of local partners, it
failed to prevent conflict of interest. In one case, Andersen's Houston
office, which performed the Enron audit, was able to overrule any
critical reviews of Enron's accounting decisions by Andersen's
Chicago partner. In addition, after news of U.S. Securities and
Exchange Commission (SEC) investigations of Enron were made
public, Andersen would later shred several tons of relevant
documents and delete nearly 30,000 e-mails and computer files,
causing accusations of a cover-up.
Corporate Audit committees usually meet just a few times during the
year, and their members typically have only modest experience with
accounting and finance. Enron's audit committee had more expertise
than many. It included:
Robert Jaedicke of Stanford University, a widely respected
accounting professor and former dean of Stanford Business School
John Mendelsohn, President of the University of Texas M.D.
Anderson Cancer Center
Paulo Pereira, former president and CEO of the State Bank of Rio de
Janeiro in Brazil
John Wakeham, former United Kingdom Secretary of State for
Energy and Parliamentary Secretary to the Treasury
Ronnie Chan, Chairman of Hong Kong Hang Lung Group
Wendy Gramm, former Chair of U.S. Commodity Futures Trading
Commission
Enron made a habit of booking costs of cancelled projects as assets,
with the rationale that no official letter had stated that the project
was cancelled. This method was known as "the snowball", and
although it was initially dictated that such practices be used only for
projects worth less than $90 million, it was later increased to $200
million.
In 1998, when analysts were given a tour of the Enron Energy
Services office, they were impressed with how the employees were
working so vigorously. In reality, Skilling had moved other employees
to the office from other departments (instructing them to pretend to
work hard) to create the appearance that the division was larger
than it was. This ruse was used several times to fool analysts about
the progress of different areas of Enron to help improve the stock
price.
Fastow and his wife, Lea, both pleaded guilty to charges against
them. Fastow was initially charged with 98 counts of fraud, money
laundering, insider trading, and conspiracy, among other crimes.[99]
Fastow pleaded guilty to two charges of conspiracy and was
sentenced to ten years with no parole in a plea bargain to testify
against Lay, Skilling, and Causey.[100] Lea was indicted on six felony
counts, but prosecutors later dismissed them in favor of a single
misdemeanor tax charge. Lea was sentenced to one year for helping
her husband hide income from the government.[101]

Lay and Skilling went on trial for their part in the Enron scandal in
January 2006. The 53-count, 65-page indictment covers a broad
range of financial crimes, including bank fraud, making false
statements to banks and auditors, securities fraud, wire fraud,
money laundering, conspiracy, and insider trading. United States
District Judge Sim Lake had previously denied motions by the
defendants to have separate trials and to relocate the case out of
Houston, where the defendants argued the negative publicity
concerning Enron's demise would make it impossible to get a fair
trial. On May 25, 2006, the jury in the Lay and Skilling trial returned
its verdicts. Skilling was convicted of 19 of 28 counts of securities
fraud and wire fraud and acquitted on the remaining nine, including
charges of insider trading. He was sentenced to 24 years and 4
months in prison.[102] In 2013 the United States Department of
Justice reached a deal with Skilling, which resulted in ten years being
cut from his sentence.[103]

