This Study Resource Was: Business Ethics, Law and Sustainability

Business Ethics, Law and Sustainability

Putri Saffira Yusuf (29320037) – GM 11
Individual Assignment
The Normative Foundations of Business (HBS, 1997)
When talking about the appropriate role for business in a capital society, we need to
dissect and define our terms of business and a capitalist society first. A business is any
organization in which private parties (referred as “owners”) provide risk capital and have
a claim on the net economic value that is created, while a capitalist society is any society
that relies heavily on businesses to produce and distribute goods and service. I personally
think that the role of business in capitalist society is very important as a value creator that
can provide solutions and products that are beneficial to society. Most entrepreneur,
including me, involved in business world not only because they want to make value, but
m
er as
also to distribute goods that beneficial for customer. As a real-life example is my small
co
business engaged in the sale of reading device, Kindle. I see that there is a value that I
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can deliver besides profit, which is to increase the reading interest of people in Indonesia.
o.
Even though I know it is a big objective and not easy, but I believe that there is a market
rs e
segment that I can reach. Capitalists do not only provide property rights and free markets
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as a basis for trade, it also can change the society to be motivated to do business and
become more innovative and creative every day. For me, it's a kind of motivation to be
o
able to produce a product that can solve problems in society. In practice, however,
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capitalism does have their imperfection too. The increasing bicycle prices in Indonesia
vi y re
during the pandemic. This case shows monopoly power that capitalism has, making it
easier for big company to gain monopoly power in product or labor markets.
Speaking of role of business, we also talk about two dimensions used to analyzed
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normative philosophies of business, which are objective(s) and constraints on business

behavior. The first dimension defines the appropriate objective(s) of businesses and their
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managers to pursue. The main question here concerns the role of profits as the primary
or sole objective. The second dimension characterizes the appropriate constraints on
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business behavior. These are the norms that should guide business decision making.
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The Objective(s) Of Business

The idea that profit maximization is the appropriate business objective has three
reasons. It consists of decision rights, emphasizes social welfare and practical realities of
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competition.
The theory of property rights, many people believe that businesses should simply
maximize profits, has its root in the work of John Locke. Locke saw private property as a
natural right, derived from an individual’s need to survive and her ability to secure
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sustenance by claiming and transforming the natural environment. Locke’s view produces
a view that profit maximization should be the primary objective of business. Most
economists consider a firm to be a single profit-maximizing entity, implying that managers
not only should but in fact do everything to maximize profit.
In addition to the argument that stresses the priority of shareholders, profit
maximization has been justified by appeals to overall social welfare. In this case, profit
maximization leads to satisfied customers and rewarded investors -- goods are produced
at their lowest cost, subject to customer demands for quality, and innovation is stimulated
and channeled in economically productive ways. However, critics of the social welfare
rationale charge that the efficient market economists imagine does not exist. Real
markets generate information asymmetries, externalities, transactions costs, search
costs, relatively small numbers of sellers and buyers, barriers to entry and exit, and
bounded agent rationality. These imperfections often mean that profits do not serve as a
good measure of social benefit created.
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With profit maximization secures social welfare, many find that the inexorable logic of
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economic competition will drive firms to embrace this objective. This called trapped in the
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“iron cage“of competition. In his analysis of the "Protestant Ethic," Max Weber (1905)
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observes that once a society endorses profit-making and competition, economic agents
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become locked into an "iron-cage" of this rationality. Economists invoke the iron-cage as
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a response to those who would have business take on more social goals. On the other
hand, empirical evidence suggests that markets are not quite as brutal as the iron-cage
rationale would suggest. The survival of companies who do not exclusively emphasize
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profit maximization suggests that either observers have underestimated the relationship
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between social commitments and productive efficiency, or that at least some markets
include sufficient slack to allow for a range of objectives.
Beyond responding to specific arguments, critics of profit-maximization have
suggested that profit-seeking is a singularly uninspired primary objective and perhaps
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even self-defeating. Theodore Levitt (1983) sees profit maximization as "morally shallow”.
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Yet under the explanation of profit maximization, there are some alternatives to profit
maximization that firms can adopt. The first alternative is putting the customer first. Levitt
(1983) argues that an objective of serving customers is not only more appealing than
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profit maximization, but likely to be more successful than other objectives. I believe that
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this alternative is very effective because I feel it in my own business. By focusing on