Lay pleaded not guilty to the eleven criminal charges, and claimed
that he was misled by those around him. He attributed the main
cause for the company's demise to Fastow.[104] Lay was convicted
of all six counts of securities and wire fraud for which he had been
tried, and he was subject to a maximum total sentence of 45 years in
prison.[105] However, before sentencing was scheduled, Lay died on
July 5, 2006. At the time of his death, the SEC had been seeking more
than $90 million from Lay in addition to civil fines. The case of Lay's
wife, Linda, is a difficult one. She sold roughly 500,000 shares of
Enron ten minutes to thirty minutes before the information that
Enron was collapsing went public on November 28, 2001. Linda was
never charged with any of the events related to Enron.
Arthur Andersen was charged with and found guilty of obstruction of
justice for shredding the thousands of documents and deleting e-
mails and company files that tied the firm to its audit of Enron.
Although only a small number of Arthur Andersen's employees were
involved with the scandal, the firm was effectively put out of
business; the SEC is not allowed to accept audits from convicted
felons. The company surrendered its CPA license on August 31, 2002,
and 85,000 employees lost their jobs. The conviction was later
overturned by the U.S. Supreme Court due to the jury not being
properly instructed on the charge against Andersen.The Supreme
Court ruling theoretically left Andersen free to resume operations.
However, the damage to the Andersen name has been so great that
it has not returned as a viable business even on a limited scale.
iii. The Cambridge Analytica Scandal
The Facebook–Cambridge Analytica data scandal was a major
political scandal in early 2018 when it was revealed that Cambridge
Analytica had harvested the personal data of millions of peoples'
Facebook profiles without their consent and used it for political
advertising purposes. It has been described as a watershed moment
in the public understanding of personal data and precipitated a
massive fall in Facebook's stock price and calls for tighter regulation
of tech companies' use of personal data.
Aleksandr Kogan, a data scientist at Cambridge University, developed
an app called "This Is Your Digital Life". He provided the app to
Cambridge Analytica.[3] Cambridge Analytica in turn arranged an
informed consent process for research in which several hundred
thousand Facebook users would agree to complete a survey only for
academic use. However, Facebook's design allowed this app not only
to collect the personal information of people who agreed to take the
survey, but also the personal information of all the people in those
users' Facebook social network. In this way Cambridge Analytica
acquired data from millions of Facebook users.
In the US, the story of how whistleblower Christopher Wylie had
built media mogul Steve Bannon’s “psychological warfare tool” by
harvesting millions of people’s Facebook profiles had erupted across
every news channel. Questions rained in on Cambridge Analytica,
Facebook, and its boss, Mark Zuckerberg, including the most
insistent – where was he?
A couple of hours later, I glanced at Twitter and saw a graph. It
showed a wavering line heading off a cliff. Facebook’s share price
had plunged $30bn in the first two hours of trading. By the end of
the week it was more than $100bn. Today it’s $170bn down.
If there’s one tiny ray of light in all this, it’s that journalism can have
an impact – even the cash-strapped, shoestring British variety. And if
there’s a reason to despair, it’s that it’s not enough.
Zuckerberg, its founder and chief executive, has defied parliament.
The company is quite simply beyond the rule of law. Because what
the Cambridge Analytica story exposed, by accident, from Facebook’s
reaction in the months that followed, is the absolute power of the
tech giants. Power and unaccountability that is the foundational
platform on which populist authoritarians are rising to power all
across the globe. Power and unaccountability that continues
unchecked. In Britain, in a media landscape that is insular and self-
regarding and obsessed with what happens at Westminster, we’ve
failed to connect the dots between Facebook and Brexit and the
world outside. To the global currents that favour autocrats and
populists. And to the technology platforms assisting them.
On October 27, 2012, Facebook CEO Mark Zuckerberg wrote an
email to his then-director of product development. For years,
Facebook had allowed third-party apps to access data on their users’
unwitting friends, and Zuckerberg was considering whether giving
away all that information was risky. In his email, he suggested it was
not: “I’m generally skeptical that there is as much data leak strategic
risk as you think,” he wrote at the time. “I just can’t think of any
instances where that data has leaked from developer to developer
and caused a real issue for us.”
In 2013, two University of Cambridge researchers published a paper
explaining how they could predict people’s personalities and other
sensitive details from their freely accessible Facebook likes. These
predictions, the researchers warned, could “pose a threat to an
individual’s well-being, freedom, or even life.” Cambridge Analytica's
predictions were based largely on this research.
Instead, the scandal and backlash grew to encompass the ways that
businesses, including but certainly not limited to Facebook, take
more data from people than they need, and give away more than
they should, often only asking permission in the fine print—if they
even ask at all. There has been a growing recognition that companies
can no longer be left to regulate themselves, and some states have
begun to act on it. Vermont implemented a new law that requires
data brokers which buy and sell data from third parties to register
with the state. In California, a law is set to go into effect in January
that would, among other things, give residents the ability to opt out
of having their data sold. Multiple states have introduced similar bills
in the past few months alone. On Capitol Hill, Congress is considering
the contours of a federal data protection law—though progress is, as
always in Washington, slow-going.
If there’s one choice that Facebook has made repeatedly over the
past 15 years, it’s been to prioritize growth over privacy. Users were
consistently encouraged to make more of their information public
than they were comfortable with. The settings to make things public
were always a bit easier to use than the ones to make things private.
Data was collected that you didn’t have any idea was being collected
and shared in ways you had no idea it was being shared.
Now Mark Zuckerberg, the CEO of Facebook, is 34. He’s a public
figure who is attacked relentlessly in the press and by politicians
around the world. He has two children, a house he blocks from view,
and a cover on his laptop camera. He’s also seen his company get
burned for ignoring user privacy, and he’s seen that the platform he
built to make the world more open and connected can also be used
by harassers, racists, trolls, bullies, and Vladimir Putin. His company’s
reputation has faltered; growth on the main platform has slowed,
and employee morale has dropped. It seems like a good time for a
change.
“Public social networks will continue to be very important in people's
lives—for connecting with everyone you know, discovering new
people, ideas and content, and giving people a voice more broadly,”
Zuckerberg wrote. “But now, with all the ways people also want to
interact privately, there's also an opportunity to build a simpler
platform that's focused on privacy first.”
The company’s loose policies on data collection over the years are
also what allowed it to build one of the most successful advertising
businesses in history. All the data the company collects helps
advertisers segment and target people. And it’s the relentless pursuit
of that data that has led to Facebook being accused of making
inappropriate deals for data with device manufacturers and software
partners. This is a history that Zuckerberg knows well, and one that
he acknowledged in his post. “I understand that many people don’t
think Facebook can or would even want to build this kind of privacy-
focused platform—because frankly we don’t currently have a strong
reputation for building privacy protective services,” he wrote.
he fact that your individual messages might be encrypted in transit
does not, in any way, prevent Facebook The Entity from knowing
who your friends are, where you go, what links you click, what apps
you use, what you buy, what you pay for and where, what businesses
you communicate with, what games you play, and whatever
information you might have given to Facebook or Instagram in the
past.

E. Some Ethical Guidelines to Combat Unethical Adversaries

When grease money is the norm, when crony capitalism is the way
to get ahead of your competition, when back-stabbing and corporate
sleaze is the corporate culture and the environment be damned is
the unwritten corporate value, how does one, as a junior employee
remain ethical?
As a junior executive, you have only three options:
i. Observe, but do not participate. Gain a reputation for being
straight. It will pay rich dividends later in your career.
ii. Become a whistleblower, if the crimes are disproportionately
high and after ensuring you have a tight case, with all data. If
the crimes are small, then follow (i).
iii. Leave the organisation for less dirty pastures
As a head honcho and in a position to decide policy and infuse an
ethical organisational culture and reputation, you have the following
options, in the face of a corrupt political and competitive milieu:
i. In responding to unethical activity by a competitor, do not
violate the very norms and values that you seek to preserve
and in terms of which you judge the adversary’s actions to
be unethical. (Deontology and Virtue Ethics). A company
must counter a competitor’s lies with the truth, not with lies
of its own. Success or victory won at the cost of one’s own
principles will be hollow. Principles cannot be turned on and
off at will. If they do not guide one’s response to immoral
activity, there is no assurance they will guide one’s response
at all. When economic survival and self-defence are morally
justifiable aims, they must be pursued ethically.
ii. In responding ethically, use your moral imagination. Gandhi
countered British armed force with a technique that
captured the imagination of masses of people, and it
achieved his goal more effectively than force could have.
Often there are many more alternatives open to us other
than simply suffering at the hands of an unscrupulous
opponent or fighting him on his terms. Moral imagination
pushes us to seek advantages we may have that we do not
ordinarily consider, to look for the chinks in the armour of
our adversary, (Blue Ocean strategies, for example) and to
search for analogies in the responses of others whom we
admire.
iii. When the response to immorality involves justifiable
retaliation or force, apply the principle of restraint. The
principle of restraint requires that the powerful, regardless
of the immorality of the enemy’s actions, use no more force
and cause no more harm than necessary to accomplish one’s
justifiable aims. The more powerful one is, the greater is the
 restraint required. In dealing with children, adults need to
apply more restraint than in dealing with other adults,
because of the difference in power. (give a corporate
example)
iv. In measuring your response to an unethical opponent, apply
the principle of proportionality. This principle requires that
any force used must be proportional to the offense and
harm suffered and to the good to be achieved, and that
those who use the force must have some hope of being
effective in achieving the end for which they use it. Relevant
in discussions of the legitimacy of whistle-blowing, for
example.
v. In responding to an unethical foe, apply the technique of
ethical displacement. Ethical displacement involves rising to
a higher level in order to solve the dilemmas that an
individual faces. Moral dilemmas are situations in which
neither of one’s choices is morally acceptable. If they are
true dilemmas, their solution cannot be found on the level at
which they appear. Thus a dilemma for an individual on a
personal level may only have a solution on the corporate
level, in the sense that solutions to personal dilemmas may
require changes in corporate structures. Corporate
dilemmas, in turn, may require changes in industry
structures to guarantee fair conditions of competition.
Industry dilemmas may require changes in national policies
or legislation. And national business dilemmas, such as
pollution problems, may require changes in structures or
agreements on an international level.
The technique of displacement analysis is initially a
descriptive technique and then a diagnostic technique. Any
solution that results from it will not be intuitive and will not
be easy. The idea that ethical issues are easy and are easily
resolved intuitively by ethical people is precisely what has to
 be overcome, both at the personal and at the organizational
level. Business supplies an example. Bribery is unethical
because it subverts the competitive system and gives unfair
advantage to those who engage in the practice. It is unfair
because someone other than the one receiving the benefit
pays—either consumers, shareholders, or taxpayers. In a
situation in which bribery is the going game, a company that
acts with integrity seems to have no option but to opt out of
it, and therefore lose business. This is blatantly unfair, yet a
company with integrity cannot either demand or accede to
bribery. At the level of the individual company, injustice
seems to triumph. It is only by rising to a higher level that
the disadvantage can be overcome. Legally outlawing
bribery is a way to make the field of competition fair on the
national level.
Nor should one draw the conclusion that law is the only
solution. Americans and American companies operating in
South Africa were faced with demands that they practice
discrimination, as specified in the South African apartheid
laws. Any individual or firm that violated those laws would
be prosecuted or be forced to leave. The successful strategy
for disobedience in this case consisted in a large number of
American firms agreeing that they would all publicly violate
the apartheid laws by following the Sullivan Principles,
which precluded discrimination. Together they were
powerful enough that the South African government ignored
their violations of its laws. Individual integrity was not
enough, even though only individuals and firms with
integrity would take the action that those individuals and
firms took.

vi. In responding to an unethical adversary, use publicity to

underscore the immoral actions. Publicity serves two
 functions. First, it opens up the unethical practice to public
scrutiny and allows the public to judge it for what it is.
Second, publicity makes it possible to mobilize public
pressure against the practice and its perpetrators. What is
tacitly accepted and quietly withstood becomes unbearable
when brought to full light. Publicity demands a public
reaction instead of a quiet individual one and often makes
possible a joint reaction that individual persons may be too
intimidated or frightened to make.

F . Universal Moral Values for Corporate

Codes of Ethics, Mark S. Schwartz, Journal of Business Ethics (2005)
59: 27–44 Springer 2005 DOI 10.1007/s10551-005-3403-2

In July 1992, the Josephson Institute of Ethics brought together in

Aspen, Colorado, 30 national leaders representing schools, teacher
unions, family support organizations, faith communities, national
youth service groups, ethics centers, and character education experts
to determine whether they could agree on a list of core of ethical
values that could provide a framework for analyzing ethical problems
and developing character education programs around a common
language acceptable to everyone (or almost everyone). The goal of
the meeting was to answer that question by articulating universal
moral values inherent in the concept of character. After three-and-a-
half days of debate and discourse, the Aspen Declaration was crafted
and signed by all those in attendance. The most momentous
statement of the Declaration was the assertion that six core ethical
values ‘form the foundation of democratic society’ and that these
core values ‘transcend cultural, religious, and socioeconomic
differences.’ This unprecedented statement forthrightly turned the
tide against the ethical relativists and values clarificationists with an
approach that promotes and advocates specific behaviors consistent
with a half-dozen universal ethical values...Ending definitively the
debate ‘whose values?’ these six distinct moral concepts were
adopted in proclamations passed by both houses of Congress and
signed by the president of the United States as well as about three
dozen governors, and nearly 1,000 cities and counties. [emphasis
added]
The six core moral values stated in the Aspen Declaration have been
referred to by other business ethicists (e.g., Carroll, 1993; Schwartz,
2002). The values include the following (Josephson, 1996, pp.
9-17):
1. Trustworthiness (including notions of honesty, candor,
integrity, reliability, and loyalty)
2. Respect (including notions of civility, autonomy and tolerance)
3. Responsibility (including notions of accountability, excellence,
and self-restraint)
4. Fairness (including notions of process, impartiality, and equity);
5. Caring (including notions of concern for the welfare of others,
as well as benevolence); and
6. Citizenship (including notions of respecting the law and
protecting the environment).
The proposed set of core universal moral values can act as a
normative foundation for the creation or assessment of any
corporate code of ethics or even global code of ethics (e.g., the UN
Global Compact).
 The Ethics of Leadership
1. AUTHENTICITY, DAVID W. LEHMAN, KIERAN O’CONNOR,
University of Virginia, BALAZS KOVACS and GEORGE E.
NEWMAN, Yale University