customers, companies can build good relationships with customers and lead to customer
loyalty and also in certain cases customer retention.
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The second is providing meaningful employment by placing workers as an asset in

business. Norman Bowie endorses this view, noting employees are often the most
vulnerable constituency and most significant risk bearers in a business. He notes that
meaningful work is more important to employees than any product is to customers, or
profit from an individual stock is to the average shareholder. He also notes that an
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employee orientation might create favorable conditions that enhance firm viability. This
job rotation is a similar strategy adopted by Toyota. According to Toyota, job rotation
helps employees to improve their skills, Knowledge and competencies. Employees get
bored by doing the repetitive task every time so job rotation is a good way to keep them
active and fresh every time.
Next alternative is balancing multiple stakeholders by assembling fiduciary
relationship to each group of stakeholders, not just stockholders. Edward Freeman and
William Evan (1990, 1993), two of this view's most prominent proponents, argue that
managers should have a fiduciary relationship to each group of stakeholders, not just
stockholders. Managers should respect the rights of stakeholders to determine their own
future and take responsibility for all the effects of their business decisions. Yet, the
objective of balancing all stakeholder interests creates a very high standard. The theory
does not offer any principle for making trade-offs or resolving conflicts between
stakeholder groups.
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Last alternative to profit maximization would be serving the public (community) good.
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This could be conducted by building a good image in the eyes of the public. Some have
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argued that businesses should be viewed as public service entities. For instance, Merrick
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Dodd (1932) urged that we develop "a view of the business corporation as an economic
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institution which has a social service as well as a profit-making function. "(p1148) A
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concrete example of "public good" applied by certain companies in Indonesia is corporate
social responsibility (CSR). Take the example of Unilever which has a CSR program in
the form of assistance to soybean farmers. For the benefit of farmers, the existence of
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this CSR program plays a role in improving the quality of production, as well as ensuring
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smooth distribution. As for Unilever itself, this will guarantee the availability of raw
materials for each of its products which are made from soybeans, such as Bango soy
sauce which has become one of the mainstays of its products. Even so, there are those
who are skeptical of the effectiveness of any business explicitly pursuing the public good,
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arguing a division of labor between businesses and the social sector is necessary and
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efficient.
Is there a single, appropriate objective function? There are some who argue that
the debate over defining an objective function is misguided since there should not be a
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single standard for all businesses. Some justify this belief by returning to the Lockean
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theme of freedom of contract, arguing that the choice of objective function should be left
to the individuals involved in the nexus of contracts. However, if there is no particular
stand for an objective function, one could just cite 'personal preference' as sufficient
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rationale for any objective function. This could lead to businesses that greatly differ from
the prevailing moral and cultural sentiments of the society from which they emerge.
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Constraints on business decision making

Constraints, the other hand, are the limits managers face pursuing their business
objective. This consists of: strategic compliance, libertarianism, conventionalism and
beyond conventions. Each of these constraints will be explained in the next paragraph.
Strategic compliance’s view contends that managers should gauge the extent to
which the law and public pressure might hinder their pursuit of the firm's objectives and
treat compliance to moral, social and legal codes as a function of costs and benefits.
Though few individuals openly advocate this position, commentators have argued that
some (perhaps many) businesses behave as if they follow it.
While libertarianism, which initiates a society with a minimal state role, where the
distribution of resources is determined by the abilities of each individual through market
mechanisms. Many people who call themselves libertarians would accept a minimal set
of normative constraints on business activity, but object to any other laws or ethical
requirements. They may respond to any additional constraints strategically, or they may
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obey them, while they work for the repeal of laws that go beyond their minimal standards.
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They accept only those moral constraints required to protect individual autonomy - a
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position generally summarized as "no force or fraud." Beyond these constraints,
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libertarians contend that people should look out for themselves and insist that societies
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have no right to impose value-laden constraints on individuals.
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The third constraint is conventionalism, which included law and social norm. For
many people, the law and social custom provide the basic framework of society and hence
are the appropriate set of constraints for business behavior. According to a popular view,
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the law is a statement of the rules of behavior with inherent moral weight. As Hosmer
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(1987) observes, the law, as expressed in the collected body of statutes and precedents
and the various institutions which serve to enforce and adjudicate, has a number of
qualities that make it an attractive code of behavior for managerial action:
• consistent: unlike social norms, laws are generally written and reviewed so that
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following one law does not mean violating another;