In short, there indeed exists a general consensus among scholars in

the social and behavioural sciences that authentic entities—whether
they are individuals, collectives, or objects—“are what they appear
to be or are claimed to be” (Trilling, 1972: 92).
The first meaning is rooted in foundational philosophical works
ranging from the Ancient Greeks to the Existentialists, as well as
classic mid-century scholarship on impression management. It
interprets authenticity as consistency between an entity’s internal
values and its external expressions; the second meaning interprets
authenticity as conformity of an entity to the norms of its social
category; the third meaning interprets authenticity as connection
between an entity and a person, place, or time as claimed.
Consistency: For example, Socrates emphasized the importance of
self-understanding and reflection: “The unexamined life is not worth
living.” Aristotle, on the other hand, focused on the importance of
action but, even here, the emphasis was on living in accordance with
one’s daimon or “true self”. Indeed, achieving consistency between
one’s actions and true self was critical for achieving eudaimonia or
“happiness” and a virtuous life. Such ideas created ripples
throughout history in later philosophical works.
Whereas past societies lived according to a set of shared values, such
as religions or other traditions that guided individuals toward
appropriate action and a meaningful life, individuals in modern
societies with fewer commonly shared values have turned inward
toward themselves in search of meaning.
The common thread across each of the three themes discussed
below is a concern with consistency between the “front” and “back”
stages. Each assumes that the backstage represents the “true self,”
whereas the front stage may or may not be an accurate portrayal of
it.
Self-Concept: For example, authenticity has been defined as “the
unobstructed operation of one’s true, or core, self”, “behavior that is
phenomenally experienced as being authored by the self”, alignment
of “our internal experiences with our external expressions”, “act[ing]
in accordance with one’s own sense of self, emotions, and values”,
and, more simply, “that sense of ‘who we really are’”.
A number of different factors have been shown to give rise to the
feeling that one is acting in accordance with her true self. Most
commonly, scholars have considered how different psychological
states prompt such feelings; for example, high levels of nostalgia,
power, positive mood (the suppression of negative moods has the
opposite effect), autonomy and attachment security, among others,
all enhance feelings of authenticity.
However, one notable point of unsettled debate is the nature of the
true self over time: Is it constant or evolving? As reflected by the
measurement scales of authenticity most commonly used within this
theme, several scholars suggest that the true self is constant, akin to
a personality trait, whereas others would suggest that it is a state
that is prone to develop or change over time. The evidence is not
entirely clear on the issue. The dominant view, at least in Western
cultures, is that the true self is essentialized and, as such, to be
‘discovered’ rather than created through an effort of will.”
Self-Presentation: Research within this second theme focuses
primarily on the front stage of the self. Scholars within this theme
acknowledge the many apparent advantages of consistency be-
tween the front and backstages of the self; at the same time,
however, they also emphasize that social and organizational
pressures often compel individuals to present themselves in ways
that are misaligned with their true selves.
Although it has been defined in various subtly different ways, those
who developed the most commonly used measure (i.e., Authentic
Leadership Questionnaire) define it as “a pattern of leader behavior
that draws upon and promotes both positive psychological capacities
and a positive ethical climate to foster greater self-awareness, an
internalized moral perspective, balanced processing of information,
and relational transparency on the part of leaders working with
followers, fostering positive self-development.”
The vast majority of scholars have sought to demonstrate the range
of positive outcomes of it. Early studies focused on individual-level
benefits for followers, including both psychological outcomes such as
well-being, psychological capital, trust in and satisfaction with the
leader and even authentic followership and behavioral outcomes
such as increased job performance, helping and other extra-role
behaviors and ethical decision-making.
Responding to calls for multilevel research, more recent studies have
demonstrated team-level benefits such as productivity, commitment,
ethical climate and workplace inclusion. In short, leaders perceived
as authentic appear to engender a host of positive outcomes for
individuals and teams.
Although authentic leadership has enjoyed a great deal of positive
attention among leadership scholars over the past decade, it has also
faced two specific critiques. First, the conceptual and empirical
distinctions between it and other forms of positive leadership,
ethical, responsible and servant leadership, among others, have
been less than clear. Indeed, a recent meta-analysis concluded that
“the relationship between authentic and transformational leadership
is large in magnitude, suggesting construct redundancy.”
Second, the inherent ethical component of the construct has raised
concerns by some scholars. Although some would argue that this
ethical component is part of “the point” in studying positive
organizational behavior, others would argue that “authenticity is not
intrinsically ethical” and that the two have been confounded.
AUTHENTICITY AS CONFORMITY
According to this second meaning, an entity is authentic to the
extent that it conforms to the social category to which it has been
assigned or that it has claimed for itself. Returning again to the
questions posed earlier, deliberations about whether or not last
night’s symphonic orchestra was true to the genre of classical music,
if the hosts of your most recent dinner party poured real Barolo wine
or if your favourite eatery down the street really serves traditional
Thai cuisine would all be invoking this meaning of authenticity. In
short, the referent at the root of an authenticity attribution
according to this meaning can be found outside of the entity: Is it
acting in accordance with the norms and expectations of its social
category?
The most straightforward definition of authenticity as conformity:
“Authenticity reflects a concern with correct classification” and, as
such, an entity “is an authentic X if it is an instance or member of the
class of Xs.”
AUTHENTICITY AS CONNECTION
According to this third meaning, an entity is authentic to the extent
that it is connected to a person, place, or time as claimed. In short,
the referent at the root of an authenticity attribution according to
this meaning can also be found outside of the entity but, here, is a
specific person, place, or time: Is the entity connected to it as
claimed?
Consider, for example, a sweater worn by Hitler or a faux-pearl
necklace once belonging to Jaqueline Onassis. “One does not
become Hitler by wearing his sweater; one does not become Jackie
O. by wearing her pearls. Rather, you possess a bit of their being”,
perhaps like carrying strands of hair in a locket, or keeping fragments
of saints’ bones. Such matters of essence and contagion are
foundational for the notion of authenticity as connection.