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• universal: law's standards are held to be applicable to any individual facing a

similar set of circumstances within a given jurisdiction;
• accessible: laws are published and available to all people;
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• enforced: under the law, third-parties to any dispute (usually the courts) serve
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to resolve differences in interpretation and attempt to settle conflicting claims

equitably;
• legitimate: since laws come from duly empowered legislators and judges, it's
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authority is based in the political system.

Because of the acknowledged limits of the law, there seems to be wide-spread
support for the idea that constraints on business activity should go beyond the law to
include social norms of moral behavior. Even economists are skeptical about "social
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responsibility," such as Milton Friedman (as noted above) and Friedrich Hayek generally
temper their views of management responsibility by considering social and moral custom
a constraint on behavior. Since social norms and conventions are largely unwritten rules
of behavior, the greatest challenge for those who wish to follow them may be to identify
and state the relevant norms clearly. For managers, norms might be deciphered by
examining behavior patterns, public reactions, opinion surveys, formal speeches,
published reports of community groups, and their own consciences, which presumably
were shaped by these social conventions. At best, the process of determining norms is
imprecise, and try to codify existing norms tend to spark extensive debate.
Last but not least is beyond conventions: developing a critical moral perspektive.
Since laws and social norms may be morally inadequate, even objectionable, a strong
set of normative constraints on business practice might depend on a well-grounded moral
theory, one that would provide a critical perspective for evaluating existing norms:
1. Schools of moral philosophy
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o Consequentialist theories (such as utilitarianism) focus on creating the
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greatest balance of benefits over harms, generally giving equal weight to
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the affected.
o.
o Rules-and-rights theories focus on the inherent moral character of certain
actions. rs e
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o Virtue theories, unlike both of the first two theories, focus on the moral
characteristics of persons.
o Relationship ethics, focuses on the value, character, and appropriateness
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of certain relationships.
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2. Common-denominator, golden-rule ethics

Instead of focusing on the diversity of philosophical theories, another view
suggests that managers consider general areas of agreement, common
denominators between moral traditions. For example, one general rule that
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nearly all traditions seem to value is the "golden rule": Do unto others as you
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would have them do unto you.

3. The implicit of morality of market theory
Another approach argues that ethical guidelines can be derived from economic
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theory concerning the distinctive roles of business. This set of morals echoes
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and extends to libertarian countries. Critics of market morality implicitly argue

that it is improper to draw normative conclusions from descriptive theories if
economic behavior.
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Constraints and corporate performance

Businesses also face practical obstacles, such as market reputation, politics, and
penalties, forcing companies to adhere to guidelines that are not part of the company's
goals. These constraints reflect the normative views of others. When companies adopt
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these restrictions, it can be difficult to say whether they were adopted for moral or practical
reasons.
The character of normative constraints A test would be become a constraint
'normative' if and only if the firm is willing to sacrifice performance (in terms of its objective)
to honor the constraint. However, finding genuine sacrifice can be difficult since managers
might contend that the long-term benefits of following a constraint outweigh any short-
term loss and long-term effects are difficult to measure. Adding to the ambiguity, many
well-run firms have found ways to combine a rigorous set of normative constraints with
strong business performance.
Ethics as good (even profitable) business Some people believe that ethical
conduct and business success are in the same page. Therefore, it is simply a matter of
prudence for managers to adopt normative constraints on their behavior. High ethical
standards can cause to better employee morale, productivity, and innovation, friendly
community relations, greater trust and, thus, lower transactions costs in dealing with
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suppliers, and enhanced consumer satisfaction and loyalty. Some believe that normative
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constraints always have long-term consequences as a way of avoiding difficult problems
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that require hard work, creativity and some sacrifice to align business goals with one's
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normative agenda. Being ethical may not go hand in hand with business success (and
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this can be an asset), but that alone is no guarantee.
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Managerial challenges
It is extremely important and difficult for managers to choose an objective function
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and a set of normative constraint for business with total confidence and authority since it
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lies under some uncertainty. Also, the corporate environment requires managers to act
on behalf other. Even if they may perceive higher standards of behavior and more
objectives, but feel powerless to implement them.
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Questions
1. What is the appropriate role for business in a capitalist society?
Answers: As I mentioned in the first paragraph of summary, we need to dissect
is
and define our terms of business and a capitalist society first. A business is any
Th
organization in which private parties (referred as “owners”) provide risk capital and
have a claim on the net economic value that is created, while a capitalist society
is any society that relies heavily on businesses to produce and distribute goods
sh
and service. I personally think that the role of business in capitalist society is very
important as a value creator that can provide solutions and products that are
beneficial to society. Most entrepreneur, including me, involved in business world
not only because they want to make value, but also to distribute goods that
beneficial for customer. As a real-life example is my small business engaged in the
6
sale of reading device, Kindle. I see that there is a value that I can deliver besides
profit, which is to increase the reading interest of people in Indonesia. Even though
I know it is a big objective and not easy, but I believe that there is a market segment
that I can reach and I can give values to the society.
2. Is capitalism good or bad? What good should it give to the society? What bad
should it prevent?
Answers: There is some debate about the pros and cons of capitalists. Capitalists
do not only provide property rights and free markets as a basis for trade, it also
can change the society to be motivated to do business and become more
innovative and creative every day. For me, it's a kind of motivation to be able to
produce products and services that can solve problems in society. With companies
and individuals competing to be innovative and hard-working, this creates
economic expansion. This helps to increase real GDP and leads to an increase in
m
er as
the economic growth eventually. In practice, however, capitalism does have their
co
imperfection too. The increasing bicycle prices in Indonesia during the pandemic.
eH w
This case shows monopoly power that capitalism has, making it easier for big
o.
company to gain monopoly power in product or labor markets.
rs e
ou urc
3. Is it enough to have profit maximization as a single objective of business?
Answers: In my view no, the objectives of business must go beyond mere profit
maximization. Critics of profit-maximization have suggested that profit-seeking is
o
a singularly uninspired primary objective and perhaps even self-defeating.

aC s
vi y re
Theodore Levitt (1983) sees profit maximization as "morally shallow”. There are
some alternatives to profit maximization that firms can adopt: putting the customers
first by delivering the best goods and services, providing meaningful employment
by placing workers as an asset in business, balancing multiple stakeholders by
ed d
assembling fiduciary relationship to each group of stakeholders, not just

ar stu
stockholders, and serving the public (community) good by building a good image
in the eyes of the public.
is
Th
sh
7
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Business Ethics, Law and Sustainability

Business Ethics, Law and Sustainability

normative philosophies of business, which are objective(s) and constraints on business

The Objective(s) Of Business

this alternative is very effective because I feel it in my own business. By focusing on

The second is providing meaningful employment by placing workers as an asset in

Constraints on business decision making

following one law does not mean violating another;

• universal: law's standards are held to be applicable to any individual facing a

to resolve differences in interpretation and attempt to settle conflicting claims

authority is based in the political system.

2. Common-denominator, golden-rule ethics

would have them do unto you.

and extends to libertarian countries. Critics of market morality implicitly argue

Constraints and corporate performance

a singularly uninspired primary objective and perhaps even self-defeating.

assembling fiduciary relationship to each group of stakeholders, not just

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