2. TAKING STOCK OF MORAL APPROACHES TO LEADERSHIP: AN

INTEGRATIVE REVIEW OF ETHICAL, AUTHENTIC AND SERVANT
LEADERSHIP, G. JAMES LEMOINE, University at Buffalo—The
State University of New York, CHAD A. HARTNELL, Georgia
State University. HANNES LEROY, Erasmus Universiteit
Rotterdam.
A vast focal shift has swept the field of leadership research in the
21st century. Whereas scholars had previously argued that
leadership could not or should not be concerned with issues of
ethics and morality, the moral nature of leaders is now seen by
many as not only necessary for the good of society but also
essential for sustainable organizational success.
These “moral contents” reflect the three major approaches to
normative morality proposed by the moral philosophy literature:
servant leadership’s emphasis on stakeholder outcomes is
congruent with moral consequentialist theory, ethical leadership’s
focus on norms and standards aligns with deontology’s core
precepts and authentic leadership’s foundation in the leader’s
self-awareness and moral courage is consonant with the most
critical elements of the virtue ethics approach.
We first review ethical, authentic, and servant leadership’s
conceptual foundations. Next, we review the empirical literature
to assess whether it corresponds with theoretical distinctions. We
then identify theoretical refinements through reviewing the moral
moorings that underpin each form of moral leadership. Drawing
on these three components of our review, we discuss the
implications of theoretical refinement for the future of ethical,
authentic, and servant leadership research as well as offer insight
into how all three moral forms of leadership can contribute
uniquely to our understanding of moral leadership in the
workplace.
Ethical Leadership—A Focus on Compliance with Normative
Standards
Ethical leadership is defined as “the demonstration of normatively
appropriate conduct through personal actions and interpersonal
relationships and the promotion of such conduct to followers
through two-way communication, reinforcement and decision-
making”
An ethical leader acts both as a “moral person”, maintaining
fairness and honesty in relationships with subordinates, and as a
“moral manager,” demonstrating and reinforcing desired and
normatively appropriate behaviors. Predicated on these
conceptual foundations, the framers of ethical leadership posited
that ethical leaders are credible role models who emulate desired
ethical attitudes and behaviors for subordinates and provide
rewards for ethical conduct and consequences for “those who
don’t follow the standards”.
James Burke—classic example of ethical leadership: In 1982,
seven people died after taking cyanide-laced extra-strength
Tylenol capsules sold in five Chicago stores. Before that happened,
Tylenol, sold by J&J’s McNeil Consumer Products division, had
35% of the $1.2 billion analgesic market. After the deaths, J&J’s
market share dropped to 7%. Under Burke’s leadership, the
company spent $100 million to recall 31 million bottles of Tylenol
and re-launched the product two months later in tamper-proof
packaging. Burke not only saved the reputation of the company,
but he also saved the brand as well. By mid-1983, Tylenol’s share
of the analgesic market had climbed to 30%, reaching 35% by the
end of the year.
Burke emphasized the value of the J&J credo, dating back to the
company’s founding in 1887, which stated that the company is
responsible first to its customers, then to its employees, the
community and the stockholders, in that order. “The credo is all
about the consumer,” Burke said. When those seven deaths
occurred, “the credo made it very clear at that point exactly what
we were all about. It gave me the ammunition I needed to
persuade shareholders and others to spend the $100 million on
the recall. The credo helped sell it.”
Authentic Leadership—A Focus on Self-Awareness and Moral
Self-Concordance
Authentic leaders are described as individuals who value a
salience of self over role, persons who have achieved high levels
of authenticity in that they know who they are, what they believe
and value, and they act on those values and beliefs while
transparently interacting with others. Authentic leaders, thus,
make moral judgments freely and independently, without concern
for potentially opposing normative or external social pressures.
Authentic leadership is composed of four dimensions: self-
awareness (i.e. knowing oneself), balanced processing (i.e.,
objectively thinking through both sides of issues), relational
transparency (i.e., acting in accordance with one’s true nature
rather than contrived or fake manners), and an internalized moral
perspective (i.e., moral self-regulation and behaving in accordance
with these moral values). Howard Schultz-great example.
Servant Leadership—A Focus on Multiple Stakeholders
Robert Greenleaf defined servant leadership as: “The servant-
leader is servant first... the difference manifests itself in the care
taken... to make sure that other people’s highest priority needs
are being served... × Do those served grow as persons? Do they,
while being served, become healthier, wiser, freer, more
autonomous, more likely themselves to become servants? And,
what is the effect on the least privileged in society? Will they
benefit or at least not be further deprived?”
“A style of leadership which emphasizes leader behaviors that
focus on follower development, and de-emphasizing glorification
of the leader”, “a model that identifies serving others – including
employees, customers, and community – as the number-one
priority.”
Such similarity among the three constructs raises questions about
their distinctiveness: if all three predict similar outcomes via
similar mediators, to what degree are three separate constructs
necessary? Furthermore, if these outcomes and mediators are
similar to those found in research on more goal-focused and less
ethics-centric forms of leadership, what makes moral leadership
uniquely important?
Among the moral approaches to leadership, ethical leadership is
unique in its use of rewards and punishments to hold followers
accountable for organizational standards and values. Ethical
leadership’s novel focus on compliance with normative standards
is exemplified by the item “[my manager] disciplines employees
who violate ethical standards.”
Authentic leaders uniquely demonstrate self-awareness and
actively seek feedback for personal growth. These behaviors are
consistent with the theoretical importance of self-awareness and
self-regulation to authentic leadership and are evidenced by items
such as “[my manager] solicits views that challenge his or her
deeply held positions.”
A novel aspect of servant leadership is that it is attentive to and
creates valued outcomes for multiple stakeholders internal and
external to the organization. This focus is operationally
exemplified by dimensions that reference creating value for
others, and items such as “My manager is always interested in
helping people in our community.”
Authentic, ethical, and servant leadership are all, in general terms,
moral. Each, however, uses a markedly distinct theoretical
approach to normative morality (or the question of what is good
and right, and what is not.
Servant Leadership: A Consequentialist Focus on Multiple
Stakeholders
Servant leadership’s multiple stakeholder emphasis, thus, extends
a leader’s concern beyond the traditional focus on employees or
the organization to include the well-being of external stakeholders
such as customers and communities. Consequentialism, one of the
three major theories of normative philosophy (or perspectives on
how individuals choose what is right and what is wrong: it argues
that what makes an attitude or behavior moral is how it impacts
the good of the world (Moore, 1903). As the name suggests,
consequentialism mandates examining the consequences of
actions, and from there determining whether actions are morally
appropriate. It is these consequences, rather than expectations,
norms, standards, or personal benefit that determines morality.
The similarities between consequentialism and Greenleaf’s (1977)
conceptualization of servant leadership (“make sure that other
people’s highest priority needs are being served”) are striking.
Rather than prioritizing reciprocation and exchange, norms and
rules, or even the emergence of a shared vision, theory indicates
that servant leaders’ actions prioritize serving the good of multiple
stakeholders.
Servant leadership further aligns with consequentialism via its
acknowledgement that the organization itself is a valued
stakeholder.
Prominent servant leadership scholars have long argued that the
organization’s success is one of many valued ends for servant
leaders. Similar to stakeholder theory, servant leaders believe that
serving other stakeholders benefits the organization because it
leads to long-term organizational success. Reciprocally,
organizational success is beneficial to other stakeholders (e.g.,
employees) and affords the organization an opportunity to
continue to serve its community and society. This reasoning is
consistent with the consequentialist view that individual success
allows individuals and organizations to better position themselves
for future aid to others. After all, if an organization closed its
doors, it would be incapable of helping others and may endanger
the well-being of several other stakeholders, dependent on the
organization’s existence (e.g., employees). Therefore, servant
leadership’s explicit focus on performance (distinct among the
forms of moral leadership) is not only compatible with its moral
nature but also concordant with its broad stakeholder allegiances.
Ethical Leadership: A Deontological Focus on Compliance with
Normative Standards
“What does ethical leadership accomplish?” “The executives we
talked with said that ethical leadership was good for business,
particularly in the long term, and avoids legal problems. ‘It
probably determines the amount of money you’re spending in
lawsuits and with corporate attorneys... you save a lot of money in
regulatory fees and lawyer fees and settlement fees.’”
Ethical leadership theory maintains that alongside basic moral
elements such as fairness and honesty, the construct’s view of
morality is guided chiefly by the importance of compliance with
norms and standards.
Ethical leadership’s distinctions from servant leadership’s more
consequentialist emphasis are also empirically supported by
studies finding that subordinates of ethical leaders develop skills
at identifying legal, but not more generally moral, ramifications of
scenarios that the effect of ethical leadership on whistle-blowing
is suppressed when there is a stronger focus on negative societal
consequences of decisions and that ethical leadership is not
predicted by consequentialist ideology, but it develops more
frequently in those with deontological moral mind-sets.
Considering ethical leadership, if employees did not follow
organizational standards, the organization’s structure and
framework would fall apart and the organization could not exist;
therefore, standards and rules are moral. A related form of
deontology, the philosophy of law (Coleman,1989), argues that
laws, rules, and standards themselves create moral obligations:
they coordinate social activities (such as everyone driving in the
correct lane or forming orderly queues for service), and
individuals who act against these conventions may needlessly
endanger or frustrate others, causing moral harm.
Although the ethical leader encourages voice, as an extension of
the fairness exhibited by the moral manager the ethical leader is
less open to criticism of company standards and policies, and
certainly intolerant of non-compliance. Questioning of
organizational norms may, therefore, be frowned upon by ethical
leaders.
Another unique aspect of ethical leadership relative to the other
moral approaches to leadership is its reliance on transactional
influence as a method to compel followers to conform to
normative standards. This focus is clear in ethical leadership’s
seminal theoretical development and operationalization, and
congruent with deontology. Whereas a consequentialist might ask
whether society would benefit from punishing a rule breaker, the
deontologist argues that on principle, wrongdoers deserve
punishment. This is a notable distinction from servant leadership.
Greenleaf specifically argued against coercion in favor of
persuasion, even for the most heinous of acts such as slavery
(Greenleaf, 1970). Altogether, a deontological focus on
compliance to and enforcement of norms, rules, and laws
emerges as the most differentiating aspects of ethical leadership
relative to servant and authentic leadership.
Authentic Leadership: A Virtue Focus on Self-Awareness and
Moral Self-Concordance
The hallmark of authentic leaders is their authentic and
transparent expression, and action in concordance with their
beliefs. Authentic leaders’ morality is proposed to be independent
of external expectations, such that the authentic leader would
make decisions based on their own moral compass, rather than on
other people’s opinions of ethics. “The authentic leader does not
try to coerce or even rationally persuade associates, but rather
the leader’s authentic values, beliefs, and behaviors serve to
model the development of associates”. Authentic leaders model
authenticity to develop trust and serve as role models, passively
“projecting” their authentic self to followers.
For instance, research indicates that authentic leadership is
uniquely predicted by a leader’s strong physical enactment of
their true emotions and values and their tendency to tell stories
about their past, particularly stories of the more sensitive,
negative, and potentially embarrassing aspects of their past.
Followers of authentic leaders grow in their own self-concordance
and moral courage to stay true to their convictions. Authentic
leadership may be strongest when it is combined with authentic
followership, such that leaders and followers share their core
values in a psychologically safe environment, assess their
situations honestly and frankly, and work together to ensure
fulfilling and productive experiences. Indeed, theory suggests that
a core motivation of authentic leaders is to have authentic
followers who similarly feel free to express themselves
transparently and make their own moral judgments.
The virtue ethicist’s reliance on their own moral judgment raises
the possibility that they may change their mind as to what is
moral, as is argued for authentic leaders: “They have the
credibility to... seek alternative ways of approaching them without
being perceived as disingenuous or shifting with popular opinion.
They can change their mind and be seen to be acting consistent
with their end-values and therefore authentic”.
This philosophy supports authentic leadership’s unique approach
to what is moral: rather than focusing on standards or
stakeholders, authentic leaders view morality as that which aids
individuals in understanding themselves, acting in self-concordant
manners, and following their own moral compass regardless of
the expectations of society or others.
“A good theory articulates not only what a construct is, but also
what it is not”. Although ethical, authentic, and servant leadership
theory has done a respectable job defining what each leadership
approach is, their conceptual boundaries (i.e., what they are not)
are much more amorphous. Ambiguous conceptual boundaries
pose problems for differentiating among moral forms of
leadership (as well as other forms of leadership).
And because of this common moral nature, some overlap among
ethical, authentic, and servant leadership’s nomological networks
is inevitable. For instance, given that all three approaches feature
generally moral behaviors such as honest and fair subordinate
relations, it is not surprising that all three are related to outcomes
such as trust, justice perceptions, and relational quality.
Are moral philosophies underlying the three moral approaches to
leadership congruent such that they complement one another in
building a grander, more holistic morality, or are they
fundamentally opposed? Such questions are central to
understanding three relational contexts associated with moral
congruence: within-leader (with connections to leaders’ moral
identity), leader–environment, and leader–follower moral
congruence. Present the three leadership styles overlap model.
Within Leader moral congruence:
“Can leaders employ more than one moral philosophy
simultaneously?” It is logical to assume that a highly moral
individual might prioritize compliance with standards, self-
awareness and self-concordance, and stakeholders, but adhering
to all three moral moorings is not necessarily assured. Some
leaders might believe in following rules even if they do not believe
in them; others might advocate for bending or breaking
organizational norms in the service of stakeholder good; still
others could lack strong feelings for compliance or compassion for
stakeholders and, instead, be guided solely by their own instincts
or deeply held philosophies or religious convictions. It is not
difficult to imagine scenarios in which the three moral interests
would align. For instance, individuals follow norms and standards
in part because they honestly believe that they positively impact
the people affected by them.
Other cases may be less straightforward, and might involve
conflict. What does a moral leader do if telling the truth and
representing him- or herself authentically would have negative
implications for stakeholders, or result in his or her speaking
against company norms and culture?
Although it may be possible for leaders to switch between moral
philosophies over time and situations (e.g., using deontology in
one situation and consequentialism in another), moral dilemmas
may impede on their overall sense of moral coherence,
consistency, and integrity. Leaders who use different moral
principles in different situations—ethical in one situation and
servant or authentic in the next—may adversely affect followers
who seek behavioral consistency and predictability from their
leaders. Moral dilemmas may create weak situations in which
followers become confused by attempting to interpret the
leader’s inconsistent ethical principles. Exploring interactions
among different moral philosophies introduces interesting
questions about followers’ interpretation and response to ethical
behavior.
It has been assumed that moral leadership styles identify leaders
who make moral decisions, but exactly what is moral is often
subjective. For instance, in a case of declining profits, are layoffs
more moral when they affect the smallest number of employees,
or is an organization-wide pay decline more moral because no one
is laid off?
Leader–environment moral congruence:
Existing approaches to moral leadership are quite normative and
morally absolutist in that they suggest one optimal moral
behavioural pattern. However, a degree of relativity may exist
such that certain approaches fit better within certain contexts.
Different contexts differ in their emphasis on different moral
content, including national cultures, political or religious climate,
and industry or corporate cultures—all of which suggest a
contingency perspective to moral leadership.
Ethical leaders would be most sensitive to these contextual issues
because of their awareness and prioritization of cultural and
organizational norms. Authentic and servant leaders, though,
would be expected to be far less concerned with such norms.
Servant leaders would focus on stakeholder good regardless of
expectations. This perspective is congruent with stakeholder
theory (Freeman, 1984) in which organizational goals transcend
mere profitability, a viewpoint that may or may not align with a
company’s internal norms. Authentic leaders might be most
strongly opposed to prevailing norms, given their high moral
courage and belief in moral freedom; indeed, to more
deontological cultures and environments, the authentic leader
may well be viewed as an unpredictable “loose cannon.” Could
ethical leaders, then, be the most effective at navigating
differences among national and organizational cultures, whereas
authentic leaders would struggle the most? If ethical leaders are
open to different contextual demands and willing to switch to the
current moral standards, then the answer is yes. It is plausible,
however, that an ethical leader might be more absolutist and even
rigid in his or her adherence to one system of norms and
expectations over another. A cross-cultural management problem.
Leader–follower moral congruence:
For instance, a leader may explicitly buy into a philosophy in
thought or theory only to find him- or herself challenged in those
beliefs by followers because they contradict more implicit
 assumptions (e.g., religious or political beliefs). Furthermore, a
certain moral leadership approach may have little to no effect
because specific followers (or larger groups) have implicit beliefs
or schemas around what is right and wrong that are not easily
challenged or changed.
In sum, depending on the belief system and moral philosophy of
individual followers, the leader’s attempt to use one leadership style
over another may fail. In this manner, how would an authentic,
virtue ethics-oriented follower react to an ethical or servant leader?
Questions such as these demonstrate that moral leadership may
serve as a double-edged sword.

Trade-offs and negative effects associated with each moral

approach to leadership:
Similarly, studies of servant leadership should examine how and
whether it is possible for servant leaders to effectively balance
organizational concerns with the goods of stakeholders such as
customers, employees, and communities. Is such a balance among
multiple stakeholders’ concerns plausible? If so, is there an optimal
stakeholder balance that can be achieved for the overall good, such
as the controversial concept “effective altruism” which has been
proposed (but not empirically verified) as the most impactful form of
utilitarian consequentialism.
Do most managers make decisions based on norms and standards,
based on outcomes and stakeholders, or based on their own self-
concordant judgments? Of these three approaches, which is the
most effective in terms of organizational success, team development,
or more morally oriented outcomes? Our review suggests that the
organizational context is an environment where different moral
approaches can be present, even simultaneously, with distinct
outcomes for each approach to moral leadership.
 3. CEO ATTRIBUTES AND FIRM PERFORMANCE: A SEQUENTIAL
MEDIATION PROCESS MODEL, DONG LIU, Scheller College of
Business, Georgia Institute of Technology, GREG FISHER,
Kelley School of Business, Indiana University, GUOLI CHEN,
INSEAD
Hambrick and Mason (1984) laid out a linear model connecting the
situation facing an organization and the characteristics of the
executives in its upper echelons with the strategic choices made to
address the situation and ultimately the organization’s performance.
As they noted, “the heart of the theory is the portrayal of upper
echelon characteristics as determinants of strategic choices and
through these choices, of organizational performance”.
Research on the relationship between TMT attributes and firm
outcomes examines whether a TMT’s attributes, such as tenure,
team size, structure and diversity, social networks and functional
backgrounds are related to firm performance. This stream of
research has provided a great deal of insight into the relationship
between executives in the upper echelons and their firm’s
performance, in the form of explanatory constructs at the TMT level.
Research has investigated a variety of different individual attributes,
including the CEO’s background, such as functional experience,
education and international experience, along with the impact these
have on diversification, innovation, and strategic change.
Researchers have also considered CEO demographics, such as age
and gender, as well as personality attributes, such as core self-
evaluation (CSE), hubris, humility, narcissism and overconfidence.
This research stream has shed light on the influence CEOs have on
what happens in firms but has seldom directly linked CEO attributes
to firm performance, instead associating CEO attributes with specific
strategic choices and initiatives of TMTs, with the implicit
assumption that these strategic choices have implications for firm
performance.
The third research stream accounts for the connection between the
individual CEO and the TMT’s processes. This perspective draws
mainly on leadership theory to assess how the attributes of a CEO
impact the group of executives he or she leads within a typical
organizational hierarchy. The essence of this research is that as CEOs
interact with TMT members, their individual attributes can have a
significant impact on TMT processes.
The starting point is CEO attributes, which in turn have an immediate
influence over the processes of the TMT that he or she establishes
and leads. TMT processes are related to strategic choices that
ultimately impact firm performance.
CEOs and other executives often need to make their most telling and
significant decisions when their firm is confronted with a novel,
disruptive, or critical event.
Third, the implementation of strategic choices within an organization
has a major impact on whether those choices translate into firm
performance, yet the aforementioned baseline model overlooks the
organizational processes through which executives’ strategic choices
are translated into organizational performance outcomes.
Because CEO attributes and their impact on outcomes at the firm
level have been extensively studied, it makes sense to categorize the
current literature according to their theoretical origins: (1) CEO
background features, (2) CEO personality characteristics and (3) CEO
leadership styles.
Background features:
Hambrick and Mason (1984) categorized functional experience based
on whether it is oriented toward output (marketing, sales, and
product development), throughput (production and ac-counting), or
peripheral activities (law, finance, and HR). A CEO’s prior output
experience is held to be positively associated with firm profitability in
turbulent industries, throughput experience is held to be positively
associated with firm profitability in stable industries, and peripheral
experience with unrelated diversification and administrative
complexity
CEO’s Personality Attributes and Firm Performance
The argument underpinning this research is that a CEO’s self-concept
as measured by personality characteristics: Hubris, humility,
narcissism and overconfidence—can impact his/her cognitive and
emotional states, which in turn affect firm performance.
More specifically, the upbeat emotions of CEOs with a positive self-
concept prompt them to process more information and attend to
more positive environmental cues (as opposed to CEOs with a lower
positive self-concept), which in turn allows them to identify more
opportunities, and view them more favourably. As such, a positive
self-concept is likely associated with strategic action in the pursuance
of opportunities: this may generate valuable returns, but may also be
risky and place the firm in a precarious position. CEOs with a positive
self-concept have favourable self-perceptions and are more likely to
view themselves as exceptional, potent, admirable, and important.
As a result, they are inclined to set more ambitious goals and pursue
grander initiatives with higher stakes attached.
Empirical research on CEO narcissism suggests that it is positively
related to the number and size of firm acquisitions, spending on
R&D, capital expenditure, and mergers and acquisitions.
Furthermore, narcissistic CEOs are more aggressive in their adoption
of technological discontinuities, especially when they anticipate
widespread admiration for their bold actions.
Empirical evidence on the relationship between CEO charismatic
leadership and firm performance is mixed.
Transactional leadership. This is largely oriented toward maintaining
existing systems and cultures. Transactional leaders operate within
an existing system or culture, as opposed to trying to change it. They
attempt to satisfy the needs of followers by focusing on exchange
and contingent reward/punishment; pay close attention to
deviations, mistakes or irregularities; and make corrections when
necessary. Empirical research provides no support for a significant
relationship between CEO transactional leadership and firm
Performance.
The CEOs Leadership style and TMT processes
Peterson et al. (2003) propose a number of TMT processes such as
TMT dynamics, flexibility, leader dominance, cohesiveness,
corruption and centralization, which may result from CEO
personality. TMT behavioural integration and risk-taking propensity
have been identified as key processes that underpin the relationship
between CEOs and firm performance. TMT behavioural integration
refers to members’ willingness to collaborate, share information,
make joint decisions, and develop a shared vision, thereby reflecting
the extent to which they engage in collective interaction.

4. Bill George, Harvard Business School professor and author of

True North: Discover Your Authentic Leadership.

There was a lot of talk in the decade of the last century about
charismatic leadership. Does that category fall into the inauthentic
side of things?
BILL GEORGE: It sure does. Unfortunately, many boards of
directors were looking for a charismatic leader can who could
come in from the outside and save the company. Most of these
people, with two exceptions, destroyed much more value than
they ever created. And boards looked more for charisma than
character. They looked more for style than substance, and they
looked more for image than integrity. And if you choose charisma
and image and style instead of character, substance, and integrity,
you’re going to get a leader that does not do the job for the long
term.
In the 20th century, we had this idea, Jim, of following the great
leader over the hill. Well, this is a flawed notion. People today are
not interested in following– they want to step up and lead. And I
think leaders that can empower people to do that and to set the
context, to be sure– know the mission and purpose of the
company, know the values we hold dear– but then people can be
empowered all over the organization, even if they don’t have
direct reports, to step up and lead. And it’s the empowering
leader that’s going to get the most, if you will, out of people
today. Because people today know more than their bosses, they
don’t want to wait in line for 10 to 20 years, they don’t want to
live in a bureaucracy. They want to have the opportunity to lead,
and why shouldn’t they have that opportunity to find meaning
and significance in their work?
BILL GEORGE: I think that it starts with having self-awareness,
knowing yourself. But that’s hard to do unless you get feedback.
And so I think feedback, getting feedback from others about how
you’re seen– so you can see yourself as others see you– is very
important. Testing your values under pressure. Not standing on
the sidelines, but getting into the game and seeing, how are you
going to respond under pressure? And then finally, something that
doesn’t seem intuitive, is having a fully integrated life– your work
life, your home life, your personal life, and your community life.
That will make you a better leader if you can achieve an
equilibrium in your life and be the same person in all those
environments. Then becoming an empowering leader becomes
much easier.
Howard Shultz: Business Leadership ( Good for authentic
leadership, Trust and Human Dignity)
Jack Ma: I have had so many failures..
Indra Nooyi—Truth from the top
JRD TATA or Jamshetjee TATA for Servant Leadership
James Burke of J&J for Ethical leadership